Minority Shareholders Minority Shareholders Basic
Basic: the protection of minority shareholders’ interests in England and Wales are: the protection of minority shareholders’ interests in England and Wales are safeguar
safeguarded by a ded by a small selection of remedies for either their own personal losses, orsmall selection of remedies for either their own personal losses, or lo
losssses es to to ththe e cocompmpanany y (e(e.g.g. . didivevertrtining g cocompmpanany y cocontntraractcts s to to ththe e didirrecectotorsrs themselves). The former is the most common and available under s! of "#$%%&, themselves). The former is the most common and available under s! of "#$%%&, a petition for 'unfairly preudicial conduct’ (*"), or by a court order re+uesting the a petition for 'unfairly preudicial conduct’ (*"), or by a court order re+uesting the winding up of the company under *art - of the nsolvency (#) /&. The latter is winding up of the company under *art - of the nsolvency (#) /&. The latter is protected by the derivative claim, codi0ed and re0ned by ss$& to $&1 "#$%%&. protected by the derivative claim, codi0ed and re0ned by ss$& to $&1 "#$%%&. 2owever, the shifting boundaries of these remedies illustr
2owever, the shifting boundaries of these remedies illustrate the ate the courts’ dilemma incourts’ dilemma in bala
balancinncing g the the compcompeting intereseting interests ts of of minominority rity sharshareholdeholders ers and and the the compcompany’any’ss rights to manage itself
rights to manage itself without court interferencwithout court interference.e. There
There are are several several methods methods by by which which the the law law protecprotects ts the the membersmembers (3
(3irirectectorsors) ) of of a a comcompapanyny. . 2ow2oweveever, r, prprobloblem em ariarises ses whwherere e the the comcompanpany y or or thethe me
membmberers s arare e wrwronongeged d by by ththe e acacts ts or or omomisissisionons s of of ththe e didirrecectotors rs or or mamaoorirityty shareholders. n such case, the persons who cause the harm are also the persons shareholders. n such case, the persons who cause the harm are also the persons who have standing to obtain redress. Without the law’s aid, members especially who have standing to obtain redress. Without the law’s aid, members especially min
minorority ity shshararehoeholdeldersrs, , whwho o susustastain in losloss s due due to to the the actactionions s of of the the dirdirectectors ors oror maority shareholders would be left without a remedy.
maority shareholders would be left without a remedy. Therefor
Therefore, e, the the concept concept of of protecprotection tion of of minority minority sharehshareholder older concernconcerns s howhow the rights and claims considered in relation to one another and placing the rights the rights and claims considered in relation to one another and placing the rights an
and d clclaiaim m in in cocontnte4e4t. t. ThThe e rurule le ththat at ththe e cocompmpanany y is is ththe e prpropoper er clclaiaimamant nt inin proceed
proceeding in which a ing in which a wrong is alleged to have done wrong is alleged to have done to a company and to a company and limits of thatlimits of that rule.
rule. "ircu"ircumstances in which smstances in which shareholdhareholders may commence and will be perers may commence and will be permitted tomitted to continue a 3erivate "laim.
continue a 3erivate "laim.
*ersonal 5ights: of a shareholder to sue in his own name for legal *ersonal 5ights: of a shareholder to sue in his own name for legal wrongs done to him in a personal capacity, to ma6e good losses he is su7ered, wrongs done to him in a personal capacity, to ma6e good losses he is su7ered, in
inclclududining, g, popotetentntiaialility ty rre8e8ecectitive ve lolosssseses. . ThThe e lalaw w ususes es a a nunumbmber er of of lelegagall mech
mechanisanisms9inms9instrustrument ment to to proprotect tect compcompanies anies frofrom m poor poor manamanagemengement t and and selfself inte
interesrested ted actiaction on by by thosthose e in in contcontrorol, l, inclincludinuding g of of genergeneral al and speci0c directand speci0c directorsors duties. f the inade+uate behaviour of director causes losses to the company, the duties. f the inade+uate behaviour of director causes losses to the company, the company can sue to recover losses cause by breaches of the duty.
company can sue to recover losses cause by breaches of the duty. The company
The company and the and the company alone have company alone have the right to the right to sue for sue for breachbreach of director’s duties because directors’ duties are owed to the company. 3i;culties of director’s duties because directors’ duties are owed to the company. 3i;culties ar
arisise e whwherere e wrwronongdgdoeoers rs arare e didirrecectotors rs ththey ey popotetentntiaial l e4e4isist t fofor r wrwronongs gs to to bebe overloo6ed and no remedies pursued by the company because it is the wrongdoer overloo6ed and no remedies pursued by the company because it is the wrongdoer who are managing the company. (When the directors are in control of the company, who are managing the company. (When the directors are in control of the company, the company lac6 to bring a claim because the directors are the member of the the company lac6 to bring a claim because the directors are the member of the company).
company). The
The di;culty may di;culty may be be overcome by overcome by the the sharehshareholders olders becoming the becoming the decisiondecision ma6ing organ of the company for the purposes of ensuring legal action is brought ma6ing organ of the company for the purposes of ensuring legal action is brought against the directors. The problem is more di;cult to overcome, however, when against the directors. The problem is more di;cult to overcome, however, when wrongdoer directors also own a maority of a company’s share.
wrongdoer directors also own a maority of a company’s share.
