shareholder protection Flashcards
(22 cards)
1
Q
Introduction
A
- In company law, shareholders play a crucial role in ownership and control. For a company to initiate court proceedings, it requires majority shareholder approval, as the majority rules. Courts are reluctant to interfere in internal shareholder disputes, as many are business decisions.
- When shareholders disagree, it typically becomes a matter of majority vs. minority, and the minority has limited recourse. The rule in Foss v. Harbottle states that only the company, with majority consent, can challenge decisions that harm its interests, as a company cannot sue itself.
2
Q
The rule in Foss v Harbottle
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- The rule in Foss v. Harbottle establishes two key points:
1. If the majority harm the company, minority shareholders can take derivative action.
2. Shareholders cannot overturn a majority decision that the majority can confirm. - Generally, the majority’s decision becomes that of the company, which the court will not typically overturn.
- In Foss v. Harbottle, the facts involved a company formed to acquire land for development, but the directors, who had purchased the land prior to the company’s formation, sold it to the company at an inflated price. The plaintiffs, minority shareholders, sought to challenge the purchase, alleging it harmed the company.
o The court held that only the company, not individual shareholders, could bring the action because the wrong had been done to the company itself. The judgment emphasized the separation between a company and its shareholders, affirming that the majority’s decision (even if harmful) governs the company, and the minority cannot override it. - The Foss decision is based on several principles of company law:
1. Shareholders can change the articles and remove directors.
2. The majority rules in shareholder decisions, and the minority’s rights are limited.
3. The company’s control over its own destiny is crucial, as affirmed in O’Neill v. Ryan.
4. The rule prevents numerous lawsuits by aggrieved shareholders and stops futile actions that can be ratified by the majority.
3
Q
The interplay with s 31 rights
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- The rule in Foss v. Harbottle does not prevent shareholders from defending their personal interests, with exceptions like Section 31 and derivative actions. Foss focuses on who can best protect the company’s interests, not personal rights.
- Section 31 creates a binding contract between the shareholder and the company, and minority shareholders can argue that the directors’ actions breach this contract, allowing them to sue personally.
- The distinction between a personal wrong and a wrong to the company is often unclear. Shareholder rights in the company’s constitution are generally personal, forming part of the Section 31 contract.
- While companies may argue Foss applies, the court will decide. Initially, courts were reluctant to allow shareholders to act on personal rights under the Articles, but this has been evolving.
- MacDougall v Gardiner – involved a shareholder who sought legal action against the chairman and directors for preventing a poll vote on the adjournment of a meeting, despite the company’s articles allowing five members to demand one. The shareholder claimed this was part of a collusion by the directors to push a damaging measure through without majority approval.
o The court applied the Foss v. Harbottle rule, ruling that the alleged breach was an internal procedural irregularity that could have been ratified by the majority of shareholders, and therefore the action could not proceed. - In Pender v Lushington – UK court allowed a shareholder to vindicate his personal rights when the chairman refused to count nominee votes, leading to the failure of a shareholder resolution.
o The court held that the right to have nominee votes counted was granted by the company’s articles, and this procedural breach did not fall under the Foss v. Harbottle rule.
o The case established that a breach of the company’s constitution could be seen as an infringement of personal shareholder rights, thus supporting a claim under Section 31 of the Companies Act as a contract issue. - Edwards v Haliwell – the court ruled that members of a trade union could sue for the infringement of their personal rights when a subscription fee was increased without a members’ ballot, as required by the union’s internal rules.
o Jenkins LJ stated that the Foss v. Harbottle rule did not apply because the issue was not a wrong to the company, but a violation of the personal rights of the union members.
o The case reinforced the idea that where a shareholder’s rights are protected by the company’s constitution (like the union’s rules), they can take action to protect those personal rights under Section 31 of the Companies Act, as the wrong is personal to the shareholder, not the company itself. - Prudential Assurance v. Newman Industries (No.2) – the court held that a shareholder cannot bring an action for the diminution in the value of their shareholding, as this is treated under the rule in Foss v. Harbottle rather than Section 31.
o The court emphasized that the principle behind Foss is rooted in the idea that a corporation is a separate legal entity, and when a shareholder acquires shares, they accept that the value of their investment is tied to the company’s fortunes.
o The only way a shareholder can influence the company’s direction is through voting at general meetings. Therefore, losses affecting share value are not considered personal wrongs, and thus shareholders cannot sue directly for such losses under Section 31.
