Please enable JavaScript.

Coggle requires JavaScript to display documents.

WS6- minority shareholder remedies - Coggle Diagram

- - - - Substratum has failed- commercial object for which the company was formed has failed or been fulfilled. Much less importance now as CA 2006 states company’s objects are unrestricted
        
        Re German Date Coffee Co- company had object of acquiring german patent for manufacturing coffee substitute from dates- they got Swedish patent instead- wound up
      - Fraud- where a company has been formed to perpetrate a fraud and winding up is the best way for shareholders to recover money invested
        
        Re Thomas Edward Brinsmead & Sons- three men who used to work in a different company started a new company under similar name to pretend they were selling products manufactured by the old company
      - Deadlock- rare for total deadlock as chairman has casting vote but where it does occur the company can be wound up
        
        Re Yenidje Tobacco Ltd- court ordered to be wound up because two directors and shareholders no longer spoke (only through secretary)
      - Justifiable loss of confidence in management- needs to be lack of probity in the way company is being run by the majority, driving the minority out so that it is unjust and unequitable to require minority to remain shareholders , justifying winding up
        
        Loch v John Blackwood Ltd- majority shareholders dominated board od directors and refused to declare dividends, call GMs or publish accounts, aiming to induce minority shareholders to sell their shares at undervalue
      - Exclusion from participation in a small private company where there was a relationship based on mutual confidence
        
        Ebrahimi v Westbourne Galleries shows typical elements for this ground: - bases of business association was a personal relationship and mutual confidence - an understanding that all shareholders will participate in management - a restriction on the transfer of members' interests preventing the petitioner from leaving
        
        Overall, it is where the petitioner can point to and prove some special underlying obligation of fellow members in good faith, or confidence, that so long as the business continues, he shall be entitled to management participation an obligation so basic that, if broken, the conclusion must be that the company must be dissolved
- - - - court approach: begin with looking at whether conduct in accordance with articles, then consider scope of fundamental understanding between the parties
      - court trying to look for unfairness: tested by looking at whether majority had acted or was proposing to act in a matter which equity would regard as contrary to good faith (unlawful conduct will not necessarily be unfairly prejudicial, neither will trivial infringements of articles)
    - - exclusion from management (common)
        
        removal of a shareholder as a director will not necessarily lead to a claim like this- there needs be unfairly prejudicial conduct regarding the removal- Re Tottenham Hotspur plc
      - mismanagement (rare to amount to unfair conduct)
        
        courts will not interfere with a bona fide business decision made by a company's board or it's majority shareholders except where there is a clear conflict of interests- Re Elgindata Ltd (???)
        
        Re Macro (Ipswich) Ltd- over 40 years sole director allowed dishonest employees to steal from company- financial losses suffered caused unfair prejudice to them
      - breach of director's fiduciary duties (common)
        
        Re Little Olympian Each-Ways Ltd- directors sold company's business at substantial undervalue which the directors gained personal benefit from the wider-transaction
        
        Re A Company 5287 of 1986- directors made secret profits
      - excessive remuneration/refusal to pay dividends
        
        court tend not to interfere with business judgment of the board provided it was determined honestly, but there is scope for abuse of power: in these cases courts will find failure to pay dividends/directors' awarding themselves excessive remuneration to be unfairly prejudicial
        
        Re a company 4415 of 1996- if remuneration and dividend levels cannot be justified by 'objective commercial criteria' then affairs have been managed in unfairly prejudicial way to interests of shareholders who are not directors
  - - - Harris v Jones- people who’s shares had been transferred but register not updated could make a claim
      - Blunt v Jackson- court had power to restrospectively amend the register of members, to allow a person who had worked low wages on basis of being a member but was not registered as such, to succeed in a petition of unfair prejudice based on his exclusion from management
  - - - Presumption the court will grant an order for purchase of petitioner’s shares by the company or another shareholder under S996(2)( e)
      - Most common remedy and usually sought by shareholders in small private companies who have limited options to sell their shares
      - court must determine value of their shares:
        
        Re Bird Precision Bellows ltd- unfair to sell shares at discount price even if shares represent limited voting power as they are being forced to sell shares due to unfairly prejudicial conduct
        
        value of shares can change after claim being brought: Abbington Hotel Ltd – starting point for buy out order is the date of judgment but court is free to choose a date most appropriate in circumstances- ‘what best remedies the unfair prejudice held to be established’
        
        O’Neill v Phillips- if company has made reasonable offer to buy out petitioner (based on expert valuation) then respondent may be entitled to have petition for unfair prejudice struck out
- - - - proper claimant in a wrong done to a company is prima facie the company itself, where alleged wrong is a transaction which may be made binding on the company and all it's memberd by a simple majority of members, no individual member of the company is allowed to maintain an action in respect of that matter (majority rule), if matters relate to an irregularity that the company is able to ratify or condone by its own internal procedures then no individual member may bring any action (irregularity principle)
      - exception to rules in Foss v Harbottle: where the act complained of is ultra vires or illegal, where matter is one which could validly be done or sanctioned only by some special majority of members, or there has been non-compliance with a special procedure, where personal and indivdual rights of a member have been infringed, where what has been done amounts to fraud on the minority and wrongdoers are themselves in control of the company
        
        only - 'where what has been done amounts to a fraud on the minority and the wrongdoers are themselves in control of the company' is a true exception and a derivative claim, the others are viewed as separate rights of action due o breaches of personal rights
  - - - claim can be brought against any director and/or another person, including former directors (s260(3)/(5)
      - claim can be brought by any member s260(1)
      - grounds:
        
        any act/omission, actual/proposed, involving negligence, default, breach of duty/trust by a director- S260(3)
        