<hareholder decisions are largely based on maority rule. Without more, then <hareholder decisions are largely based on maority rule. Without more, then the potential would e4ist for the holders of a maority of the shares in a company to the potential would e4ist for the holders of a maority of the shares in a company to have no procedure by which to assert the rights of eh company when directors who have no procedure by which to assert the rights of eh company when directors who were also maority shareholders acted in breach of duty to the detriment of the were also maority shareholders acted in breach of duty to the detriment of the company. The derivative claim procedure has been developed to assist minority company. The derivative claim procedure has been developed to assist minority shareholders who 0nd themselves in such a position to protect the company.
5ather than being concerned to protect the company, a minority shareholder in such a position is usually more concerned to protect himself personally from the adverse conse+uences of being a shareholder in a company with a maority shareholder managing the company in his own best interests rather than for the bene0t of all shareholders.
The main procedure available to a shareholder to protect himself personal is to petition the court for a remedy pursuant to the "#$%%&, s! based on the company’s a7airs having been conducted in a manner that is unfairly preudicial to the interest of the minority shareholder.
f the company su7ers loss caused by a breach of duty owned to the company its shareholders also usually su7er loss because the value of their shares is not as great as it would be otherwise. The shareholders loss of share value merely 5e8ects the loss su7ered by the company, and for this reason, is called 5e8ective =oss. <hareholders are unable to sue wrongdoers who beach duties owed to the company, because those duties are not also owed to the shareholders.
Even where a wrongdoer owes a separate and additional duty to the shareholder, the shareholder may be unable to sue for breach of that duty and recover losses they have su7ered. This is because insofar as the shareholders’ losses are re8ective losses, to allow recovery could result in the wrongdoer being ordered to compensate more than one person for the same loss: the company (for the loss to the company) and individual shareholders (for the reduction in share value they su7er which is a re8ection of the loss to the company). #s a matter of public policy, the law has set its fact against allowing shareholders to recover re8ective losses e4cept in one very limited circumstance.
Three Principle Remedies:
()The 3erivative "laim under <tatutory ($) The nfair *reudice 5emedy (*")
(>) The *etition for Winding up the "ompany
Relationship between Shareholders and the Company. CA 2006 s !"ect o# company$s constit%tion
()The provisions of a company?s constitution bind the company and its members to the same e4tent as if there were covenants on the part of the company and of each member to observe those provisions.
($)@oney payable by a member to the company under its constitution is a debt due from him to the company.
n England and Wales and Aorthern reland it is of the nature of an ordinary contract debt.
The Proper Claimant Principle
The company is a separate legal entity from its shareholders and conse+uently has legal rights and liabilities. f its rights are infringed9trespassed, by a person failing to perform a contract they have entered into with the company, for e4ample: the company may sue to enforce its rights under the contract. The decision to litigate rest with the board of directors as part of the general powers of management of the company. Brom this perspective, it ma6es perfect sense to have a basic rule, 6nown as the rule in &oss ' (arbottle, that in any legal proceedings in which a wrong is alleged to have been done to a company, the proper claimant is the company.
The ", Boss and Turton, were shareholders in a company formed to buy land for use as a pleasure par6. The defendants were directors and shareholders of the company. The " shareholders alleged that the 3 had defrauded the company in number of
ways including some of the 3’s selling land belonging to them to the company at an e4orbitant price. The " sought an order that the 3’s ma6e good the losses to the company.
2eld, dismissing the action: in any action in which a wrong is alleged to have been done to a company, the proper " is the company and as the company was still in e4istence, it was possible to call a general meeting and therefore there was nothing to prevent the company from dealing with the matter.
The R%le in &oss ' (arbottle:
The rule in &oss ' (arbottle is a cardinal9fundamental principle of company law. n the case of Boss v 2arbottle, the court established three principles such as:
,)- The C*roper "laimant *rincipleD: This provides that only the company, and not the members, can commence proceedings for wrongs committed against it. This principle is a corollary9result of a company’s corporate personality.
,2- The Cnternal @anagement *rinciple: this provides that where a company is acting within its powers, the courts will not interfere in matters of internal management, unless the company itself commences proceedings. This principle is a corollary of the courts’ longestablished reluctance to become involved in the internal a7airs of business.
