Chapter IIntroduction

1.1 Introduction

The rights of minority shareholder are derived from several

different areas of company law and consequently law texts have

tended to deal with such rights within specific categories.

Section 223 of the Companies Act, 1994, reflects the concept

that has swept the entire corporate world in the last fifty

years, namely that those who are not in the control of the

management of the company should have a direct mode of

complaint to the Court if they can show that the affairs of

the company are being run in a manner which is prejudicial to

the interest of the company. This section has been inserted in

our company law after a long felt need for enabling the court

to interfere if it finds that the majority in the company are

operating in a manner that is oppressive to the interest the

minority.1 The genesis of this section 210 of the English

Companies Act, 1948, which provided an alternative remedy to

winding up in cases of oppression.2 This provision gave any

number of the company the right to petition the Court that the

affairs of the company were being run-in a manner oppressive

to some part of the members including himself and the Court,

1 Dr. M Zahir, Company and Securities Law, (Revised and updated Edition), 2005, theUniversity Press Limited, p. 182.2 Nirmalendhu Dhar, Company Law & Partnership, 3rd Edition, ReMiSi Publishers, p.187

1

if it found that the allegation was true but that to wind up

the company would unfairly prejudice those members but

otherwise the facts would justify the making up of winding up

order on the ground that it would be just and equitable that

it should be wound up and then the Court might, with a view to

bringing to an end the matters complained of, make such order

as it thinks fit, whether for regulating the conduct of the

Company’s affairs in future, or for the purpose of the share

of the company by other members of the company and or the

company itself. The Court could ask also make an alteration or

additions to the company’s memorandum or articles of

associations and these changes could not be altered by the

company without leave of the Court.3

Section 397 of the Indian Companies Act follows the English

law and provide that any members of the company who complain

that the affairs of the company are being conducted in a

prejudicial manner to public interest or in a manner

oppressive to any member or members including any one or more

of themselves may apply to the company law board provided such

members constituted one tenth of the number or issued share

capital of the

company and if the board is of the opinion that the allegation

is true and that to wind up the company would unfairly

prejudice such member or members, but that otherwise the facts

would justify the making of a winding up of order on the

ground that t is just and equitable of that the company should

be wound up then the Board may, with a view to bringing to an

end the matters complained of, make such order as it thinks3 Dr. M Zahir, supra note 1, p. 183.

2

fit.4

The Bangladesh law differs from the Indian, English and

Australian law (section 260 of the Australian Corporations and

securities legislation) in that those laws requires that

applicants to show that the affairs of the company or the act

complained of are likely to cause ‘unfair prejudice’ to the

petitioners whereas the Bangladesh law speaks only ‘prejudice’

to the petitioner.5 This, in theory, means that the Bangladesh

Court should be under less restraint in using the power under

the section. Further, Bangladesh law permits an action to be

brought when there is discrimination regarding the interest of

any member or debenture holder. The Australian law mentions

that an act or resolution of the company, if is ‘unfairly’

discriminatory, may cause the Court to interfere. The Indian

law does not mention anything about discrimination nor does

the English Law but it is clear that if discrimination is

proved then that would tantamount to oppression on members.6

There have been only a few reported decisions available on the

application of section 23 in Bangladesh. The decisions in

other countries will no doubt be closely followed by the High

Court Division here and I am going to discuss those decisions

to get an idea of the possible interpretation the Court

regarding protection of minority shareholders.7

4 C.R. Datta, The Company Law, V-II, 6th Edition, 2008, Wadhawa and Company, p.16655 Dr. M Zahir, supra note 1, p. 183.6 Ibid7 Nirmalendhu Dhar, supra note, p. 187

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1.2 Research Questions

This paper primarily focuses on and tries to find solutions to

the following questions:

a) How the principles of protection minority shareholders’

rights have been developed since the rule of Foss v. Harbottle

had declared?

b) Under what circumstances might it be argued that the

right to bring derivative actions amounts to “shareholder

activism”?8

c) What are the elements of unfair prejudice?9

d) Whether the statutory remedy is sufficient enough to

protect the minority shareholders’ rights?

e) When the question of the sanctity of the bargain between

shareholders embodied in the article and the prevention

of unfair treatment arises and how it resolves?10

f) How far the legislation and practice regarding protection

of minority shareholders’ rights in our country can be

improved compared to other country?

