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Topic 4: Majority Rule and Minority Protection - Coggle Diagram
Topic 4: Majority Rule and Minority Protection
Introduction
When can a shareholder sue to complain about a wrong done to themselves or the company (such s a breach of director's duties)?
Derivative action
The company will get the benefit of any derivative action
The Majority Rule:
The democratic principle of majority rule:
Those who control more than half of the votes on the board have substantial power:
Foss v Harbottle
x
Allowing individual shareholders unrestricted standing to sue in respect of wrongs done to the company raises 2 potential problems:
(1) Multiplicity of actions
- a lot of actions for very similar wrongs done (
MacDougall v Gardiner
[1875])
(2) Vexatious litigation
- bringing any kind of litigation against someone to disrupt the process (
Edwards v Halliwell
[1950])
The Proper Claimant Principle
A 3rd party cannot bring an action on behalf of damage in some sense done to someone else
The person to whom the damage was done is the person who must bring the claim
Prudential Assurances Co Ltd v Newman Industries Ltd (No.2) [1982]:
'... A cannot, as a general rule, bring an action against B to recover damages or secure other relief on behalf of C for an injury done by B to C. C is the proper plaintiff because C is that party injured and therefore, the person in whom the cause of action is vested. This is sometimes referred to as the rule in
Foss v Harbottle
when applied to corporations, but it has a wider scope and is fundamental to any rational system of jurisprudence
Foss v Harbottle:
Proper Plaintiff Rule
Majority Rule
Rule stems from 2 related concepts:
a) that a company is a legal entity distinct from its shareholders
b) that a company cannot function effectively unless the will of the majority prevail
The Rule:
The proper plaintiff in an action in respect of a wrong alleged ot be done to a corporation is, prima facie, the corporation
Perfect balance? Yes
Because you need to balance the wrong that has been done to a group of shareholders/corporation and individuals in general don't like how the business is going
Exceptions:
Common law:
... need to let shareholders sue on behalf of the company in some situations and;
the need to limit these situations to avoid multiplicity of actions and vexatious litigation
1) Ultra vires or illegal
2) Special majorities
3) Personal rights:
Cannot be taken away by ordinary resolution
Wood v Odessa Waterworks Co
[1889]
Pender v Lushington
[1877]
The rule is relaxed in favour of the aggrieved minority. They are allowed to bring a minority sharehodlers action on behalf of themselves and all others
If they were denied by it, their grievances will never reach the court
Prudential Assurance Co Ltd v Newman Industries Ltd (No.2) [1981]:
There is an exception to the rule where what has been done amounts to fraud and the wrongdors are themselves in control of the company. In this case the rule is relaxed in favour of the aggrieved minority, who are allowed to bring a minority shareholders' action on behalf of themselves and all others. The reason for this is that, if they were denied that right, their grievances could never reach the court (at p211)
Statutory derivative action
:
S.260-269 Part 11 CA
S.260(1) CA 2006
A multiple derivative claim may be brought at common law
It has not been abolished by CA 2006 (
Universal Project Management Services v Fort Gilkicker Ltd
[2013])
Per CA 2006:
A proceeding by a member of a company:
In respect of a cause of action vested in the company, and
[a member bringing an action, deriving the grounds to bring the action from the company itself]
seeking relief on behalf of a company
When will a DA be allowed:
In respect of a cause of action specified in S.260 - 269 can a member bring a claim
Or in pursuance of a court order under S.996(2)(c)
Procedures
1st Test - The 2 Staged Procedure:
A check and balance to make sure that the claim proper and not vexatious
The
Prima Facie Test:
Yes:
The court may direct the company to provide evidence and may adjourn the proceedings to allow this evidence to be collected
No:
The court must dismiss the application and may take any consequential order it considers appropriate (CA 2006, S.261(2)
2nd Test - The Mandatory Test:
Have any of the conditions specified in S.263(2) been satisfied?
Yes:
Permission to continue the claim must be refused
No: The Discretionary Test:
In exercising its discretion, the court must take into account the factors specified in S.263(3) and have particular regard to the evidence specified in S.263(4)
Claimant has to show a prima facie case in order to get permission of the court to proceed
S.263: Explains when permission to proceed
must
be refused
[Its very difficult for the claimant]
Causes
S.260(3)
Wider than the old law in
F v H
The cause of action must be vested with the company
Must arise from an actual or proposed act or omission which involves negligence, default, breach of duty or breach of trust by director, former director or shadow director
Old Law:
Previously needed to show:
Fraud on the minority
Wrongdoers in control
New Law:
No need to show
fraud on the minority
Old cases now covered under new section (
Estmanco Kilner House Ltd v Greater London Council
(1982) or self-serving negligence
Daniels v Daniels
)
Situations
Wrongdoers in control
- Prudential Assurance Co Ltd v Newman Industries (No.2) [1982]:
The CA recognised that the term "control" ... embraces a broad spectrum extending from an overall absolute majority of votes at one end, to a majority of votes at the other endmade up of those likely to be cast by the delingquent himself plus those voting with him as a result of influence or apathy".
No need to show this now, but it would help
Independent organ
- Smith v Croft (No.2) [1988]:
Knox J: if an "independent organ" of the company believes such an action would not be in the interest of the company, the action could be property prevented
The problem is now avoided
Good faith:
Barret v Duckett
[1995] - Need to establish C is bringing the claim in good faith
Portfolios of Distinction Ltd v Laird
[2004]
The Impact of Part 11
Cases so far indicate a certain court reluctance to allow claims to proceed see:
Mission Capital Plc v Sinclair
[2008]
Franbar Holdings Ltd v Patel
[2008]
What cases show:
The views of the hypothetical member matter:
What does the objective hypothetical director think?
"If I was a member, would I be disadvantaged by this particular course of action?" "Is it justified?"
No dramatic changes so far:
Proper plaintiff and Majority Rule
Treshold Test and Informational disadvantages deter claimants
Co benefits, not the claimant
For a number of reasons:
The mere introduction of the statutory Derivative Claim has
not dramatically increased the litigation risk to directors nor improved the position of shareholders
Alternativees to Derivative Actions
Doctrinal confusions of F v H
And the possible court reluctance with Part 11
= means shareholders are often refused a remedy
S.994 CA 206
S.122(1)(G) IA 1986
Personal action (in the guise of the member)