Majority rule and Minority protection

8/14/2019 Majorityruleand Minorityprotection

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MAJORITY RULE AND

MINORITY PROTECTIONMajority Rule

The company is the proper plaintiff in an action to redress a

wrong done to the company

Carlen v. Drury (1812) 1 V. & B. 154 Lord Eldon, This

Court is not to be required on every Occasion to take the

Management of every Playhouse and Brewhouse in the

Kingdom.


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MAJORITY RULE

Macdougall v. Gardiner[1875] 1 Ch. D. 13 per Mellish

L.J., If the thing complained of is a thing which in

substance the majority of the company are entitled to do,

or if something has been done irregularly which the

majority of the company are entitles to do regularly, or if

something has been done illegally which the majority of

the company are entitled to do legally, there can be no

use in having litigation about it, the ultimate end ofwhich is only that a meeting has to be called, and then

ultimately the majority gets its wishes.


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MAJORITY RULE AND

MINORITY PROTECTIONMozley v. Alston (1847) 1 Ph. 790

Two shareholders in their individual capacity broughtproceedings against the company and the members of the

board to restrain them from acting until they had retired by

rotation and new directors had been appointed. HeldThe

action failed. This was a wrong done to the company and it

alone was the proper plaintiff


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MAJORITY RULE AND

MINORITY PROTECTIONI say folks, shall we bring

a court action against

ourselves for breach of our

duties

Never!

You must

be mad!!

I think that

he is off his

trolley


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Representative, Derivative and

Personal Actions

Representative Action.

Where claimant and other shareholders have a

common interest and claimant sues on behalf of

all to enforce that interest.


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Personal Actions

Derivative Action.

Form minority shareholder (ostensibly on behalf of self andother shareholders) against wrongdoing directors and the

company!

Reality minority shareholder (on behalf of company)

v

wrongdoing directors with the company joined as co-defendant

to receive any award of damages


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Personal Actions

Wallersteiner v. Moir (No.2) [1975] 1 All E.R. 849 Lord

Denning,

Stripped of mere procedure the principle is that where the

wrongdoers themselves control the company, an action can be

brought on behalf of the company by the minority shareholders,

on the footing that they are its representatives to obtain redress

on its behalf.


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Derivative Actions

Unlike true representative actions because actually on

behalf of company

Hence claimant should not be allowed to settle or

compromise the action.

Claimant can ask for costs to be paid by the company on

whose behalf the action is really being brought Re Jaybird

and Smith v Croft

Should be able to sue for pre-membership wrongs

Cannot join personal claims, and cannot claim for fall in

value of shares etc. Johnson v Gore Wood


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Personal Actions

These lie where the personal rights of shareholders have

been invaded and they are suing the company to have

them vindicated.Pender v Lushington (voting rights)

Wood v Odessa Waterworks (dividends)


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Statutory Derivative Action

Companies Act 2006

260 Derivative claims

(1) This Chapter applies to proceedings in England and Wales or

Northern Ireland by a member of a company(a) in respect of a cause of action vested in the company, and

(b) seeking relief on behalf of the company.

This is referred to in this Chapter as a derivative claim.

(2) A derivative claim may only be brought

(a) under this Chapter, or

(b) in pursuance of an order of the court in proceedings under

section 994 (proceedings for protection of members against unfair

prejudice).


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Companies Act 2006

260 Derivative claims

(3) A derivative claim under this Chapter may be brought only in

respect of a cause of action arising from an actual or proposed act oromission involving negligence, default, breach of duty or breach of

trust by a director of the company.

The cause of action may be against the director or another person

(or both).

(4) It is immaterial whether the cause of action arose before or after

the person seeking to bring or continue the derivative claim became

a member of the company.


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Companies Act 2006

261 Application for permission to continue derivative claim

(1) A member of a company who brings a derivative claim under this

Chapter must apply to the court for permission (in Northern Ireland,leave) to continue it.

((4) On hearing the application, the court may

(a) give permission (or leave) to continue the claim on such terms as

it thinks fit,

(b) refuse permission (or leave) and dismiss the claim, or

(c) adjourn the proceedings on the application and give such

directions as it thinks fit.


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Companies Act 2006

262 Application for permission to continue claim as a derivativeclaim

(1) This section applies where

(a) a company has brought a claim, and

(b) the cause of action on which the claim is based could be pursued

as a derivative claim under this Chapter.