1.3 Scope and Objectives

The emancipation of minority shareholders is a recent

event. The rights of minority shareholders is an

important and rapidly developing branch of law. Although

the nascent branch of law addresses huge scope to

discuss, but due to limitations, this paper attempts to

focus only on those issues which are closely connected

8 John H Farrar, Nigel E Feury and Brenda M Hanningam, Farrar’s Company Law, 3rd Edition,1991, London, p. 6439 Janet Dine, Company Law, 3rd Edition, 1998, Macmillan Press Ltd., p. 263.10 H.C. Johari, Commentaries on Companies Act, V-2, 2006 Edition, Kamal Law House,p. 1281.

4

with the principles of protection of minority

shareholders’ rights. To be precise, the paper tries to

find answer to the aforementioned questions. The sole

purpose, however, of this paper is to show how the rights

of minority shareholders of a company can be protected

truly in our country. While doing so, it also tries to

make reference to and share the experiences of some

countries regarding protection of minority shareholders.

Finally, it suggests some more ways in addition to

existing principles to protect the rights of minority

shareholders in the light of experience of other common

law countries.

1.4 Methodology

Both primary and secondary sources have been utilized while

conducting this research. The sources include relevant

statutory provisions, case laws in different jurisdiction,

reviewing literatures focused on Protection of Minority

Shareholders’ issues (e.g., books, journals, articles, reports

and newspapers), and searching the internet and interviewing

university professors and professionals (e.g., Company Law

practicing Lawyers, Barrister, Shareholders of different

company and Business Executive). Specific references of the

materials used are given in the footnote of concerned

chapters, while a detail account of references is available in

the bibliography section.

1.4.1 Historical Study: This research is related to some

abstract ideas or theory. It is used by jurist and

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thinkers to develop new concept or to interpret

existing on its historical background.

1.4.2 Analytical Study: In analytical research it has tom

use facts or information already available and

analyzes this to make a critical evaluation of the

material.

1.4.2 Empirical Study: Empirical research relies on

experience or observation.

1.5 Limitation of the Research

The main limitation of this paper is its extensive dependency

on foreign case laws and foreign reference books. Further,

unavailability of data with regard to land mark cases in

relation to the research issue may also be termed as another

limitation.

1.6 Abstract of the Chapters

Keeping in perspective the research questions, this paper is

arranged in eight chapters.

Chapter One:First chapter deals with the introduction where I have tried

to show what the minority protection of shareholder is and

what I will analyze. In putting research questions I have

tried to show how I will develop my whole research. In another

point, scope and objectives I have tried to present the

importance of the rule of protection of minority shareholder

and how we will develop practice in our country. I have

expressed my research methodology, by which resources I will

do this research paper. I also tried to show the limitations

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which I have faced while preparing this research paper.

Chapter Two:

Second chapter tries to give a brief historical background

upon which the principles of protection of minority

shareholders’ are based. In specific, I have tried to find out

how the principles of Foss v. Harbottle Case and the exceptions of it

has evolved. In addition to that I tried to show some

historical aspect of company, share, shareholder and minority

share holder and protection of it a bit.

Chapter Three:

Third chapter tries to show equitable exceptions to the

general principle of majority rule in details. In specific to

find out the answer of the question, in what circumstances and

upon what grounds is the will of the majority of shareholders

vitiated? Subsequently, I have tried to show what are

derivative actions and the fundamental objections of the

derivative actions. I have also tried to find out the answer

of my research question under what circumstances might it be

argued that the right to bring derivative actions amounts to

“shareholder activism”?

Chapter Four:

Fourth chapter focuses on the unfair prejudice remedy of the

minority shareholders’. In specific, when a minority

shareholders can apply to the on the ground of unfair

prejudice remedy and how far has been practiced in our

country. In a while, I have tried to find out the elements of

unfair prejudice and application of unfair prejudice test and

finally concluded with few suggestions.