,- The Crregularity *rincipleD: this provides that where some procedural irregularity is committed, an aggrieved member cannot commence proceedings where the irregularity is one that can be rati0ed by a simple maority of the members. This principle is a corollary of principle of maority rule.
The irregularity principle applies both to rights vested in the company and to rights vested personal in the members. #ccordingly, even where the right to commence proceedings is vested personally in member, the member will be unable to commence proceedings if the members can ratify the irregularity by passing an ordinary resolution.
=imits to the *roper "laimant *rinciple: the courts were compelled to recognise limits to the rule in Boss v 2arbottle. The rule was not applied, for e4ample: if a minority shareholder complained to the court about action by the company for which more than a simple maority was needed, as in !dwards ' (alliwell )/0 which is a trade union case, but the principle is applicable to companies.
!dwards ' (alliwell )/0
The constitution of a trade union provided that contributions were not to be altered until a ballot vote of members had been ta6en and a twothirds maority in favour obtained. "ontributions were increased following a resolution supported by a simple maority. Two members sued see6ing a declaration that the resolution was invalid. 2eld, where a matter cannot be sanctioned by a simple maority of the members of the company but only by some special maority, an individual member is not prevented from suing by the rule in Bv2.
The principle area where the rule presented di;culties was where those who control the company, and in particular, the decision to sue or not sue a person who has legally wronged the company, are themselves the wrongdoers. The most
important limit to the rule which is the only true e4ception to the rule,, came to be referred to as 'fraud on the minority’9 where directors who were also maority shareholders had perpetrated a fraud on the company, a minority shareholder was permitted to commence an action based on a wrong done to the company to secure a remedy for the company. The action was called a 3erivative action.
Proper Claimant Principle
,a-irectors as 1rondoers: it is helpful to illustrate how the proper claimant principle and the e4ception to it, wor6s by analysing a hypothetical scenario. "onsider a company with two directors. They 0nd out informally that planning permission will be granted for a piece of land from the company at a price representing permission. n these circumstances, the directors cannot act as a decision ma6ing organ of the company and decide to sell the land to themselves because they are con8icted out.
#rticles normally provide that they cannot vote on the decision of the company to sell the land to them, and even if the articles did not say this, and the directors cause the company to sell the land to them, they are in breach of ss)324 )3/ and )04 such as:
• they have not acted to promote the success of the company s)324
• they have used information obtained as director to personal advantage s)3/ and
• they have failed to obtain the approval of the shareholders s)0
"onse+uently, the transaction will be voidable by the company, the directors will be liable to account for any pro0ts they have made and must indemnify the company against any losses caused by the breach of duty. #lthough the directors, as the board, ordinarily have the power to decide whether or not to commence any legal action, in these circumstances control of the decision to litigate transfers to the shareholders and the shareholders, as a decision ma6ing organ of eh company, decide whether or not the company will sue the directors. The legal proceedings are still brought by the company, in the name of eh company, see6ing a remedy for the company.
,b-Ma5ority shareholders as wrondoers: staying with h hypothetical situation, the company has three shareholders each owning one third of the shares. Two of the shareholders are the directors. ecause the wrongdoers are directors, who are not going to decide to sue themselves, the decision to litigate or not has reverted to the shareholders.
<hareholders ta6e most decisions by ordinary resolution, which encompasses maority rule. n our hypothetical, the wrongdoers own a maority of the shares and as maority shareholders, they are able to pass or defeat ordinary resolutions.
#re they, therefore, permitted to:
%estion ): pass an ordinary resol%tion appro'in the sale o# the land p%rs%ant to s)07
%estion2: pass an ordinary resol%tion rati#yin the breach p%rs%ant to s27
The answer is no, on a resolution to ratify his breach of director’s duty, the votes of both the director9shareholder and nay person connected with him
are disregarded s$>(!). "uriously, there is no similar provision in s% re+uiring the votes of the director to be discounted on a resolution to approve a substantial asset transaction which leaves the matter moot and the answer to +uestion dependent upon the approach the court ta6es to statutory interpretation. # literal approach would suggest that all shareholders can vote, as the section does not state otherwise, whereas s$> does state otherwise.
%estion : de#eat a proposed resol%tion to s%e the directors to reco'er the land7
# resolution to sue the directors, if defeated, could be characterised as an indirect decision of the company to ratify a breach of duty, thereby bringing it within s$> which re+uires the directors’ votes to be disregarded. t is surprising that the answer to these +uestions is not clearcut.
%estion +: ha'e any leal action commenced by the minority shareholder stopped beca%se he is not the proper claimant7
*rovided the minority shareholder brings the legal action as a claim under s$&%, a statutory derivative claim, the action will not be stooped based on him not being the proper claimant. 2e will, however, need to secure the permission of the court to continue the claim.
