MOCK Q - minority protection Flashcards
(5 cards)
Question 4.
George and his friend Albert set up a partnership many years ago which
specialized in selling household products. After years of success they
converted the partnership to a company in order to allow George’s son Francis
to become involved in the business. George, Albert and Francis each hold an
equal amount of shares in the company. Over time George and Francis have
become tired of Albert holding the company back with his risk averse approach
and they remove him from the board. Albert is extremely unhappy about this
and subsequently discovers that George and Francis have been transferring
assets out of the company into another company in which they have an interest.
Advise Albert.
[100 MARKS]
Intro
corporate governance – driven by majority rule in decision-making.
assess the balance between majority and minority.
majority rule governs internal company affairs.
However, there are several exceptions through case law and statutory reform (Companies Act 2006) for minority relief.
In this scenario, Albert, a co-founder and shareholder, has been removed from the board and discovers that George and Francis have been diverting company assets to another business they control. This raises serious issues concerning the protection of minority shareholders, especially under both common law and the Companies Act 2006.
- Foss v Harbottle and Exceptions
The rule in Foss v Harbottle 1843 holds that only the company can sue for wrongs done to it, as the proper claimant. Courts generally avoid intervening in internal affairs where the majority can ratify the alleged wrongdoing. However, Albert may rely on exceptions to this rule where the majority abuses its power.
- Common Law Exceptions
a. Fraud on the Minority – In Cooks V Deek, directors diverted contracts to a separate company they owned. Similarly, George and Francis have diverted assets to another company to which they hold an interest, so Albert is disadvantaged and deprived the company of value. This is a misuse of corporate power for personal gain.
b. Wrongdoers in Control
Breach of fiduciary duties by directors.
Because g & f act together, they control the company and would never authorise action against themselves. This justifies a derivative claim, Albert can sue on behalf of company,
Statutory Remedies
a. Derivative Action s60 CA 2006
Like in Nurcombe V Nurcombe, the husband diverted business, and the wife claimed profit from the diverted business. Directors are under s171-177, duty to promote success of company 172 and avoid conflicts of interest 175. Transferring assets to a company they have interests in breaches both!
Permission from court is required, and success depends on Albert acting in good faith and demonstrating a strong prima facie case.
b. “Unfairly prejudicial conduct – s994 CA 2006”
Albert can apply under s459 (must be shareholder affected).
In RE R.A. Noble & Sons (Clothing) Ltd - the company was a quasi-partnership; 1 shareholder was excluded, and the court upheld its unfairness.
Given the long-standing partnership, Alberts involvement likely amounts to more than a financial interest; it includes expectations of participation. His removal from the board and secret asset diversion could mean unfair prejudice.
c. “Just & Equitable Winding Up s122 Insolvency Act 1986”
LAST RESORT, Albert can wind up the company. (shut down).
This applies when there is a breakdown in mutual trust or deadlock. The longstanding partnership and his exclusion may support this.
- Evaluation & Conclusion
Although courts are reluctant to interfere, they have developed common law and statutory safeguards for minority shareholders.
IMPACT OF CA 2006:
Section 994 is flexible and accessible, though some critics argue litigation is expensive & uncertain.
The derivative action route is more difficult, as it needs court leave before action is filed but provides vital remedy where directors commit wrongs against the company itself.
uncertain, as it should only codify and clarify existing law but uses different terminology and imposes additional obligations on directors.
new concept of “duty of enlightened shareholder value” – directors consider issues, e.g., long-term, interests, environmental.
benefits the minority but can provide dissatisfied shareholders.
Albert has multiple options:
1st pursue a petition under s994 for unfair prejudice, exclusion and diversion of assets.
2nd pursue derivative action – breach of fiduciary duty.
3rd if the relationship has fully collapsed, a just and equitable windup section 122 of the Insolvency Act 1986 may be considered.
Ultimately, courts have shown willingness to protect minority shareholders in such circumstances. Albert’s longstanding role & equal shareholding strengthen his case!