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Chapter Five:

Fifth chapter tries to show personal rights of shareholders

which is closely connected with the principle of derivative

action. When a shareholder can bring an action to restrain any

proposed breach of the company’s memorandum or articles of

association or to declare any action invalid based on such a

breach. I have also added the duties owed to shareholders

personally.

Chapter Six:

Sixth chapter focuses on rights and duties of individual

shareholders. Besides that, I have endeavored to show how the

personal rights have been invaded from the core of the Foss v.

Harbottle rule. In addition to that, I have tried to show that

rights declared in relation to alteration of Memorandum or

Articles of Associations of the Company, class rights,

financial assistance for and the purchasers of a company’s

shares and department of trade investigation.

Chapter Seven:

Seventh chapter tries to show a comparative analysis on

protection of minority shareholder in between Bangladesh and

some other counties. I have tried to, how far The Bangladesh

law differs from the Indian, English and Australian law

(section 260 of the Australian Corporations and securities

legislation). I have also tried to show protection of

shareholder around some countries.

Chapter Eight:

Finally, the eighth chapter concludes the paper with some8

findings, remedied, observations and recommendations. In the

findings paragraph, I have tried to explain the matters for

consideration on the contractual protections which a minority

shareholder in a company might seek and the

statutory/corporate law remedies which may be available.

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Chapter II

Historical Background

The distinction between partnerships and companies is often

merely on of machinery and not of function. If a small number

of persons wish to carry on business in common with a view to

profit they may either form themselves into a partnership or a

company. Normally the only restraint on their freedom of

choice is that, if their numbers are too great for that mutual

trust appropriate to a partnership, they must form a company.

Since the last few centuries the concept of the company has

become more admired. Thus, more companies are being formed

numerously.

The company has a separate legal entity and this entity is

closely connected with the word “capital”. The capital of the

company is divided into shares and holder of the shares is

shareholder. Sponsor shareholder or Promoters usually keep the

maximum shares in their names and they can be called as

majority shareholder who generally constitutes a Board of

Directors to run the company and keep control over the

company. Apart from the sponsor shareholder or promoters there

may other shareholders who holds less shares than sponsor

shareholder or promoters they can be called as minority

shareholder. In course of the affairs of the company if the

majority shareholder vandalizes the rights of the minority

shareholder in any sphere prescribed by the law or winding up,

then they can seek protection of their rights to the concern

10

court.

Professor Gower notes that the scope of the two remedies of

seeking to wind up a company on just and equitable ground

because of unfairly prejudicial conduct and seeking protection

of minority shareholders “is not wholly co-terminous”. The

author suggested that a single act or omission may be unfairly

prejudicial but is less likely to be regarded as making it

just and equitable to wind up. On the other hand, in case of a

deadlock but no unfairly prejudicial conduct, the company may

be wound up. However, on a winding up, the court may after

examining the conduct of any person involved in the promotion

or management of the company compel him to repay or restore

any money retained or misapplied by him.

It is for this reason that an oppressed member may sometimes

welcome the winding up of a company. In an action under

section 233 (protection of minority shareholders) the ten

percent shareholders applying under that section must prove

that the business is being carried on in prejudice to a member

but in liquidation the court may investigate and find out for

itself whether a person in control of the business has

misapplied or retained the monies of the company.

2.1.1 Company

The history of companies stretches back to Roman times, and

deals principally with associations of people formed to run a

business, but also for charitable or leisure purposes. A

corporation is one kind of company, and refers to an entity

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which has a separate legal identity from that both of those

people who carry out its activities and those who have rights

to its property. Originally, corporations were solely able to

be established through an act of the state, for example

through royal charter or an Act of Parliament.11

It was only in the mid-19th century, the first being through

the Joint Stock Companies Act 1856 in the United Kingdom, that

private individuals could, through a simple registration

procedure, be considered to have established a corporation

with limited liability.12 Companies today dominate economic

life in all developed countries and in the global economy.