(2) A member of the company may apply to the court for permission

(in Northern Ireland, leave) to continue the claim as a derivative

claim on the ground that

(a) the manner in which the company commenced or continued theclaim amounts to an abuse of the process of the court,

(b) the company has failed to prosecute the claim diligently, and

(c) it is appropriate for the member to continue the claim as a

derivative claim.

.


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Statutory Derivative ActionCompanies Act 2006

262 Application for permission to continue claim as a derivativeclaim

(3) If it appears to the court that the application and the evidence

filed by the applicant in support of it do not disclose a prima facie

case for giving permission (or leave), the court(a) must dismiss the application, and

(b) may make any consequential order it considers appropriate

(4) If the application is not dismissed under subsection (3), the

court

(a) may give directions as to the evidence to be provided by the

company, and

(b) may adjourn the proceedings to enable the evidence to be

obtained.


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Companies Act 2006263 Whether permission to be given

(2) Permission (or leave) must be refused if the court is satisfied

(a) that a person acting in accordance with section 172 (duty to

promote the success of the company) would not seek to continue theclaim, or

(b) where the cause of action arises from an act or omission that is

yet to occur, that the act or omission has been authorised by the

company, or

(c) where the cause of action arises from an act or omission that has

already occurred, that the act or omission

(i) was authorised by the company before it occurred, or

(ii) has been ratified by the company since it occurred.


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263 Whether permission to be given

(3) In considering whether to give permission (or leave) the court must take into

account, in particular

(a) whether the member is acting in good faith in seeking to continue the claim

(b) the importance that a person acting in accordance with section 172

(duty to promote the success of the company) would attach to continuing it

(c) where the cause of action results from an act or omission that is yet to

occur, whether the act or omission could be, and in the circumstances

would be likely to be

(i) authorised by the company before it occurs, or

(ii) ratified by the company after it occurs


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263 Whether permission to be given

(d) where the cause of action arises from an act or omission that has

already occurred, whether the act or omission could be, and in the

circumstances would be likely to be, ratified by the company(e) whether the company has decided not to pursue the claim

(f) whether the act or omission in respect of which the claim is brought

gives rise to a cause of action that the member could pursue in his own

right rather than on behalf of the company.

(4) In considering whether to give permission (or leave) the court shall have

particular regard to any evidence before it as to the views of members of the

company who have no personal interest, direct or indirect, in the matter.


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264 Application for permission to continue derivative claim brought by

another member

(1) This section applies where a member of a company (the claimant)

(a) has brought a derivative claim,

(b) has continued as a derivative claim a claim brought by the company, or

(c) has continued a derivative claim under this section.


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Civil Procedure RulesDerivative claims

Rule 19.9E

The court may order the company, body corporate or trade union for thebenefit of which a derivative claim is brought to indemnify the claimant

against liability for costs incurred in the permission application or in the

derivative claim or both.

Rule 19.9F

Where the court has given permission to continue a derivative claim, the

court may order that the claim may not be discontinued, settled or

compromised without the permission of the court.


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The Personal Action

Applies:-

1) The matter is ultra vires or illegal

2) Where the matter requires a special

resolution

3) Where the personal rights of a shareholder

are invaded


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Where the matter requires a special

resolutionIf Companies Act requires special or extraordinary resolution

to do something a shareholder can sue to ensure it is not done

just by ordinary resolution.

A company which, by its directors, had broken its own

regulations by doing something without a special resolution

which could only be done validly by a special resolution could

assert that it alone was the proper plaintiff in any consequent

action, and the effect would be to allow a company acting in

breach of its articles to do de facto by ordinary resolution that

which according to its own regulations could only be done by

special resolution. Edwards V Halliwell


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Where the personal rights of a

shareholder are invaded

Pender v. Lushington

Wood v. Odessa Waterworks

Prudential v Newman (No. 2)

Johnson v Gore Wood - No personal action for diminution

in value of shares caused by directors fraud, because

shareholders loss was just a reflection of the loss sufferedby the company


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Where the personal rights of a

shareholder are invaded

Brown v. British Abrasive Wheel Co.

Dafen Tinplate v. Llanelly Steel Co.

Sidebottom v. Kershaw Leese & Co.

Shuttleworth v. Cox Bros.

