Minority Shareholder Protection

Question 1

Burland v Earle (1902) ?

Answer 1

Lord Davey, “In order to redress a wrong done to the company, the action should prima facie be brought by the company itself”
Every member of company is bound by its articles and fellow members - a member agrees to be bound by decisions of the majority as expressed at a general meeting

Question 2

Rule of the majority?

Answer 2

Directors owe their duty to the company - not to individual members, therefore if they breach their duty, it is the company who should bring the proceedings

Question 3

Foss v Harbottle (1843)

Answer 3

2 Shareholders sued other shareholders and other directors for taking actions to defraud the company.
As the board was still in existence it was the board that should call a general meeting to make a claim.
This case denied minority shareholder rights.
Court however, recognised that ‘claims of justice’ must prevail over ‘technical rules’ and a minority shareholder must have an effective voice in a general meeting

Question 4

The reluctancy of judiciary to interfere with internal management of companies stems from…

Answer 4

Carlen v Drury (1812) - Lord Eldon “This court is not required on every occasion to take the management of every playhouse and brewhouse in the kingdom.” Therefore the internal management rule became encompassed in the rule in Foss v Harbottle

Question 5

Exceptions to Foss v Harbottle rule…

Answer 5

No majority vote can be effective to sanction illegal acts
If those who control, use this control to defraud/act oppressively to minority, they can bring legal action
If company deprives member of individual rights
A fraud has been perpetrated and wrongdoers are in control - true exception

Question 6

Representative action?

Answer 6

Claimant and other shareholders have a common interest and claimant sues on behalf of all to enforce that interest

Question 7

Derivative action?

Answer 7

shareholder claim on behalf of company for breach of duty of directors (company cannot bring claim)
Claimant can ask for costs to be paidby the comapny on whose behalf the action is really being brought - Re Jaybird and Smith v Croft

Question 8

Personal action?

Answer 8

Personal rights of shareholders are affected and sues company to have them vindicated - Pender v Lushington and Wood v Odessa Waterworks

Question 9

3 Criteria of personal action?

Answer 9

1. Matter is ultra vires or illegal
2. Matter requires special resolution
3. Personal rights of shareholders are invaded

Question 10

Pender v Lushington 1877

Answer 10

Personal rights of shareholders invaded
Claimants votes were rejected - C sued stating only the company itself could object to irregularity of voting procedure
Claimants votes were a ‘right of property’ and he was entitles to protect

Question 11

Unfairly prejudicial conduct?

Answer 11

CA 2006 - S994-999
permits a member of a company to petition the court for relief on the ground that the company’s affairs are being or have been conducted in a manner that causes unfair prejudice to the interests of members generally or of some part of its members

Question 12

Re A Company

Answer 12

Hoffman - “The use of the word ‘unfairly’ enables the court to have regard to wider equitable considerations”

Question 13

Hoffman J…

Answer 13

Section 459 (previously) enables the court to give full effect to the terms and understandings upon which the members of the company became associated but not to write them.”

Question 14

O’Neill v Phillips 1999

Answer 14

O’Neill gained more shares in company and Phillips retired. Phillips then took back control when industry went into recession and made oneill a branch manager and took his share of the profits
O’Neill took out s459 action
Hoffman held there was no basis for the court to hold that phillips had acted unfairly - not sufficient enough to plead denial of a legitimate expectation

Question 15

Unfair AND prejudicial?

Answer 15

Re RA Noble Clothing Ltd - action of exclusion from management not deliberately to harm petitioner - brought it on himself due to the lack of interest in the affairs of the company, prejudical but NOT unfair
Breach of his fiduciary duties

Question 16

Re Cumana

Answer 16

diverted business, rights issue as the other shareholders could not afford, this was unfair and prejudicial

Question 17

Just and equitable winding up…

Answer 17

s122 Insolvency act 1986

Company may be wound up by the court if the court is of the opinion it should be wound up on these grounds

Question 18

s152 (2)?

Answer 18

If petition is presented by members of company on grounds that it is just and equitable, the court
(if it is of opinion that
1. the petitioners are entitled to relief
2. that in the absence of any other remedy it would be just and equitable that company should be wound up)
shall make a winding up order, but does not apply if the court believes that some other remedy is available and petitioners are acting unreasonably

Question 19

Re German Date Coffee Co 1882

Answer 19

company’s sole object was to manufacture coffee from dates and they manufactured from swedish patent instead
Company existed only to ‘work a particular patent’ and so it should be wound up
illegal and fraudulent purpose

Question 20

Important ground for winding up?

Answer 20

Court decides company is a quasi partnership - shares are held by small number of shareholders who all participate in management of the company and personal relationship between parties has broken down

Question 21

Deadlock?

Answer 21

Re Yemindje Tobacco Co Ltd (1916)
The only two shareholders of company only communicated through a third party due to breakdown of relationship - court held this was in essence a partnership and there was too much breakdown of communication so granted winding up

Question 22

Ebrahimi v Westbourne Galleries Ltd

Answer 22

E & N had business together, N brought his son to join the business and they transferred 100 shares each to him. There were then disputes and N and his son removed E from his directorship by using their voting control
Company should be wound up - they were within their legal rights, the past relationship made it ‘unjust or inequitable’ to insist on legal rights. It was a just and equitable winding up.

Question 23

The just and equitable provision…

Answer 23

Does as equity does, enables court to subject the exercise of legal rights to equitable considerations
This applies where…
1. Association formed on bases of partnership
2. Agreement that all shareholders would participate in running of the business
3. Restriction on free transfer of shares

Question 23

The just and equitable provision…

Answer 23

Does as equity does, enables court to subject the exercise of legal rights to equitable considerations
This applies where…
1. Association formed on bases of partnership
2. Agreement that all shareholders would participate in running of the business
3. Restriction on free transfer of shares

Question 24

Re A Company & BC Chewing Gum 1975

Answer 24

Similar to Ebrahimi - but majority offered and petitioner agreed that they would settle the dispute by a sale of his shares to majority
Settlement broke down as they could not agree on price.
Court held that company should be wound up since majority shareholders has repudiated the minority’s right to nominate a director and participate in management.

Question 24

Re A Company & BC Chewing Gum 1975

Answer 24

Similar to Ebrahimi - but majority offered and petitioner agreed that they would settle the dispute by a sale of his shares to majority
Settlement broke down as they could not agree on price.
Court held that company should be wound up since majority shareholders has repudiated the minority’s right to nominate a director and participate in management.

Question 25

Re Zinatty Properties Ltd 1984

Answer 25

A & B formed a company to develop property, they allotted part of their shares to B and C. When the property was completed B & C used their money to acquire more shares. Petitioner filed to have the company wound up. This was not supposed to happen and the company had been established on the basis of trust and confidence between A and B. The trust had broken down so it was just and equitable to wind up the company.