2.1.2 Share

A unit of ownership that represents an equal proportion of a

company's capital. It entitles its holder (the shareholder) to

an equal claim on the company's profits and an equal

obligation for the company's debts and losses.13

Two major types of shares are (1) ordinary shares (common

stock), which entitle the shareholder to share in the earnings

of the company as and when they occur, and to vote at the

company's annual general meetings and other official meetings,

and (2) preference shares (preferred stock) which entitle the

shareholder to a fixed periodic income (interest) but

11 C.R. Datta, supra note 4, V-I, p. 10212 H.C. Johari, supra note 10, V-I, p. 87.13 Share. See<http://www.businessdictionary.com/definition/shareholder.html#ixzz2YbHZ0wGU> 01 July 2013

12

generally do not give him or her voting rights.14

2.1.3 Shareholder

An individual, group, or organization that owns one or more

shares in a company, and in whose name the share certificate

is issued. Shareholder can also be called stockholder.15

2.1.4 Minority Shareholder and its Protection

A shareholder whose proportion of shares is too small to

confer any power to exert control or influence over corporate

action. A minority shareholder has certain statutory rights,

depending on the size of its stake in the company. Statute

gives the shareholder the power to block the passing of

special or extraordinary resolutions, which covers a limited

but important number of matters.16 However, a minority

shareholder cannot block ordinary resolutions, which are

decided by majority vote and are required for most decisions

of the company. A minority shareholder may also, in extreme

circumstances, be able to apply to the court on the basis of

conduct which amounts to unfair prejudice by majority

shareholders, but the remedy is limited and rarely a form of

satisfactory protection.

Given the limitations of the protection afforded by statute,

minority shareholders will seek express contractual

protections in the shareholders’ agreement and/or articles of

14 Janet Dine, supra note 9, p. 156.15 Dr. M Zahir, supra note 1, p. 181.16 C.R. Datta, supra note 4, V-II, p. 1665

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association of the company. A minority shareholder with a

large stake or in a strong bargaining position may seek a

right to appoint a director supported by a requirement that

its representative is a necessary part of a quorum. It is also

important to have veto rights over certain important matters

(known as reserved matters) which can then be entrenched at

board or shareholder level, through the requirement that they

be subject to unanimous or super-majority approval.17

Additional protections for minority shareholders may include

tag-along rights, and establishing a put option, whereby

majority shareholders can be obliged to purchase the shares of

the minority shareholder in accordance with a pre-determined

price formula and at a defined stage.

2.1.5 Historical Background of Protection of Minority

Shareholder

Foss v Harbottle is a leading English precedent in corporate law.

In any action in which a wrong is alleged to have been done to

a company, the proper claimant is the company itself. This is

known as "the rule in Foss v Harbottle", and the several important

exceptions that have been developed are often described as

"exceptions to the rule in Foss v Harbottle". Amongst these is the

'derivative action', which allows a minority shareholder to

bring a claim on behalf of the company. This applies in

situations of 'wrongdoer control' and is, in reality, the only

true exception to the rule. The rule in Foss v Harbottle is best

17 Ibid.14

seen as the starting point for minority shareholder remedies.18

The rule was later extended to cover cases where what is

complained of is some internal irregularity in the operation

of the company. However, the internal irregularity must be

capable of being confirmed/sanctioned by the majority. The

rule in Foss v Harbottle has another important implication. A

shareholder cannot generally bring a claim to recover any

reflective loss- a diminution in the value of his or her

shares in circumstances where the diminution arises because

the company has suffered an actionable loss. The proper course

is for the company to bring the action and recoup the loss

with the consequence that the value of the shares will be

restored.19

Because Foss v Harbottle leaves the minority in an unprotected

position, exceptions have arisen and statutory provisions have

come into being which provide some protection for the

minority. By far and away the most important protection is the

unfair prejudice action. Also, there is a new statutory

derivate action available.20

2.1.6 Legislative Instrument for Protection of Minority

Interest

Most companies are small or medium sized entities owned

by a handful of shareholders run by those same people18 Minority Shareholder Protection. See. <http://en.wikipedia.org/wiki/Foss_v_Harbottle> 5 July 201319 The Rule of Foss v. Harbottle. See,<http://myassignmenthelp.info/assignments/tag/foss-vs-harbottle/> 5 July 201320 Ibid.

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acting as directors. Typically, they start out as

businesses owned and controlled by family or friends, by

consensus and will little in the way of formality and

compliance with the numerous legal formalities imposed by

various Companies Acts.