The Ma5ority R%le
The principle of the maority rule is a general and sensible rule, which is a fact of business life. # company is bound by the decisions of the maority that applies to decisions in pursuing business activities. Therefore, the practice of proper maority rule sometimes speci0cally leads to a special maladministration purpose i.e. not to pursue corporate wrongdoers specially directors. The fact that the members of a company controlling more than half of votes at a meeting do not owe any duty infers that they have +uite substantial power and can vote for their own advantage. FG Even the wellrecogniHed restrictions based on bona 0de and proper purpose principles goes unrestrained allowing maority rule to operate lawfully. Bor instance, even the 0duciary duties of directors does not prohibit them acting in their own sel0sh interest. F$G
<tatutory protection li6e need for a special resolution instead of simple maority vote, court’s sanction in some of the matter li6e reduction of capital, attempts in stri6ing a balance in the con8icting interests of minorities and controllers. In the other hand, to prevent the abuse of power members can also bring petition for compulsory winding up and unfairly preudicial conduct in order to e4ercise other statutory provisions that are provided
8ro%nds #or the R%le o# &'(
2oward <mith =td v #mpol *etroleum =td J!
s a leading K company law case, concerning the duty of directors to act only for Lproper purposesL. This duty has been codi0ed into the "ompanies #ct $%%§ion J, and arises particularly in cases involving ta6eover bids.
5W @illers was embroiled in a hostile ta6eover bid, by a large petrol company called #mpol. #mpol already controlled (with an associated company) 11M of the shares. The directors did not want #mpol to buy the shares of 5W @illers as 2oward <mith had bettered terms for ta6e over by o7ering employment to the directors even in the future. <o the directors of 5W @illers issued N%m of new shares. They said it was to 0nance the completion of two tan6ers. The shares were given to
2oward <mith =td who were going to ta6e over 5W @illers, and that bloc6ed #mpol’s rival bid. Without the issue, 2oward <mith =td had no hope of succeeding in ta6ing over the company. ut with the new issue, #mpol could not complete its ac+uisition. <treet O said that the argument of the directors that the tan6er purchase was the dominant purpose was 'unreal and unconvincing’.
=ord Wilberforce held that the issue was intra vires but that it was e4ercised for an improper purpose. 'To de0ne in advance Fwhat that means isG impossible.’ t must be adudged 'in the light of modern conditions’, and referred bac6 to Hogg v Cramphorn Ltd. 2is udgment continued.
n Maco%all ' 8ardiner4 9)*3/ @ellish =O, pointed out a situation in which an action for minority’s right could be initiated before the court that is to say if they are deprived by the maority’s abuse of power (e.g. Braud), whereas situations where maority are entitled to do something, only the company have a right to set it aside. 2ence, the court following the principle laid down in Boss v 2arbottle and @oHley v #lston stated that in compelling the directors for a general meeting the court lac6ed urisdiction.
Therefore, without being a7ected by the irregularity principle in Boss v 2arbottle, the di;culty remains with the issue of deciding whether a personal right e4ists for a member. #s Macdo%all ' 8ardiner and Pender ' ;%shinton, shows instances of being inconsistent with each other.
CA200/ on the R%le:
The "ompany #ct ("#) $%%& introduced some changes to the rules on the minority members’ remedies and actions in pursuing company claims after the =aw "ommission and the "ompany =aw 5eview suggested and recommended a new statutory derivative procedure with modern, accessible and 8e4ible criteria while studying the issues. FG "onse+uently, reforms were brought for a statutory derivative action in replacing the common law e4ceptions to the rule in Boss v 2arbottle by few statutory conditions without a7ecting the underlining principle of the rule. 2owever, many of the prere+uisites that were imposed by common law still have a lin6 with the conditions imposed by the reforms introduced by "# $%%&.
Director’s Duty under section 172
3irector’s duty under s. J$ precisely de0nes his legal obligation to promote the success of the company for the bene0t of its members. F%G 2ence, interpreting the company’s obectives in ma6ing decisions and to act in good faith to promote success that is calculated for longterm bene0t remains with the directors. F G
<ection J$ in relation with <ection J% e4presses that duties imposed also regards (without owing a direct duty) the interest of employees, suppliers, customers, community i.e. persons other than the company. <ection J$ assumes the 'enlightened shareholder value’ principle of the =aw "ommissions and "ompany =aw 5eview ("=5). F$G 3irectors acting in accordance with <ection J$ must have regard to the conse+uence of his decisions in the long term, the need to promote company’s business relationships, company’s reputation for business conduct, impact on the community and environment. F>G Therefore, director is li6ely to be in breach of these duties if it is found that the basis of his actions could not reasonably promote the success of the company. F !G n Bassihi, the issue that the breach of director’s duty is e4tended to his duty to disclose the breach to the company under
the e+uitable duty to act bona 0de in the interest of company was also put forward for consideration.
