Majority Rule and Minority Protection

MAJORITY RULE AND
MINORITY PROTECTION
Majority 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.”
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 of
which is only that a meeting has to be called, and then
ultimately the majority gets its wishes.”
MAJORITY RULE AND
MINORITY PROTECTION
Mozley v. Alston (1847) 1 Ph. 790
Two shareholders in their individual capacity brought
proceedings 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. Held The
action failed. This was a wrong done to the company and it
alone was the proper plaintiff
MAJORITY RULE AND
MINORITY PROTECTION
I say folks, shall we bring
a court action against
ourselves for breach of our
duties
Never! I think that
he is off his
You must trolley
be mad!!
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.
Personal Actions
Derivative Action.
Form – minority shareholder (ostensibly on behalf of self and
other shareholders) against wrongdoing directors and the
company!
Reality – minority shareholder (on behalf of company)
v
wrongdoing directors with the company joined as codefendant
to receive any award of damages
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.”
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 premembership wrongs
Cannot join personal claims, and cannot claim for fall in
value of shares etc. Johnson v Gore Wood
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)
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).
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 or
omission 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.
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.
Companies Act 2006
262 Application for permission to continue claim as a derivative
claim
(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 the
claim 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.
.
Companies Act 2006
262 Application for permission to continue claim as a derivative
claim
(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.
Companies Act 2006
263 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 the
claim, 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.
Companies Act 2006
(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;
Companies Act 2006
(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.
Companies Act 2006
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.
Companies Act 2006
(2) Another member of the company (“the applicant”) may apply to the court for
permission (in Northern Ireland, leave) to continue the claim on the ground
that—
(a) the manner in which the proceedings have been commenced or continued
by the claimant amounts to an abuse of the process of the court,
(b) the claimant has failed to prosecute the claim diligently, and
(c) it is appropriate for the applicant to continue the claim as a derivative
claim.
Civil Procedure Rules
Derivative claims
Rule 19.9E
The court may order the company, body corporate or trade union for the
benefit 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.
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
Where the matter requires a special
resolution
If 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
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 director’s fraud, because
shareholder’s loss was just a reflection of the loss suffered
by the company
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
Statutory Remedies
Just and Equitable Winding up
122(1) [Circumstances] A company may be wound up
by the court if–
(g) the court is of the opinion that it is just and
equitable that the company should be wound up.
125(2) [Just and equitable winding up] If the petition is
presented by members of the company as contributories on the
ground 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 windingup order; but this does not apply if
the 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.
Shareholder must allege surplus of assets over liabilities to
show that they have an interest in the winding up.
Re Rica Gold Washing Co
Re W.R. Willcocks & Co. Ltd.
Re Chesterfield Catering Co.
Re Bellador Silk (not for an ulterior motive)
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)
Ebrahimi v. Westbourne
Galleries Ltd
Ebrahimi (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.
Ebrahimi v. Westbourne
Galleries Ltd
The 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 the
shareholders would participate in running the business
iii) Restriction on free transfer of shares
Must come with clean hands!!
Re Zinotty Properties Ltd. [1984]
Re a Company (No 00370 of 1987), ex p Glossop [1988]
Nonpayment 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.”
Unfairly Prejudicial Conduct
994 Petition by company member
(1) A member of a company may apply to the court by petition
for an order under
this Part on the ground—
(a) that the company’s 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.
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 company
have been transferred or
transmitted by operation of law as they apply to a member of a
company.
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.
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!
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 a
director – so that his dismissal would be unfairly
prejudicial to his interests as a member”
But Hoffman sings a different tune in O’Neill 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.”
Re Posgate & Denby (Agency) Ltd
Hoffman J “Section 459 enables the court to give full
effect to the terms and understandings upon which the
members of the company became associated but not to
rewrite them.”
Re Blue Arrow plc
Re Tottenham Hotspur plc
“a member of a company will be able to bring himself
within the section if he can show that the value of his
shareholding 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 to
the 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 petitioner’s interests.”
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.
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
O’Neill 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 arose
and he resumed management and removed O’Neill’s 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
O’Neill 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 certain
relationships in which it considered that this would be
contrary to good faith. These principles have, with
appropriate modification, been carried over into company
law.
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 the
company 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.
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 the
conscience 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.
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]
The Law Commission (Shareholder Remedies (Law Com.
No. 246) (1997) (Cm.3769), paras. 3.2656) 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
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,
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 relief
in respect of the matters complained of.
Remedies
(2) Without prejudice to the generality of subsection (1), the court’s order
may—
(a) regulate the conduct of the company’s 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 company’s capital accordingly.
Purchase of Shares
Usual preferred remedy.
The proper approach to valuation was stated by Lord Keith of
Avonholm, in Scottish Cooperative Wholesale Society Ltd v
Meyer, 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 proceedings
had 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 …’
Purchase of Shares
Pro rata basis
Total value of net 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
articles
In 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 the
articles. 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
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 for
its 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 an
expert. 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
• 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 reasonable
opportunity to make an offer (which may include time to explore
the question of how to raise finance) before he becomes obliged
to pay costs.
FAIR OFFER
However, in Re Abbey Leisure Ltd the 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 a
minority 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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