Wall v London & Northern Assets Corp [1898] 2 Ch 469

Henderson v Bank of Australasia (1890) 45 ChD 330

Foster v Foster


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Statutory Remedies

Just and Equitable Winding up

122(1) [Circumstances] A company may be wound upby the court if

(g) the court is of the opinion that it is just and

equitable that the company should be wound up.


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125(2) [Just and equitable winding up] If the petition is

presented by members of the company as contributories on theground that it is just and equitable that the company should be

wound up, the court, if it is of opinion

(a) that the petitioners are entitled to relief either by

winding up the company or by some other means, and

(b) that in the absence of any other remedy it would be just

and equitable that the company should be wound up,

shall make a winding-up order but this does not apply ifthe court is also of the opinion both that some other remedy

is available to the petitioners and that they are acting

unreasonably in seeking to have the company wound up

instead of pursuing that other remedy.


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Shareholder must allege surplus of assets over liabilities to

show that they have an interest in the winding up.

Re Rica Gold Washing CoRe W.R. Willcocks & Co. Ltd.

Re Chesterfield Catering Co.

Re Bellador Silk (not for an ulterior motive)


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Grounds for Petition

Where substratum gone.

Re German Date Coffee Co. (1882)

Re Bleriot Manufacturing Aircraft Co

Deadlock

Re Yenidje Tobacco Co

Oppression or Loss of Confidence.

Re Cuthbert Cooper Ltd.

Lock v. John Blackwood Ltd. (omission to hold meetings,

submit accounts or declare dividends)


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Ebrahimi v. Westbourne

Galleries LtdEbrahimi (500 shares) gave 100 to :-

George

Nazar (500 shares) gave 100 to :-

After a dispute Nazar and George vote Ebrahimi off the board

Court recognises the right to remove E from board but there is

room in company law for recognition of the fact that behind it

or amongst it there are individuals, with rights, expectations

and obligations inter se, which are not necessarily submerged

in the company structure.


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Ebrahimi v. Westbourne

Galleries LtdThe just and equitable provision does as equity always does,

enable to court to subject the exercise of legal rights to

equitable considerations.This applies where:-

i) Association formed on basis of a personal relationship

ii) Agreement or understanding that all or some of theshareholders would participate in running the business

iii) Restriction on free transfer of shares

Must come with clean hands!!

J t d E it bl Wi di


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Re Zinotty Properties Ltd. [1984]

Re a Company (No 00370 of 1987), ex p Glossop [1988]

Non-payment of dividends defeating proper and legitimate

expectations of shareholders.

Re A. & B.C. Chewing Gum Ltd.

Re North End Motels (Huntly) Ltd[1976]

Re Guidezone [2001] BCC 692, [2000] 2 BCLC 321

Parker J. If the conduct by the majority relied on by

[plaintiff] in the instant case is not unfair for the purposes of

s.459, it cannot found a case for a winding up order on the

just and equitable ground.


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Unfairly Prejudicial Conduct

994 Petition by company member

(1) A member of a company may apply to the court by petition

for an order underthis Part on the ground

(a) that the companys affairs are being or have been

conducted in a manner that is unfairly prejudicial to the

interests of members generally or of some part of its members

(including at least himself), or(b) that an actual or proposed act or omission of the company

(including an act or omission on its behalf) is or would be so

prejudicial.


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994 Petition by company member

(2) The provisions of this Part apply to a person who is not a

member of a company but to whom shares in the companyhave been transferred or

transmitted by operation of law as they apply to a member of a

company.



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Who can petition?

Re Quickdome [1988]

Re Martin Coulter Enterprises Ltd[1988] No need to

show tangible interest

Re London School of Electronics No clean hands policy.

Interests of the Members

Re J.E. Cade & Son Ltd

Re a Company (No.00477 of 1986) [1986] BCLC 376

[1987] 1 WLR 102 Interests not limited to strict legal

rights - court has regard to wider equitable considerations.


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Re A Company (No.0477 of 1986)

Hoffman J. the interests of a member are not necessarily

limited to his strict legal rights under the constitution of the

company. The use of the word unfairly in s.459, like the

use of the words just and equitable in [122(1)(g) of the

Insolvency Act 1986] enables the court to have regard to

wider equitable considerations.

Re Sam Weller & Sons Ltd Same very low dividend paid

for 37 years!