Types o# Action: a) *ersonal #ction
!dwards ' (alliwell )/0
%in and A<tens ;td ' Salmon )0
Puin Q #4tens =td was set up as a business of drapers, furnishing and general warehousemen at !$$ to !!%ri4ton 5oad, ri4ton. Williams #4tens was the chairman. Ooseph <almon and another man, #rthur Way, were managing directors. @r oysTombs replaced Way in %&. #4tens and <almon held the maority of shares. The constitution said no resolution would be e7ective if either #4tens or <almons dissented (art /%). The directors were otherwise to manage the company (art J1). #4tens and oysTombs wanted to buy and let some properties (buy !$& ri4ton 5oad and let out $1$ <toc6well 5oad), but <almon disagreed. Then an e4traordinary general meeting was held, where the same resolution was passed by a maority of shareholders
2ideOudgment
Warrington O held that the motions were not inconsistent with the articles, and distinguished #utomatic <elf"leansing Bilter <yndicate "o, =td v "uninghame.FG "oHens2ardy =O and Barwell =O,F$G said that the resolutions were inconsistent with the articles, which clearly said that a director’s .
b- Representati'e Action: CPR ).6 c- eri'ati'e Actions
eri'ati'e Action: the rule in B v 2, however is not absolute. f it were, wrongs committed by the directors would rarely be subect to litigation. #ccordingly, the courts crafted four so called e4ceptions, to the rule, whereby members could commence an action on the company’s behalf. <uch actions were 6nown as derivative actions because the member was bringing an action based on rights derived from the company. This derivation is reinforced by the fact that, if the action succeeded, the remedy was granted to the company. With the creation of the stat%tory deri'ati'e claim4 the derivative action was abolished, but 6nowledge of the common law e4ceptions will be of aid should an essay +uestion re+uire the common law derivative action to the statutory derivative claim.
eri'ati'e Claim:
<ection $&%() of the "# $%%& e4plains the meaning of the term 'derivative claim’ as an action brought by a member of a company in a court deriving the right of action from the company in see6ing relief or to enforce a right of the company. 3erivative claims acts as an e4ception to the proper claimant principle i.e. when a wrong is done to a company only the company may sue for a remedy. n addition when it is not possible to bring the claim in the companies own name the name of the member of a company is ta6en in a derivative claim for a remedy that will accrue to the company. To begin with a derivative claim only a cause of action that emerge from director’s F1G actual or proposed act or omission involving negligence, default, breach of duty or trust are recogniHed. F &G #s a proceeding in derivative claim recogniHes breach of directors’ duty it is inferred remedies that are available in such a claim would be the same as those, which might be claimed in proceedings brought by the company.
f # sustains loss due to the actions of , then generally only # can sue to obtain redress. # third party " could not sue on #’s behalf. #s companies have separate personality, this principle applies e+ually in the corporate conte4t. f a company sustains loss due to the actions of another, then generally only the company can sue to obtain redress. 2owever, where the company sustains loss due to the actions of tis directors, problem arises in that the powers of the company are usually delegated to the directors, and this would include the authority to determine whether or not the company will commence litigation. "learly, in such a case, the directors will not cause the company to initiate litigation against themselves. The +uestion that therefore arises is can the members commence litigation on the company’s behalf. 3ue to three principle 6nown collectively as the rule in B v 2 the answer is generally no. (The *roper "laimant, The nternal management, The irregularity principle).
!<ceptions to the R%le in &oss ' (arbottle ,+
e<ceptions-eri'ati'e Actions in common law: still relevant in order to help the courts how to apply sections $&% to $&!
The Boss v 2arbottle rule re8ects the principle that where damage is done to the company itself, it is the company that should bring any claim. There are e4ceptions to the rule and in order for a minority shareholder to bring a derivative action on behalf of the companyR it must show () that the company is entitled to the relief claimed, and ($) that the action falls within the proper boundaries of an e4ception to the rule in B v 2.
There are #o%r e<ceptions to the & ' ( r%le4 s%ch as . an act which is illeal or %ltra vires to the company
$. an irregularity in the passing of a resolution which re+uires a +uali0ed ma5ority= when special ma5orities are %nobser'ed
>. an act purporting to abridge or abolish the individual rights of a member9shareholder>s personal rihts ha'e been 'iolated
!. an act which constitutes a fraud against the minority and the wrongdoers are themselves in control of the company9 #ra%d is committed aainst the company and the wrondoers are in control
)- 1hen the act complained o# was illeal or %ltra 'ires4 a member co%ld commence a deri'ati'e action.
