Minority Shareholder Remedies Flashcards
(35 cards)
What is the general principle governing decisions of members?
majority rule
Why is it particularly problematic for minority shareholders if majority shareholders are also directors?
Because majority shareholders have the benefit of ratifying decisions taken by them as directors, as well as being able to pass any resolution as the majority.
- It would be very hard for minority shareholders to get any decisions through on their own.
What is the rule in Foss v Harbottle?
That if a company suffers loss, it is the company which is the proper Claimant, not the shareholders.
Briefly give the facts and outcome of the case of Foss v Harbottle
Facts
- 2 members in company issue proceedings on behalf of themselves and other members, alleging that director has damaged company by misapplying and wasting company assets.
Held:
- members had no standing to bring claim, either separately or together.
- The company, a separate legal person, had suffered loss and only company had standing to bring claim.
The rule in Foss v Harbottle developed into the…
Rule against reflective loss
What is the rule against reflective loss?
It’s simply a development of Foss v Harbottle rule
It states that members cannot recover relief for losses suffered by company if their own loss is simply a reflection of company’s loss, and the company already has a cause of action against wrongdoer.
What can minority shareholders turn to, in order to ensure their not disadvantages by being the minority?
Minority shareholder remedies
Are minority shareholder remedies only available to minority shareholders?
No, they’re available to any shareholder but in practice, as majority shareholders already have effective control over resolutions, they don’t need to rely on them.
Do minority shareholder remedies coincide with Foss v Harbottle/rule against reflective losses?
No, they are generally considered to be exceptions to Foss v Harbottle
Name 5 shareholder remedies?
- Derivative Claims
- Actions by members to enforce membership rights.
- Unfair prejudice petitions.
- Just and equitable winding up.
- Winding up on grounds of insolvency.
What are derivative claims?
A derivative claim is a legal action where a member can sue on behalf of a company for act/omission involving director where company has failed to take action itself, as long as the cause of action is still vested in company.
NOTE:
- no action possible if company ratifies act/omission
- derivative claims can only be brought with leave (permission) of court.
Can minority members recover costs in derivative claims?
Yes
What is needed from the court in order to bring a derivative claim?
Leave/permission of the court.
In what limited circumstances can a derivative claim be brought against a wrongdoer e.g. director?
They can only be brought where the cause of action arises from actual or proposed…:
- Negligence on part of director
- Default on part of director (i.e. failure to perform legal obligation, e.g. appearing in court when required).
- Breach of duty by director.
- Breach of trust by director
Does someone bringing a derivative claim already have to be a member when the cause of action first arises?
No, it is immaterial whether the cause of action arose before or after the person bringing it became a member of the company.
Can derivative claims only be brought against directors?
No they can be brought against any wrongdoer, including another shareholder.
What is a common example/scenario for a derivative claim?
Where fraud is alleged against the directors of the company
What is the application procedure for derivative claims?
- Permission stage 1:
- member applies to court.
- court dismisses if no substantial evidence to allow for prima facie case. - Permission stage 2:
- at initial hearing, court considers:
* any other action more suitable?
* is member’s action in good faith?
* how important is claim?
- court must refuse leave if:
* actions are ratified.
* a person acting in accordance with their duty to promote success of company would not progress claim. - If passes both stages, claim goes to full trial.
How do ‘enforcing membership rights’ act as an exception to Foss v Harbottle?
Members can bring legal action where the rights granted to them by virtue of their shares are being denied, despite the general principle that only the company itself can bring actions for wrongs done to it.
What kind of membership rights can members enforce?
They can enforce their rights to:
- receive a dividend once it is declared;
- receive capital on winding up
- receive notice of GM
- vote at GM
- sue to ensure vote is only passed through special majority (i.e. where directors ignore provision in AA’s stating that special majority is needed)
- sue to enforce constitution/objects clause, but no longer relevant since CA 2006 came into force.
What kind of membership rights can members NOT sue to enforce?
Members can’t sue to enforce rights that don’t specifically attach to shares, even if those rights are written in AA’s
- They can only sue in respect of rights attaching to shares.
Briefly speaking, what is the ‘unfair prejudice petition’ remedy?
Under s.994 CA, any member can petition on grounds that actions of company have caused or will cause unfair prejudice to that member.
What type of member is the ‘unfair prejudice petition’ remedy particularly relevant to?
Minority shareholders
These also tend to be members whom shares have been transferred even if the transfer is not registered and someone who acted to their detriment on the mistaken belief that they were a shareholder.
Is the unfair prejudice petition an equitable remedy?
No it is not an equitable remedy.
- the member does not need to have “clean hands”