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Re a Company [1986] BCLC 382 Hoffman J. the

interests of a member who had ventured his capital in a

small private company might include the legitimate

expectation that he would continue to be employed as adirector so that his dismissal would be unfairly

prejudicial to his interests as a member

But Hoffman sings a different tune in ONeill v Phillips

Where he says that The concept of legitimate expectation

should not be allowed to lead a life of its own, capable of

giving rise to equitable restraints in circumstances to which

the traditional equitable principles have no application.


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Re Posgate & Denby (Agency) Ltd

Hoffman J Section 459 enables the court to give full

effect to the terms and understandings upon which themembers of the company became associated but not to

rewrite them.

Re Blue Arrow plc

Re Tottenham Hotspur plc



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U y ejud c Co duc

a member of a company will be able to bring himself

within the section if he can show that the value of hisshareholding in the company has been seriously

diminished or at least seriously jeopardised by reason of a

course of conduct on the part of the persons who have had

de facto control of the company, which is unfair to the

member concerned. The test of fairness must, I think, be

an objective, not a subjective one. In other words it is not

necessary for the petitioner to show that the persons who

have had de facto control of the company have acted as

they did in the conscious knowledge that this was unfair tothe petitioner or that they were acting in bad faith the test,

I think, is whether a reasonable bystander observing the

consequences of their conduct, would regard it as having

unfairly prejudiced the petitioners interests.


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Re R.A.Noble (Clothing) Ltd Action of exclusion from

management not deliberately to harm petitioner. He

brought it on himself by lack of interest in the affairs of the

company prejudicial, but not unfairly so.

Breach of fiduciary duties relevant

Re London School of Electronics Ltd. A 75% majority

transferred students to their own college ordered to buy

out petitioner on basis that these students not transferred

Re Cumana Diverted business, rights issue the other

shareholder could not afford, excessive bonus and pension.


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Mismanagement

Re Elgindata

Re Macro (Ipswich) Ltd

Exclusion from Board

Re Bird Precision Bellows Ltd.

Re Ghyll Beck Driving Range Ltd.

Alteration of Articles

Re Saul D. Harrison


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ONeill v Phillips House of Lords

Owner of co. promoted worker to the board and gave him

25% share of company. Then made him MD, said he could

have half the profits and effectively retired. Problems aroseand he resumed management and removed ONeills half

share of profits, but did not dismiss him and let him

continue managing part of business.

First instance no unfair prejudice

Court of Appeal legitimate expectations defeated

House of Lords not unfair


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ONeill v Phillips

First, a company is an association of persons for an

economic purpose, usually entered into with legal advice

and some degree of formality.

Secondly, company law has developed seamlessly from the

law of partnership, which was treated by equity, like the

Roman societas, as a contract of good faith. One of the

traditional roles of equity, as a separate jurisdiction, was to

restrain the exercise of strict legal rights in certainrelationships in which it considered that this would be

contrary to good faith. These principles have, with

appropriate modification, been carried over into company

law.


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ONeill v Phillips

The first of these two features leads to the conclusion that a

member of a company will not ordinarily be entitled to

complain of unfairness unless there has been some breach

of the terms on which he agreed that the affairs of thecompany should be conducted. But the second leads to the

conclusion that there will be cases in which equitable

considerations make it unfair for those conducting the

affairs of the company to rely upon their strict legal

powers. Thus unfairness may consist in a breach of the

rules or in using the rules in a manner which equity would

regard as contrary to good faith.

ONeill v Phillips


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p

So I agree with Jonathan Parker J. when he said in In re

Astec (B.S.R.) Plc. [1998] 2 B.C.L.C. 556, 588:

"in order to give rise to an equitable constraint based on

'legitimate expectation' what is required is a personal

relationship or personal dealings of some kind between the

party seeking to exercise the legal right and the party

seeking to restrain such exercise, such as will affect theconscience of the former.

Ask whether the exercise of the power in question would

be contrary to what the parties, by words or conduct, have

actually agreed.

The aggrieved member could be said to have had a

"legitimate expectation" that he would be able to

participate in the management or withdraw from the

company.

ONeill v Phillips


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p

The concept of a legitimate expectation should not be

allowed to lead a life of its own, capable of giving rise to

equitable restraints in circumstances to which the

traditional equitable principles have no application. That is

what seems to have happened in this case. [See Court of

Appeal Judgment]

I do not think that there is any support in the authorities for

such a stark right of unilateral withdrawal. [No no fault

divorce from Company]

ONeill v Phillips


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The Law Commission (Shareholder Remedies (Law Com.No. 246) (1997) (Cm.3769), paras. 3.26-56) has

recommended that in a private company limited by shares

in which substantially all the members are directors, there

should be a statutory presumption that the removal of a

shareholder as a director, or from substantially all his

functions as a director, is unfairly prejudicial conduct. This

does not seem to me very different in practice from the

present law. But the unfairness does not lie in the exclusion

alone but in exclusion without a reasonable offer.

