Flashcards in Minority Shareholder Protection Deck (43):
What are the possible actions for minority shareholders who feel aggrieved?
1. Just and equitable winding-up (s122(1)(g) IA 1986);
2. Petition for unfair prejudice (s994 CA 2006);
3. Derivative action on behalf of the company (s260 CA 2006);
4. Personal action under s33 contract
What are the suggested grounds for just and equitable winding-up?
1. Substratum has failed (Re German Date Coffee);
2. Fraud (Re Thomas Edwards Brimsmeads & Sons)
3. Deadlock (Re Yenidjie Tobacco Co Ltd)
4. Loss of confidence in management (Loch v John Blackwood Ltd)
5. Exclusion from management in a quasi-partnership where there was mutual agreement the aggrieved party would be included in management (Ebrahimi v Westbourne Galleries).
What three elements must be proven to successfully argue that the company must be wound-up because the shareholder has been excluded from management?
1. There was a personal relationship and mutual confidence;
2. An undertaking that all or certain shareholders would participate in management;
3. Restriction on transfer of members' interests preventing the petitioner leaving.
Who has the right to petition for just and equitable winding-up?
Any shareholder who has held shares for at least six months (s124(2) IA 1986) past or present (ss 74 and 79).
Would just and equitable winding-up be permitted by the court if there was another remedy?
Just and equitable winding-up is a remedy of last resort and will not be granted if there is another remedy and the petitioner is being unreasonable (s125(2) IA 1986). Petitions are likely to be struck out if there is a remedy under s994 (Re Woven Rugs) or there is an offer to buy him out (Fuller v Cyracuse) unless valuation by an accountant will result in discount in the value of the shares (Virdi v Abbey Leissure).
What must be the status regarding assets in order to petition for just and equitable winding-up?
There must be some assets available to distribute which represent the disadvantage/loss the shareholder has suffered (Re Rica Gold Washing Co (1879) and Re Chesterfield Catering (1976).
What are the elements of unfair prejudice under s994 CA 2006?
1. Unfair prejudice must arise from the conduct of the company;
2. The petitioner must prove his interests qua member have been unfairly prejudiced;
3. There must have been some unfair prejudice.
Must the conduct of the company which gave rise to unfair prejudice and the petitioner have been a shareholder at the same time?
No, the petitioner may petition against unfairly prejudicial conduct before he was a member (Lloyd v Casey).
In Re Legal Costs Negotiators was the conduct complained of viewed as that of the company?
No, a former director refused to sell his shares and remained a minority shareholder.
May actions of parent companies constitute unfair prejudice in relation to their subsidiaries and vice versa?
Yes, parents' conduct can form the basis of a petition against a subsidiary (Nicholas v Soundcraft Electronics) and vice versa (Gross v Rackind and Re Citybranch Group Ltd).
Can a majority shareholder apply for unfair prejudice?
In theory but unlikely (Re Legal Costs Negotiators).
Have the courts viewed 'interests' for the purposes of s994 widely or narrowly?
Widely. Hoffmann J in Re a Company (No 00477 of 1986) stated 'interests' encompassed more that 'rights' under the constitution (confirmed by Peter Gibson J in Re Sam Weller & Sons Ltd).
How was members' interests interpreted in Re Bovey Hotel Ventures?
Members have an interest in the value of their shares.
Can legitimate expectation form the basis of an interest to petition for unfair prejudice?
Yes, but only to an extent. Lord Hoffmann preferred the wording 'equitable considerations' (Re Saul D Harrison). The court will seek to strike a balance between the constitution on one hand and the extraneous expectation on the other (Re a Company No 4377 of 1986). It is said to be near impossible to argue when petitioning a public company (Re Blue Arrow and Re Saul D Harrison).
In which case was it decided that interests qua members includes interests qua creditors?
Gamblestaden Fastigher AB v Baltic Partners Ltd.
Will a claim be successful if the conduct complained of is in the constitution?
No (Re Saul D Harrison).
In which case was it decided that interests qua members includes interests qua directors?
O'Neill v Phillips.
What interests were not held to be interests qua member in Re JE Cade and Sons Ltd?
Interests in land ie petitioner was freeholder of a farm which the company refused to sell.
How will the court determine whether conduct has been unfairly prejudicial?
The court will look to see if there has been some breach of agreed terms or failing that some use of the rules contrary to good faith (per Lord Hoffmann in O'Neill v Phillips).
What are some examples of conduct that has been held as unfairly prejudicial?