Pr%dential Ass%rance Co ;td ' ?ewman @nd%stries ;td ,?o 2- 9)*2 is that a shareholder cannot sue to recover damages for themselves in relation to wrongs done to the company. The proper course is to bring a derivative action on behalf of the company. #ny recovery will 8ow through to the shareholders in the form of an increase in the value of their shares. The primary usti0cation for the rule is said to be to avoid double recovery.
Smith ' Cro#t ,?o 2- )**
This is a K company law case concerning derivative claims. ts principle that in allowing a derivative claim to continue the court will have regard to the maority of the minority?s views has been codi0ed in "ompanies #ct $%%&, section $&>(!
the 0nancial assistance prohibition (now found at section &J/ of the "ompanies #ct $%%&) and being ultra vires. They had !M of the company?s shares, the defendant’s held &>M, and other shareholder, who did not want litigation, held $M.
Kno4 O held that if the claimants were a minority even after the wrongdoers were ta6ing out of the e+uation, then there is no right to sue, even with a Boss v 2arbottle e4ception. ndependence is a +uestion of fact. 2e followed urland v Earle in =ord 3avey’s dicta that shareholders cannot have a bigger right to sue than the company with its procedural and substantive limitations.
Simpson ' 1estminster Palace (otel Co )*30 , may set aside an unlawful act by bringing a derivative action.
2- 1hen special ma5orities are %nobser'ed: where the act infringed9trespassed the personal rights of a member, a derivative action could be brought. 5ights breached could include a failure to provide su;cient notice of general meetings, a failure to pay dividends in accordance with the articles, or the improper reection of a member’s votes.
!dwards ' (alliwell )/0
%in and A<tens ;td ' Salmon )0
- Shareholder>s personal rihts ha'e been 'iolated: where the act complained of could only be done or sanctioned by the passing of a special resolution, a derivative action could be brought.
!dwards ' (alliwell )/0 Maco%all ' 8ardiner )*3/
=ord "ottenham =" in Moley ' Alston, abstaining himself from e4pressing an opinion deduced that even the courts are reluctant to interfere in internal a7airs of corporations. 2ence, the proper claimant remains the company in an action for a wrong and not the shareholders individually (proper claimant principle).
@oreover, the rule also states that minorities are not allowed to bring legal actions about a wrong done in the company e4cept if the action falls within the e4ceptions to the rule. To prevent multiple actions the rule also ac6nowledges e4istence of a company as a separate legal personality.
Cho%dh%ry and others ' Bhatter and others 200
The claimants (" and 5) sought declaratory and inunctive relief in respect of resolutions made at general meetings of the company, which was the third defendant in the proceedings. " and 5 were the company?s directors. The only other director was the 0rst defendant (). The company had its registered o;ce in England but was situated in ndia. p to 3ecember $%%/, the company?s rules stipulated that the convening of a general meeting and the passing of a resolution at such a meeting re+uired the approval of two directors. n a series of company meetings held in that month, " and 5 were removed as directors and replaced with 0ve others. The company?s rules were also altered to re+uire that all further resolutions and decisions be approved by 0ve members of the board. n addition, certain company shareholdings were forfeited and its secretary was replaced. had conducted the meetings at which each of those resolutions were passed. " and 5, who were not present at any of them, sought declarations that the resolutions were void on
the grounds that they had approved neither the convening of the meetings nor the resolutions purportedly passed at them. nstead, they maintained that had forged their signatures on the convening notices and the resolutions in order to move maority ownership and control of the board to the second defendant. ?s position was that " and 5 were well aware of what had happened and had participated in the events up to and including their resignation from the oard. argued that () the proceedings were misconceived because many of " and 5?s complaints were no more than defects in internal management, which could be recti0ed at a general meetingR ($) the court lac6ed urisdiction on the ground that ndia was the forum conveniens.