Approved in O’Neill v Ryan - Flanagan v Kelly – the plaintiff, a director, sued the defendant, an auditor, for negligence in preparing a declaration of solvency for the company’s liquidation. The plaintiff claimed personal loss.
o However, O’Sullivan J. held that under Foss v. Harbottle, shareholders cannot sue for a diminution in share value, as the loss belongs to the company, not the individual shareholder.
o The court also dismissed the plaintiff’s claim for a duty of care as a creditor, ruling that there was insufficient proximity between the plaintiff and defendant.
4
Q
Derivative action and exception to Foss v Harbottle
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- Exceptions to the rule now include:
1. Where the act cannot be ratified by the majority, such as criminal or ultra vires acts. However, for LTDs under the 2014 Act, the ultra vires rule no longer applies. - Cockburn v. Newbridge Steam Laundry – the MD paid bribes to secure contracts. Shareholders sued to recover the money. The MD argued only the company could sue, but the court disagreed, holding that criminal acts (like bribery) cannot be ratified, so shareholders could bring the claim. This falls under an exception to the rule in Foss v. Harbottle: criminal or ultra vires acts can justify shareholder action.
- Section 973(1) – members may also apply to restrain ultra vires acts. But LTDs no longer have objects, so the ultra vires rule doesn’t apply to them, only to other types like DACs.
2. Where an act requires a 75% special resolution but only gets 51%, it is invalid. The minority shareholder can challenge it, as it cannot be ratified by a simple majority.
3. Where there has been a fraud on the minority, the rule in Foss does not apply. In Cook v Deeks, directors diverted company contracts for personal gain. Though a general meeting tried to ratify this, it was ineffective, the court held it was a fraud on the minority, which cannot be ratified.
4. Where the justice requires it - Where a shareholder sues on behalf of the company under one of the Foss exceptions, it is called a derivative action. The shareholder’s right to sue comes from the company’s own right, it’s a claim for a wrong done to the company, not to the shareholder personally.
- Prudential Assurance v. Newman Industries, the Court of Appeal endorsed the Foss v. Harbottle rule:
1. The company is the proper plaintiff when wronged.
2. If a transaction can be ratified by a majority vote, no individual shareholder can sue; the company will act if the majority rejects it.
3. If the transaction is ultra vires, the majority cannot ratify it. Shareholders may have personal rights to seek an injunction or sue on behalf of the company.
o The ultra vires exception isn’t truly a deviation from Foss, as such acts can’t be ratified by the majority, and shareholders may have personal rights in such cases.
5
Q
2
A
- Russell v. Wakefield Waterworks shows a member can set aside an ultra vires act and recover funds.
o Fraud on the minority is the clearest exception to Foss. A minority can bring a derivative action when the majority, in control, commits fraud. These cases often involve misuse of company property, breach of duty, bad faith, or negligence. - Menier v. Hooper’s Telegraph Works Ltd – the defendant company diverted a government contract away from a company it had agreed to supply and arranged for it to be transferred to a third party.
o To block legal action, it passed a resolution to wind up the original company and appointed a friendly liquidator. A minority shareholder was allowed to bring a derivative action, as the majority had acted fraudulently by taking company assets for themselves. - Courtney’s key elements for fraud on the minority:
Majority committed fraud on both the company and minority.
Majority was in control (does not merely relate to voting)
The company wouldn’t act unless a derivative action was allowed.
“Control” usually means over 50% of voting shares.