        It is immaterial whether cause of action arose before or after claimant become a shareholder- S260(4)
    - - Court considers whether the applicant has a prima facie case for permission to continue a derivative claim. Applicant provides evidence of a good cause of action. If this is satisfied it moves to second stage. Court dismisses cases that have little chance of succeeding (outlined S261-263)
        
        Stage may be bypassed where defendant company admits there is a case there- Franbar Holdings Ltd v Patel
        
        Stage may be bypassed where court is prepared to hear first and second stages together- Stimpson v Southern Landlords Association
      - S263- full permission hearing- court may order the company, as well as applicant to provide evidence at this stage. Sets out absolute and discretionary bars to granting permission to a member to continue a derivative claim:
        
        during this phase they consider discretionary and absolute bars to continuining the claim
        
        absolute bars: S263(2) permission must be refused if court is satisfied that:
        
        (a) that a person actinf in accordance wirh S172 (duty to promote success of the company) would not seek to continue the claim
        
        (b) 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 this (i) was authorised by the company before it occurred (ii) has been ratified by the company since it occurred
        
        discretionary bars: S263(3) factors for court to take into account when considering to grant permission to continue with the claim:
        
        (a) whether the member is acting in good faith by seeking to continue the claim
        
        (b) importance that a person acting in accordance with S172 would attach to continuing the claim
        
        (c) where cause of action results from an act or omission that is yet to occur, whether the act would be likely to (i) be authorised by the company before it occurs or (ii) ratified by the company after it occurs
        
        (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 circum would likely 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 brough gives rise to a cause of action the member could pursue in their own right rather than on behalf of the company
        
        another consideration (though not technically a discretionary bar: S263(4) court must have particular regard to any evidence as to views of the members of the company who have no personal interest direct, or indirect, in the matter
      - approach of the courts:
        
        Mission Capital v Sinclair- if an old director can make a claim for unfair prejudice instead, they will not allow for a derivative claim under S260- particularly where a discretionary claim where a director for the company would not consider continuing the claim in accordance with their duty as directors under S172 to promote the success of a company
        
        Franbar Holdings v Patel- not continue with a derivative claim for the shareholder as they could also be covered by breach of shareholder agreement and petition for unfair prejudice under S994 instead
        
        Lesini v Westrip Holdings Ltd- directors had not breached their duty so there were no grounds for derivative claim
        
        Stainer v Lee- approval to continue only to disclosure stage as they would know more about the case then
        
        Cullen Investments Ltd v Brown- shareholder had assumed all financial risk of the claim so court rejected that no director acting in accordanc with S172 would have supported the claim
        
        Bridge v Daley- where overwhelming majority of shareholders and board members did not support the claim, permission was refused- better brought under unfair prejudice
        
        Unfair prejudice is not an absolute bar to hearing derivative clains- they will sometimes be heard together- Phillips v Fryer
        
        ClientEarth v Shell plc- environmental law charity with 27 shares in shall plc derivative claim for climate risk was refused at stage 1 as they brought it in bad faith
    - - Rule 19.9E Civil Procedure Rules allows court to order company to indemnify claimanst against liability in respect of costs incurred in the claim/permission application- pre-emptive costs order
      - Wallersteiner v moir- member may be indemnified by compsny provided they acted reasonably in bringng the action
      - company receives the benefit of any remedies as it's brought on company's behalf
    - - why not: harder to succeed through permission stage whereas unfair prejudice does not have a permission stage
- - - - Johnson v Gore Wood & Co: summarises: a) where company suffers loss caused by breach of duty owed to it, only the company may sue in respect pf that loss b) where company suffers loss but has no cause of action to use to recover that loss, the shareholder cay sue c) where company suffers loss caused by breach of duty to it and shareholder suffers separate loss caused by independent breach to that shareholder, each shareholder may sue but not in relation to loss to other shareholders, owed to other shareholders
      - Giles v Rhind- where a company’s own director’s breach stops the company being able to sue in their own name, personal claims may be allowed
  - - - Special resolution (75% majority) required to make changes to articles. Court will look at whether reasonable shareholders could have considered the amendment to be for benefit of the company. Shareholders must vote to amend articles in good faith- Allen v Gold Reefs of West Africa and not to undermine substantive rights of minority shareholders. If not, court may hold amendments invalid. Provisions can be entrenched in articles by providing higher majority needed to alter (S22(1)). Shareholders can agree in shareholder’s agreement how they will exercise their voting rights on a resolution to change articles, and this agreement is enforceable- Russell v northern Bank Development Corpn Ltd
    - - S303 gives shareholders right to request the directors call a GM. This requisition can be brought by shareholders holding not less than 5% voting paid-up capital of the company. If directors fail to call the meeting within 21 days of the requisition or hold the GM within 28 days after calling it, shareholders may call GM themselves (S305)
    - - on poll vote, one vote per share and poll vote can be demanded by (S321) not less than 5 members having a right to vote at the meeting, members holding not less than 10% all voting rights that could be cast at the meeting, members holding shares conferring a right to vote at the meeting on which the aggregate paid up sums equals not less than 10% total sum paid up on such shares