Goes on to define a reasonable offer

ONeill v Phillips


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Goes on to define a reasonable offer

In the first place, the offer must be to purchase the shares at

a fair value. This will ordinarily be a value representing an

equivalent proportion of the total issued share capital, that

is, without a discount for its being a minority holding.

Secondly, the value, if not agreed, should be determined by

a competent expert. Thirdly, the offer should be to have the

value determined by the expert as an expert [not as

arbitrator].

Fourthly, the offer should, as in this case, provide for

equality of arms between the parties. Both should have the

same right of access to information about the company

which bears upon the value of the shares and both should

have the right to make submissions to the expert,


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Remedies

996 Powers of the court under this Part

(1) If the court is satisfied that a petition under this Part is well

founded, it may make such order as it thinks fit for giving reliefin respect of the matters complained of.


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Remedies

(2) Without prejudice to the generality of subsection (1), the courts order

may

(a) regulate the conduct of the companys affairs in the future

(b) require the company

(i) to refrain from doing or continuing an act complained of, or

(ii) to do an act that the petitioner has complained it has omitted to do

(c) authorise civil proceedings to be brought in the name and on behalf of

the company by such person or persons and on such terms as the court may

direct

(d) require the company not to make any, or any specified, alterations in its

articles without the leave of the court(e) provide for the purchase of the shares of any members of the company by

other members or by the company itself and, in the case of a purchase by the

company itself, the reduction of the companys capital accordingly.


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Purchase of Shares

Usual preferred remedy.

The proper approach to valuation was stated by Lord Keith of

Avonholm, in Scottish Co-operative Wholesale Society Ltd vMeyer, as follows (at p.364):

Lord Sorn has, in my opinion, approached this matter on a

correct principle, by considering what would have been the

value of the shares at the commencement of the proceedingshad it not been for the effect of the oppressive conduct of which

complaint was made. This is clearly not a matter on which a

calculation can be made with mathematical accuracy or by the

application of strict accounting principles


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Purchase of Shares

Pro rata basis

Total value ofnet assets (i.e. assets minus liabilities)

number of shares = net asset value per share

Open market price discounted for the fact that

purchasing a minority holding

Date of valuation relevant factor in some cases

Share purchase provisions in


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Share purchase provisions in

articlesIn Re a Company (No. 004377 of 1986) (XYZ Ltd)

Hoffmann J. struck out a s.459 petition where the petitioner

was refusing to sell his shares under a provision in thearticles. He held that where the option to purchase the shares

at a fair value was available it was unreasonable for the

minority shareholder to refuse to accept it.

FAIR OFFER


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FAIR OFFER

In O'Neill v Phillips Lord Hoffmann set out a number of

conditions which would enable the parties to know what would

be considered a reasonable offer.

A fair value should normally represent an equivalent

proportion of the total issued share capital without a discount forits being a minority holding. Where the offer is for a discounted

value, this will not be plainly reasonable, and it will probably

be necessary for the case to go to a full hearing.

The value, if not agreed, should be determined by anexpert. The parties should normally share the costs of the

expert's report, but he should have the power to decide that they

should be borne in some different way.

FAIR OFFER


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The valuer should act as an expert, and not as an

arbitrator. In the interests of economy and expedition, the expert

should not be required to give reasons.

Both parties should have the same right of access to

information about the company which bears upon the value of

the shares and should have the right to make submissions to the

expert.

If there is a breakdown in relations between the parties,

the majority shareholder should be given a reasonableopportunity to make an offer (which may include time to explore

the question of how to raise finance) before he becomes obliged

to pay costs.


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FAIR OFFER

However, in Re Abbey Leisure Ltdthe Court of Appeal

reversed a ruling of Hoffmann J., holding that there was a risk

that an accountant valuing the petitioner's shares might have

applied a discount to reflect the fact that they represented aminority shareholding which the court might not have done

and that there was nothing unreasonable in his refusing to

accept that risk.

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Majority rule and Minority protection