If there is a breakdown in the relationship between the

shareholders or any of their number, this will give rise

to questions about the future ownership and control of

the company. A common scenario is where a majority

shareholder treats the company as their own and acts

accordingly, to the detriment of the others or, where a

director uses his talent for his own benefit rather than

for the benefit of the company. The situations in which

the shareholder relationship can break down are many and

varied but in order to address the imbalance of power

between majority and minority shareholders and to secure

protection for minority shareholders, there are a number

of protections afforded to minority shareholders,

contained mainly in the Companies Act, 1994.

Section 19521 of the Companies Act, 1994: Investigation of

affairs of company by inspectors: The Government may appoint

one or more competent inspectors to investigate the affairs of

any company and to report thereon in such manner as the

Government may direct-

(a) in the case of a company having a share capital, on

the application of members holding not less than one-21 The Compamies Act, 1994, Secetion 195.

16

tenth of the shares issues;

(b) in the case of a company not having a share capital,

on the application of not less than one-fifth in number

of the person on the company is register of members;

Section 23222 of the Companies Act, 1994: Amendment of articles

for conversion of a public company into private company.

(1) A public company, having not more than fifty members

at the time of conversion, may be converted into a

private one by passing a special resolution altering

its articles so as to exclude provisions, if any, in

the articles of association applicable to public

company and include therein provisions applicable to a

private company.

(2) If the company has secured creditors, their written

consent shall have to be obtained before passing a

resolution as per provision of subsection (1) and the

shares enlisted with the stock Exchange shall have to

be delisted.

Section 23323 of the Companies Act, 1994: Power of Court to

give direction for protecting interest of the minority.

(1) Subject to fulfillment of the conditions of the

required minimum as specified in section 195 (a) and

(b) any member or debenture holder of a company may

either individually or jointly bring to the notice of

the court by application that-

(a) the affairs of the company are being conducted or22 The Compamies Act, 1994, Secetion 232.23 The Compamies Act, 1994, Secetion 233.

17

the powers of the directors are being exercised in a

manner prejudicial to one or more of its members or

debenture holders or in disregard of his or their

interest; or

(b) the company is acting or is likely to act in a

manner which discriminated or is likely to

discriminate the interest of any member or debenture

holder;

(c) a resolution of the members, debenture holders or

any class of them has been passed or is likely to be

passed which discriminates or is likely to

discriminate the interest of one or more of the

members or likely to debenture holder and pray for

such order, as in his or their opinion, would be

necessary for safeguarding his or their interest and

also the interest of any other member or debenture

holder.

(2) The Court shall, on receipt of an application under

sub-section(1) send a copy thereof to the Board and fix

a date for hearing the application.

(3) If after hearing the parties present on the date so

fixed, the Court is of opinion that the interest of the

applicant or applicants has been or is being or is

likely to be prejudicially affected for reasons

specified in the application, it may make such order as

prayed for or such other order as it deems fit

including a direction-

(a) to cancel or modify any resolution or transaction ;18

or

(b) to regulate the conduct of the company's affairs in

future in such manner as is specified therin.

(c) to amend any provision of the memorandum and

articles of the company.

(4) Where by an order of the Court, any amendment is made

in the memorandum or articles of the company, the

company shall not, without leave of the Court, make any

amendment therein or take any action which is

inconsistent with the direction contained in the order.

(5) A company shall, within fourteen days from the making

of an order under this section, inform the Registrar in

writing of such order and send him a copy thereof, and

if the company makes default in complying with this sub-

section the company, and also every officer of the

company who is in default, shall be liable to a fine not

exceeding one thousand taka.