2eld () #s the composition of the body of shareholders was a central issue in the case, a general meeting would resolve nothing, @ac3ougall v Sardiner (/J1J&) =5 "h 3 > "# distinguished. Even if there were not dispute as to shareholdings, the court would have urisdiction to ma6e an appropriate order regulating the conduct of the company?s a7airs until such time as a general meeting could be convened. @oreover, a director could sustain an action in his own name against the other directors if he was wrongfully e4cluded from acting as a director, including a claim for an inunction to restrain that e4clusion, *ulbroo6 v 5ichmond "onsolidated @ining "o (/J/) =5 "h 3 &% "h 3 applied. ($) had overloo6ed the impact of 5egulation !!9$%% art.$$, which provided a basis of urisdiction regardless of domicile in proceedings concerning the constitution or internal management of the company, <peed nvestments =td v Bormula Ine 2oldings =td (Ao$) ($%%!) EW"# "iv 1$, ($%%1) W=5 >&, considered. Where urisdiction e4isted under the 5egulation, the court on which it was conferred was obliged to hear and determine the claim even where the potential alternative court was not that of a @ember <tate, Iwusu v Oac6son (t9a -illa 2olidays al nn -illas) ("$/9%$) ($%%1) P /% E"O applied, 2arrods (uenos #ires) =td (Ao$), 5e ($) "h J$ "# ("iv 3iv) superseded. (>) The substantial disputes of fact in the instant case could not be determined on an interlocutory application or without a trial. n the interim, it was necessary to ma6e orders which preserved the status +uo. @ore speci0cally, it was necessary to restrain the parties from doing anything detrimental to the interests of any other party. #ccordingly, was ordered to act in relation to the management of the company?s business only as directed or authorised by " and 5, or as ordered by the courts of ndia. n addition, was restrained from ta6ing any step to convene a general meeting or to procure a decision of directors to alter the composition of the board or the shareholding in the company. " and 5 were to give an underta6ing to the same e7ect. +- &ra%d is committed aainst the company and the wrondoers are in
control: this e4ception is more comple4 and much important, and occurred where those persons who controlled the company had committed some sort of fraud on the minority. The fraud included actual fraud (breach of the Theft #ct &/ or the Braud #ct $%%&) and e+uitable fraud ("onduct tainted by impropriety). Aegligence, even gross negligence, would not su;ce (Pa'lides ' ensen )/6), but where the negligence bene0ted those who control the
company, this would su;ce9be enough as the negligence would be tainted by impropriety (aniels ' aniels )3*). The courts would not allow a claim based on fraud on the minority to succeed if it would not serve the interests of ustice (where the independent members had indicated that they did not wish the claim to proceed (Smith ' Cro#t ,no 2- )***)
&ra%d on the minority Coo ' ees ))6
3ee6s and 2inds were the directors of a construction company. They negotiated a lucrative construction contract with the "anadian *aci0c 5ailway. 3uring the negotiations, they decided to enter into the contract personally, on their own behalves, and incorporated a new company, the 3ominion "onstruction "ompany to carry out the wor6. The contract appeared to be ta6en over by this company, by whom the wor6 was carried out and the pro0ts made. # shareholder in the Toronto "onstruction "ompany brought a derivative action against the directors and the 3ominion "onstruction "ompany. ecause this was a derivative action, the Toronto "onstruction "ompany was also oined as a defendant. 2eld: 3ee6s and 2inds were guilty of a breach of duty in the course they too6 to secure the contract, and were to be regarded as holding it for the bene0t of the Toronto "onstruction "ompany: Cwhile entrusted with the conduct of the a7airs of the company they deliberately designed to e4clude, and used their in8uence and position to e4clude, the company whose interest it was their 0rst duty to protect.D This led to the legal conclusion that: Cmen who assume the complete control of a company’s business must remember that they are not at liberty to sacri0ce the interests which they are bound to protect, and, while ostensibly acting for the company, divert in their own favour business which should properly belong to the company they represent.D
#n e4ample of a case involving negligence in a situation where the result is a personal advantage to the wrongdoer is aniels ' aniels ,)3*-, where three minority shareholders claimed that mr. Q mrs.3aniels (two directors and maority shareholders) had acted negligently in ma6ing the company sell land to @rs.3aniels at a very low price although it was worth a lot more money, it was held that the plainti7s had the right to sue in such circumstances. n contrast, where a minority shareholder claimed that the directors had acted negligently in selling an asbestos mine to another company at a fraction of its true value in Pa'lides ' ensen ,)/6-, it was held that as no fraud or personal advantage was evident from the facts of the case it appeared that the minority shareholder had no right to sue in such circumstances.
The wrondoers control the company:
n Smith ' Cro#t no. 2,)**-, where the minority shareholders claimed for the recovery of sums given away in transactions which were both in breach of the statutory prohibition on 0nancial assistance and ultra vires, it was held that as it appeared to be a prima facie case of ultra vires and illegality, thus the plainti7s had the right to bring a derivative action, provided that maority shareholders had no obection to the continuation of the action.
What the law needs to do is stri6e a balance. t can neither give more support to the maority (as the minority will then be preudiced) and nor to the minority (who would then obect on every action, resulting in the 8oodgates argument). 2owever, it seems +uite evident from these four e4ceptions and the various case law 8owing as a result of them that under common law minority shareholders have been given
protection to +uite an e4tent and the law seems to have provided some remedies to meet those cases in which maority power has been abused.
The Three actions:
)- The Stat%tory eri'ati'e Action:
Stat%s7 A deri'ati'e claim can be bro%ht %nder the CA200/
<ource of law "# $%%& *t Srounds for claim Aegligence
3efault
reach of duty reach of trust Imission committed by 3irectors (only)
"laims can be brought by # member or a person who is not a member, but to whom shares have been transferred o transmitted by operation of law.