If unclear, minority must show why the company did not bring an action on its own:
a) Proving that the company refused to bring an action, or
b) It would be pointless to ask due to majority control. - Glynn v Owen – two minority shareholders (40%) claimed “fraud on the minority” against three majority shareholders (60%). The wrongdoing alleged was distinct for each.
o The third respondent had no proven improper gain.
o The first and second (father and son) had acted wrongfully, qualifying as “fraud on the minority.”
o However, since they held only 40% and were not connected to the third respondent, there was no majority control, and so the derivative action failed, the required “control” element was not satisfied. - The meaning of “fraud” in this context does not require dishonesty or criminality. Keane notes this, while Courtney suggests some degree of moral turpitude is needed. This view is supported by Connolly v Seiskin, where Kelly J held that “fraud” involves various degrees of moral wrongdoing.
- In Estmanco v GLC – GLC used its voting control to block an action against itself, harming other shareholders. The court allowed a derivative action, showing that “fraud on the minority” can arise from abuse of power with moral wrongdoing, even if not fraud in the strict legal sense.
6
Q
Foss & Negligence/Constitutional Rights
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- It’s argued that Foss v. Harbottle should evolve to reflect modern negligence law. In Re Fredrick’s Inns, the Supreme Court recognised that directors owe duties to creditors once insolvency arises, suggesting a shift towards broader accountability.
7
Q
Procedure for Derivative Action
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- Primary criterion – unless the action is brought, a wrong against the company would otherwise be unredressed.
- Wallersteiner v Moir (No.2) – Denning MR – without derivative action ‘an injustice would be done without redress’
- A minority shareholder can bring a derivative action on behalf of the company, naming the company as a party. If successful, the shareholder drops out, and the order is made in favor of the company. The shareholder may withdraw at any time without company consent. If the court allows the action, the shareholder’s name is removed, and the case proceeds in the company’s name.
- Prudential Assurance Co v. Newman Industries (No. 2) – a two-step test for derivative actions was set out:
1. The company is entitled to the relief claimed.
2. The action falls within the proper exceptions to Foss.
o This ensures the company’s protection from excessive costs. A shareholder must act in good faith for the company’s benefit. Courts will not allow a derivative action if they suspect an ulterior motive.
o Lawton LJ – the minority shareholder must act for the company’s benefit, not for personal gain. The court must ensure the shareholder is the proper person to bring the action. - Fanning v Murtagh – in Ireland, to bring a derivative action, the shareholder must show a ‘realistic prospect of success.’
- The Rules of Superior Courts (Order 15, Rule 38) now require the shareholder to obtain leave from the High Court before proceeding. The application must include an affidavit detailing efforts to have the company pursue the claim and evidence supporting a realistic chance of success. If the judge is satisfied, the full dispute will be heard with the shareholder acting on behalf of the company.
8
Q
Oppression action
A
- Section 212 – provides statutory protection to minority shareholders, separate from the common law rule in Foss v. Harbottle. It was introduced to address concerns that the common law did not adequately protect minority shareholders from abuses of power.
- Section 212 allows a shareholder to apply to the court if the company’s affairs or the directors’ powers are being exercised oppressively or in disregard of the shareholder’s interests. This provision is now commonly used in disputes involving minority shareholder protection.
- Section 212 offers broader protection than the common law rule in Harbottle, as it covers not only directors’ powers but also decisions made by majority shareholders. It is now more commonly used in shareholder disputes due to its broad criteria and provision for confidential or in camera hearings.
o These hearings are allowed when disclosing information publicly would harm the company’s legitimate interests, such as financially sensitive data. - However, in Re R Ltd., the SC emphasized that in camera hearings should only occur in exceptional cases.
- More recently, in Re Glenman – Cregan J. stressed the exceptional nature of the in-camera provision under s. 212(9), requiring the applicant to prove the prejudice caused by a public hearing. He also pointed out that company disputes, unlike personal matters, don’t justify in camera hearings and refused the order, though some evidence could be redacted.