2.2 Principles of Foss v. Harbottle Case and the

exceptions thereto in connection of Protection of

Minority Shareholder

2.2.1 Facts of Foss v. Harbottle24

Richard Foss and Edward Starkie Turton were two minority

shareholders in the "Victoria Park Company". The company had

been set up in September 1835 to buy 180 acres (0.73 km2) of

land near Manchester and, according to the report, "enclosing

24 [1843] 2 Hare 461.19

and planting the same in an ornamental and park-like manner,

and erecting houses thereon with attached gardens and

pleasure-grounds, and selling, letting or otherwise disposing

thereof". This became Victoria Park, Manchester. Subsequently,

an Act of Parliament incorporated the company.25

The claimants alleged that property of the company had been

misapplied and wasted and various mortgages were given

improperly over the company's property. They asked that the

guilty parties be held accountable to the company and that a

receiver be appointed. The defendants were the five company

directors (Thomas Harbottle, Joseph Adshead, Henry Byrom, John

Westhead, Richard Bealey) and the solicitors and architect

(Joseph Denison, Thomas Bunting and Richard Lane); and also H

Rotton, E Lloyd, T Peet, J Biggs and S Brooks, the several

assignees of Byrom, Adshead and Westhead, who had become

bankrupts.26

2.2.2 Rule passed in the Foss v. Harbottle

This rule of Foss v Harbottle has long been serving as barrier

in the way of derivative actions of shareholders. Particularly

this restricted the action of shareholders in cases of

wrongdoing by companies own directors. Here in this case two

shareholders of a company brought action against the directors

and promoters of the Company, alleging that they are

misappropriating and mishandling the assets of the Company.

The courts rejected the plea on the ground that the company

25 The facts of Foss v. Harbottle. See,<http://en.wikipedia.org/wiki/Foss_v_Harbottle> 15 June 201326 Ibid.

20

after its incorporation becomes a separate legal entity and it

has the right and power to sue any person on its behalf. The

reasons given by the court were about the separate legal

entity of the Company and the internal affairs of the

Company.27

In specific:

Reason 1: The "proper plaintiff rule"28 is that a wrong done to

the company may be vindicated by the company alone.

Corporation has separate legal entity.

Reason 2: The "majority rule principle”29 states that if the

alleged wrong can be confirmed or ratified by a simple

majority of members in a general meeting, then the court will

not interfere, cadit quaestio.

The courts are not supposed to look into the internal matters

of the Company that’s going on between their members in

exercise of their powers. The rule was set out by Sir James

Wigram VC in simple words that the corporation could sue in its

own name or by any representative of corporate character

appointed by the law.30

Hence it was clear from the decision that if the action did

not have the support of directors of the company or by the

majority shareholders then it can never succeed. This

principle was later expanded to the action of majority. It was

said that if the thing which is complained is the majority of27 C.R. Datta, supra note 4, V-II, p. 166528 Ibid.29 Ibid.30 Dr. M Zahir, supra note 1, p. 181.

21

them are entitled to do then there is no use of the

litigation.

2.2.3 Exceptions to the Rule of Foss v. Harbottle

The courts laid down few exceptions to the rule of Foss v

Harbottle. The action by the shareholder as derivative action

must fall within any of these exceptions.31

1. If there is ultra vires or illegal act32- where an act is

ultra vires or illegal, a share holder could sue to restrain

the action, as the majority cannot rectify acts which

are ultra vires to company.

2. If the transaction requires special majority33- when an

act is done in breach of any requirement in the

constitution requiring a special majority which has to

authorize that action then a member could sue to

challenge the validity of that resolution.

3. If it is a personal right34- whenever the personal rights

of any of the shareholder had been infringed then the

rule of this case will not apply, the shareholder could

sue in their own name to protect their personal rights.

4. If there is a fraud on minority35- where any action

31 This read “An Act for Establishing a Company for the Purpose of Laying Outand Maintaining an Ornamental Park within the Townships of Rusholme,Charlton-upon-Medlock and Moss Side, in the County of Lancaster”. Itreceived Royal assent on the 5 May 1837 (7 Will 4). See. <http://en.wikipedia.org/wiki/Foss_v_Harbottle> July 2013 32 Smith v. Croft (No 2) and Cockburn v. Newbridge Sanitary Steam Laundry Co. [1915] 1 IR237, 252-59.33 Edwards v. Halliwell [1950] 2 All ER 1064.34 Pender v. Lushington (1877) 6 Ch D 70.35 Atwool v. Merryweather (1867) LR 5 EQ 464, and Gambotto v. WCP Limited (1995) 182

22

amounts to fraud on minority shareholders and the

wrongdoers are in control of the company, in such

situation the minority shareholders are permitted to

bring an action against the wrongdoer on behalf of that

corporation. The first three right to action was the

personal reasons and action brought under fraud on

minority exception is the derivative one, hence it has

been described as the only true exception to the rule of

Foss v Harbottle.