1. Exclusion from management (Brownlow v Marshall);
2. Mismanagement (Re Macro (Ipswich) Ltd c/f Re Elgindata);
3. Breach of directors' fiduciary duties (Almack v Burnham);
4. Excessive remuneration and failure to pay dividends (Re Metropolis Motorcycles c/f Grace v Baglioli, Quinlan v Essex Hinge, Irvine v Irvine);
5. Misappropriation (Re Olympian Each-Ways);
6. Improper allotment of shares (Re Coloursource);
7. Breach of articles/statute.
How will the court find unfairly prejudicial conduct under Lord Hoffman's second limb in O'Neill v Phillips ie abuse of rules contrary to good faith?
Patten J in Grace v Baglioli said 'the exercise of power or rights in question would involve a breach of an agreement or understanding between the parties which it would be unfair to allow a member to ignore.'
Where do we find the remedies for petitions for unfair prejudice? What are they?
Under s996(1) 'the court may make such order as it thinks fit'. Examples have included regulatory orders, restraining actions, authorise derivative actions (Re Cyplon Developments), amend or prevent amendments to Articles, order a share purchase (Grace v Biagioli), award damages for reflective loss (Re Brightview Ltd).
The most common remedy following s994 petitions is a buy-out. What are the issues inherent in this remedy?
Undervaluing the minority shares. In Irvine v Irvine 49.96% shareholding was not given a premium despite the buyer effectively gaining control of the entire share capital.
What are the two ways the courts will value a minority shareholder's shares?
1. Discount basis ie taking into account lack of voting power and control.
2. Pro rata basis ie disregarding power and control and taking into account fairness.
Are courts more likely to impose a pro rata valuation of shares?
Yes (Strahan v Wilcock) but especially where the company is a quasi-partnership and/or the petitioner is unwilling to sell (per Nourse J in Bird v Precision Bellows Ltd).
When are courts more likely to impose discount valuations of minority shares?
When the shareholder bought them at a discount or has not participated in management (Re DR Chemicals) or when the petitioner does not have clean hands (Richardson v Blackman).
What date will the court use for valuing the shares in a buy-out?
The starting point is the date of the judgment but the court is free to choose what is most appropriate to apply a fair remedy (Abbington Hotel Ltd).
If a fair offer is made to buy out a minority shareholder what will happen to the petition under s994?
It will be struck out (O'Neill v Phillips).
Is the court order to buy out a shareholder negotiable?
From when did the new rules on derivative actions come into force?
1 October 2007.
Who can claim for a derivative action?
Any shareholder (s260(3)).
Can you claim for incidents before you were a member under derivative action?
Who can you claim against in a derivative action?
A director, former director or third party who dishonestly assists a director to breach his duty (s260(3) and (5)).
On what basis can you claim in a derivative action?
You may claim for any act or omission, actual or proposed, involving negligence, breach of duty or trust by a director (s260(3)) including any breach under s174 ie 'mere negligence' (which differed fro old case law requiring 'self-serving' negligence).
What is the procedure for bringing a derivative action?
The two stage process (s261) includes:
1. Claimant must ask permission to continue of the court and prove a prima facie case;
2. Full permission hearing where evidence from the company may be required.
What are the absolute bars to a derivative action?
1. No prima facie case (s262(3)) and the court may decide to adjourn for ratification or authorisation (s261(4)).
2 (a) A director in accordance with s172 would not pursue the claim (including the costs the company would have to bear (per Lewison J in Kiani v Cooper) or (b)/(c) the act or omission has been authorised or ratified.
What are the discretionary bars to a derivative action?
Section 263(3) states:
(a) lack of good faith or clean hands (Barrett v Duckett);
(b) importance a director acting in good faith would attach to the claim (Stainer v Lee and Iestini v Westrip Holdings Ltd);
(c) likely authorisation or ratification;
(d) majority of directors have not pursued;
(e) members could pursue a claim in their own right (Frambar Holdings Ltd v Pate);
(f) views of disinterested shareholders (263(4) taking up Smith v Croft (No2)).
If the member's only loss is the same suffered by the company who is allowed to sue?
This is known as reflective loss and only the company can sue (Prudential Assurance v Newman (No 2) and Johnson v Gore Wood & Co).
Who must pay for a derivative action?
The claimant may seek a refund (Wallersteiner v Moir (no 2) and the defendant director may also be funded but must repay if he loses (s205(1) and (2))
Out of all the remedies which should be pursued first?
What are the advantages of unfair prejudice?
1. It is easier to proceed
2. No absolute bars
3. Remedy is for claimant not company
4. Wide discretion of remedies
What are the advantages of derivative action?
1. Reimbursement for costs (Wallersteiner order);
2. Avoid being bought out