9
Q
Reliefs
A
- Under Section 212, the court can grant various remedies, including:
o S. 212(3)(c) – Ordering the company or members to buy a shareholder’s shares
o S. 212(3)(d) – Compelling the oppressor to compensate
o S. 212(4) – Amending the Memorandum/Articles
o S. 212(4) – Winding up the company - The court can also:
o S. 212(2)(a) – Direct or prohibit actions, or cancel/modify transactions
o S. 212(2)(b) – Regulate the company’s future affairs
10
Q
Who can apply?
A
- Under Section 212, only members or their representatives can apply. The member must be on the register, but if they’ve signed a contract to transfer shares, they lose the right to petition, even if still on the register. The member doesn’t need to be a minority shareholder, as upheld in Re Westwinds Holding Company Ltd.
11
Q
Presenting the petition
A
- Section 212(1) gives members the right (locus standi) to petition the High Court for relief, but the petition must be made in good faith (Re Walsh Western Computer Holdings).
- The member doesn’t have to show the conduct affected them only as a shareholder, it can also relate to their role as a director Re Murph’s Restaurant.
- This makes s.212 particularly useful, as it allows shareholder-directors to challenge actions like being excluded from management.
- However, under s.520(4)(g, actions taken during examinership cannot be challenged under s.212.
- To succeed, a shareholder must show:
a) Oppression, or
b) Disregard of their interests.
12
Q
What constitutes oppression
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- The English Act defines oppression as conduct that is “burdensome, harsh and wrongful.” To assess a claim, examine whether the actions of the directors or shareholders fit this definition.
- Scottish Co-operative Society v Meyer – this definition was accepted. The plaintiff, a minority shareholder in a subsidiary, refused to sell its shares when the holding company no longer needed the subsidiary. In response, the holding company transferred all the business from the subsidiary to itself, making the subsidiary’s shares worthless.
o The court found this conduct oppressive, and the holding company was ordered to buy the plaintiff’s shares at their value before the transfer. Viscount Simonds confirmed this definition of oppression.
13
Q
Must be burdensome, harsh, and wrong
A
Re Greenore Trading Company – three shareholders each held a one-third stake. One (B) sold his shares to V, with part of the payment, 14,500 coming from the company as compensation for B’s loss of office. The third shareholder claimed oppression under section 205 (now s.212).
o Keane J found the £14,500 either an unauthorised company payment or illegal financial assistance for share purchase, breaching section 60 of the Companies Act 1963. He ruled it a clear misuse of company funds to give V control, calling it “burdensome, harsh and wrongful” falling within the definition of oppression.
14
Q
Objective test
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- Re Irish Visiting Motorists Bureau – oppressive behaviour is judge by objective standards and on a case-by-case basis.
15
Q
Oppression need not be qua member (in their position as a member)
A
- In Irish law, oppression can be suffered by a member as a director, not just as a shareholder, as confirmed in Re Murph’s Restaurant Ltd.. However, the person must still be a shareholder to bring a claim under section 212.
16
Q
A single act suffices
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- Re Williams Group Tullamore Ltd. – Barrington J. ruled that a single act could lead to oppression, as seen when preference shareholders were given benefits at the expense of ordinary shareholders. Although the court didn’t find subjective oppression, it ruled that the actions objectively disregarded the ordinary shareholders’ interests.
- Re Greenore – Keane J. stated that while a single act generally isn’t enough to prove oppression, a “multiplicity of unlawfulness” in one act can still ground a claim if it disregards shareholder interests.
17
Q
Fraudulent and unlawful transaction
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- Re Westwinds Holding Company Ltd – the defendant’s actions were deemed oppressive and fraudulent. The defendant, as a ‘governing director’ with weighted votes, arranged for the company to acquire land, which was later sold at a gross undervalue to companies he controlled. The plaintiff’s signature was forged on the sale deed.
o The defendant also used forged documents to have the company guarantee an overdraft for another company he owned.
o Kenny J. found these actions to be a “fraud on the other member of the company,” benefiting the defendant at the expense of the plaintiff and the company. The court ordered the defendant to purchase the plaintiff’s shares, valuing them based on the land still held by the company. Actions don’t need to be illegal to be oppressive; they can still be deemed oppressive if they unfairly harm the interests of a shareholder.