5. The interest of justice36- this exception was subjected to

debate that whether in the interest of justice will be

the exception to the rule of Foss v Harbottle or not. It

depends on the courts to allow the action on behalf of

the company by the shareholders against the wrongdoers in

the interest of justice. Sealy was of the view that this

is not much as the exception, it depends on the courts

willingness to lend its aid to a majority members who

seek redress for the corporations loss.

These exceptions laid the general rule of Foss v Harbottle

where it was said that generally the company has the only

right to sue on behalf of it. But when the situation comes

under any of the exception then the courts will allow the

derivative action on behalf of the company to the

shareholders. Although the common law rule in Foss v Harbottle

is beneficial in reducing the multiplicity of the shareholders

cases and leaving the decisions in the hands of those

qualified men who are responsible to take actions on behalf ofCLR 432 (Aus).36 The Derivative Actions. See,<http://www.sc.com.my/eng/html/resources/inhouse/shareholders.pdf> 01 July 2013

23

the company, it has been criticized on many grounds.37 As it

was complex and harsh on shareholders, also it was the rule

laid down by the court before a decade hence these criticisms

raised many issues such as:

1. The cost of litigation issue38- it was held later in many

cases that the shareholders who brought action against

the wrongdoers on behalf of the company must be

indemnified by the company because it is the company

after all which will be benefitted by the action. But

subsequently many jurists also limited its efficiency. In

Smith v Croft, Holten J held that the final funding to

the shareholders should not be made until the final

discovery or in genuine need. Australian courts are also

of this opinion.

2. Foss v Harbottle as uncertain rule39- the rule was complex

and obscure with conflicting authority leaving behind the

scope of the rule. The exceptions of the rule made it

difficult to exactly define the law on the topic.

3. Ratification40- the ratification law attached with the

rule of derivative action was considered as the greatest

difficulty in the application of the remedy. The

derivative action could only be brought by the

shareholder against the director for its breach of duty

only if that breach is not rectified by the company.

37 Shareholders rights, Business Law. See http://www.enotes.com/business-law-reference/shareholder-rights> 02 July 201338 The Statutory derivative actions, <Seehttp://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1012> 04 July 201339 Ibid.40 Ibid.

24

There is a conflict between authority that what type of

act or omission by the directors may be rectified by the

company or not.

Chapter III

Equitable Exceptions to the General Principle of

Majority Rule

3.1 Companies

A company registered under the Companies Act is a special type

of group. The principal difference between companies and most

other groups is that a company in law a separate persons

distinct from its members, whereas other groups such as

partnership are simply the sum of their members.41

The separate legal personality of the company is a crucial

factor in limiting the number of occasion where a number can

say that this persona rights, as opposed to the rights of the

company, have been infringed. It is axiomatic that a wrong to

the company is not necessarily a wrong to each member

individually. If a minority shareholder wishes to escape from

the general principles of majority rule, one of his routes

will be to attempt to establish a personal wrong.42

3.2 General Equitable Principles

The general issue may be sated as follows: in what41 Robin Hollington, Minority Shareholders’ Rights, 2nd ed., (London: Sweet &Maxwell, 1994), p. 6.42 But see Regal (Hastings) v. Gulliver [1942] 1 ALL E.R. 378.

25

circumstances and upon what grounds is the will of the

majority shareholders as expressed by resolution at a general

meeting vitiated? In exceptional cases, the court would

intervene.43 The authorities as to when the courts would

intervene are, however, unsatisfactory, and save in the

context are derivative actions are now largely of historical

interest only because of the existence of the Board unfair

prejudice remedy.

It is easier to state when the courts would not intervene.