"laim can be brought against # director of the company or another person (or both)
"laim for negligence "laim can be brought, irrespective of whether or not a director bene0ted personally.
The statutory derivative claim is the only proceeding by which a minority shareholder, notwithstanding h slac6 of control over company decisionma6ing, can commence legal action in respect of a cause of action vested in the company, see6ing relief on behalf of the company, to remedy a wrong done to the company (s$&% "# $%%&). The $%%& act has e4panded the grounds on which a derivative claim may be brought but re+uires court permission for the continuation of claims. The conse+uences of introduction the new statutory procedure were not easy to
predict.
8ro%nds #or the claim: a statutory derivative claim may be brought IA=U in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company. The cause of action may be against the director or another person or both ,s260,--.
The e4posure of Third *arties to a s$&% claim will depend upon dishonest assistance and 6nowing receipt as the courts have developed these concepts in the conte4t of breaches of duty by directors (these concepts are usually addressed in trusts courses when e4amining the liability of strangers to the trust in the event of a breach of duty by one or more trustees).
"laims cannot be brought under s$&% against third parties based on causes of action arising independently from the director’s legal shortcomings.
Proced%re o# the Claim:
The parties: the claimant in a s260 derivative claim is the shareholders, because the shareholder is bringing the action to secure relief for the company, the company must be made a defendant to the claim along with the directors and any third parties against whom relief is sought.
Application #or permission to contin%e C s 26): an application to continue a 3" by a maority shareholder was reected in Cinematic &inance ;td ' Ryder 20)0, the court accepted that a 3# could be brought by a maority shareholder but stated that permission to continue would be given to a maority shareholder IA=U in very e4ceptional circumstances and it was di;cult to envisage what such circumstances might be. n Stimpson ' So%thern Pri'ate ;andlords Association 20)0, the +uestion of the importance of wrongdoer control of the members arose, although the comments in the case on this issue were obiter.
Ince the claim form has been drafted and either before or after it has been issued, an application must be made to eh court for permission to continue the claim (s26),)-). The shareholder is precluded from ta6ing any further step in the proceeding until the court has given permission for the claim to continue. There is a twostage process by which the court decides whether or not to permit the claim to continue.
Stae one: a Prima #acie case: ,prima #acieDat the Erst instance=#ace- the court must be satis0ed that the particulars of the claim and the evidence submitted to support it disclose a prima facie case for giving permission to continue. f not prima facie case is disclosed, the court must dismiss the application and ma6e any conse+uential order it considers appropriate (s26),2-). f the court does not dismiss the application, the application goes to stage $, where the claimant will submit written evidence with his application for permission to continue, supporting his statement of claim, and there is no re+uirement to involve the defendant.
The burden of proof imposed on a claimant and the range of issues necessarily considered at this stage de0ne the process within which the courts balance protection of the company from the cost and distraction of bogus actions on the one hand, and minority shareholders from unacceptable e4cesses of maority shareholder rule on the other hand. f a heavy burden is imposed, many claimants will have to be denied permission to continue.
@esini 1estrip (oldins ;td 20)0 and &ranbar (oldins ;td ' Patel 200* , these two cases imply that the claimant must present evidence rather than simply asserting the relevant breach of duty in the statement of claim. Stimpson ,B%rden o# proo# and to what e<tent it is
satisEed.-@esini 1estrip (oldins ;td 20)0 claimants asserted that defendants in breach of their duty deprived the company of its assets. "ourt considered the derivative procedure laid down under <ection $&%, $&> in conveying that the case was one for the application of <ection $&>(>)(b), as it was inferred that some directors would not see6 to continue the claim. @oreover, it was found that the board too6 advise on technical matters from eminent counsels before acting. 2ence, the permission to continue the claim was refused.
&ranbar (oldins ;td ' Patel 200* certain e4tent to which director acting in a manner conforming to <ection J$ were interpreted. #t the same time, some udicial guidance were given by the court on matters such as li6elihood of success
of the claim, company’s ability to recover from an award of damage, disruption caused by proceedings on development of company’s business, costs of proceedings, damage to company’s reputation while assessing the importance of a derivative claim.
Stae2: it involves a hearing of the application for permission to continue the claim and the defendant and, if it wishes, the company ta6e part. #t this stage, the court @<T refuse permission to continue if:
• # person acting in accordance with the sJ$ duty to promote the success of the company would AIT see6 to continue the clam (s$&>($)(a)) @esini ' 1estrip (oldins ;td 20)0
• The act or omission has been authorised (a ahead of time) or rati0ed (after the event) by the company (s$&>($)(b) and (c) or where the cause of action arises from an act or omission that has already occurred that the act or omission was authoriHed by the company before it occurred, or has been rati0ed by the company since it occurred.