18
Q
Incompetence or mismanagement is insufficient
A
- Re Five Minute Car Wash Services Ltd. – the court clarified that mere incompetence, or mismanagement does not amount to oppression.
o The petitioner, a former director, claimed the Managing Director’s actions were oppressive to the other shareholders.
o However, while the Managing Director’s behavior might have been unwise, inefficient, and careless, it did not rise to the level of unscrupulous or unfair conduct. There was no evidence of actions that were harsh, burdensome, or wrongful towards any member, thus no oppression was found. - Re Five Minute Car Wash Services Ltd –> Irish Press plc v Ingersol – ‘where a deliberate plan to damage the interests of a company is carried out by a shareholder in the manner by which it exercises its power to conduct the affairs of the company, such behaviour is oppression.’ The failure by the respondent to operate a management agreement was a repudiation of that agreement and central to the finding of oppression. Emphasis is placed on whether the behaviour was deliberate when deciding oppression or mismanagement.
- Scottish Co-op v. Meyer – Viscount Simonds addressed the role of nominee directors, emphasizing their duty not to passively allow a majority shareholder to strip a company of its assets.
o He stated that parent companies must treat minority shareholders fairly and avoid pressuring nominees to disregard their instructions. Barron J. cited this in Irish Press, reinforcing that nominees should not harm anyone’s interests in the company.
19
Q
Exclusion from management is sufficient
A
- Murph’s Restaurants Ltd (No.2) – exclusion of a director from management can amount to oppression.
20
Q
Disregard of members’ interests
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- Section 205 allows action if the company’s affairs or directors’ powers are exercised in disregard of a member’s interests, which is a less severe ground than oppression.
- However, Irish courts tend to focus more on oppression as a ground. The term “member’s interests” is broad and encompasses more than just the “member’s right.”
- Re Williams Group Tullamore Ltd. – company’s articles prevented ordinary shareholders from attending or voting at general meetings as long as there were preference shareholders, who received fixed annual dividends. The ordinary shareholders, however, received more substantial, non-fixed dividends.
o When preferential shareholders proposed a new class of shares to receive additional dividends, it would redistribute profits that would otherwise go to ordinary shareholders.
o Despite following proper procedures and acting in good faith, Barrington J ruled that this change was in disregard of the shareholders’ interests under section 205.
o To succeed under this ground, unlike under section 212, the damage must be suffered in the capacity of a member. The action must involve the conduct of the company’s affairs or the exercise of directors’ powers, as in Re Williams.
21
Q
Remedies
A
- Section 212(3) allows the court to:
Direct or prohibit acts
Cancel or vary transactions
Regulate future company affairs
Order the purchase of shares - The main limitation is when the court cannot resolve the issue, often leading to a company’s winding up.
- Examples of remedies:
Purchasing the petitioner’s shares (Re Greenore Trading, Re Clubman Shirts)
Purchasing the respondent’s shares (Irish Press v. Ingersoll)
Company buying its own shares
Cancelling or varying transactions (Re Williams Group)
Altering the memorandum/articles - Section 205 is preferred when shareholder relationships break down, allowing a buy-out instead of winding up, as seen in Colgan v. Colgan & Colgan.
22
Q
Winding up under s. 569
A
- Another remedy available to shareholders is applying to the High Court for the company’s winding-up. Key principles are:
No fixed categories of complaints for winding up.
Section applies to members, directors, examiners, or creditors.
Actions consistent with company regulations may still fall outside what the parties reasonably expected when becoming members.
A company can be compulsorily wound up on just and equitable grounds. - Re Murph’s Restaurant – Gannon J stated, “A limited company is more than a mere legal entity… behind it are individuals with rights, expectations, and obligations not submerged in the corporate structure.”