(i) Clearly, equity would not justify intervention by

the court merely because the minority alleged the

commercial judgment of the majority was wrong, or indeed

obviously wrong: the courts are not suited to sit and do

not sit as assessors of commercial judgment.44

(ii) The courts would not intervene merely because it was

alleged that the majority had a personal interest in the

subject matter of the resolution.45

In North-West Transportation Co. Ltd. v. Beatty46 a director contracted to

sell a steamer to the company, and it was common ground that

under the constitution of the company this contract required

the assent of the members in general meeting. The directors

commanded a majority of the votes at the general meeting and

43 Robin Hollington, supra note 41 at p. 7.44 Ibid.45 Ibid.46 [1887] 12 App. Cas. 589. Followed in RE Swindon Town F.C. [1990] B.C.L.C. 467,468h. Contrast in the case of Regal (Hastings) Ltd. v. Gulliver [1942] 1 All E.R. 378,where a director made a profit out of his position and omitted to pass aresolution in general meeting ratifying the transaction.

26

produce the passing of a resolution approving the purchase. It

was established that that there were no grounds for setting

aside the purchase of any of the usual equitable ground. The

sole basis for the challenge by the minority shareholder was,

therefore that the director, having a conflict interest, could

not vote his shares at the general meeting.

Shareholders in sharp contrast to directors in respect of

their powers as directors, are not trustees of their shares

for the company of the other shareholders and do not owe the

trustee’s fiduciary duties to them in the exercise of their

powers as shareholders.47

In certain cases, however the directors, having acted breach

of their fiduciary duties or committed some other wrongs

against the company, cannot forgive their own wrongdoings by

ratifying their actions as shareholders. This important issue

is addressed under the heading below of Derivative Actions.

The courts would usually intervene, however, to prevent the

majority taking steps to expropriate a majority shareholding

even it would appear if the majority were prepared to pay a

fair value of the shares of the minority shareholders. For

example, in Dafen Tinplate Co. Ltd. v. Llanelly Steel Co. (1907) Ltd.48 the

articles of association of the company were altered to add a

provision giving the member the right, by ordinary resolution

to require any shareholder to sell shares to such person as

was nominated by the board of directors and at a value47 See per Walton J. in Northern Counties v. Jackson & Steeple [1947] 1 W.L.R. 1133,1144E-G.48 [1920] Ch. 124.

27

declared by the board. The background to this alteration was

that the majority shareholder did not approve that the action

of a particular shareholder in transferring business to a

competitor. Peterson J. held that as a matter of fact, the

alteration was not for the benefit of the company, and that

the new article was to widely drawn and therefore permitted

compulsory expropriation of a member’s share without

justification.

By way of contrast, in Greenhalgh v. Ardrne Cinemas49, the articles

od association of the company contained the common pre-emption

provisions requiring members who wished to sell their shares

to offer them first to existing members at their fair value.

The majority shareholders concluded an agreement to sell their

shares to a third party and then convened an extraordinary

general meeting to amend the relevant article so as to add a

proviso that id did not apply to transfers with the sanction

of an ordinary resolution. The majority shareholders had a

clear personal interest in securing the amendment: the

amendment allowed them to complete their sale to the third

party, and yet the minority shareholder continuing to be

prevented from doing likewise.50 The Court of Appeal did not

even call on the majority shareholder for argument and, in a

short judgment, unanimously held that the amendment was

validly passed.

49 [1951] Ch. 28650 Although the majority amended the article by adding the proviso ratherthan just deleting the article, the practical effects of the amendment wasprovable the same as that of deletion, since the minority shareholder wouldprovable not have found a purchaser for his shares and there would haveremained the usual discretion of the directors to refuse to register atransfer. See Robin Hollington, supra note 41 at p. 9

28

The test of discrimination between shareholders, enunciated in

Greenhalgh v. Ardrne, has been discarded and disapproved of the

context of the statutory unfair prejudice remedy.51 It is

likely that nowadays on the facts of Greenhalgh v. Ardrne, the court

would order the majority shareholder to buy the shares of the

plaintiff, unless it was found that the Plaintiff was the

cause of his own misfortune.

3.3 Derivative Actions

One of the opportunities open to the shareholders of the

companies to seek to enforce the rights of the company is

commonly known to have derivative actions. Derivative actions

are those actions brought by the shareholders or directors of

any Company on behalf of that company. This is so called

derivative because it is not actually the right to bring an

action of that party but it is derived from the company

itself. Generally this right of bringing the action lies to

the Directors of the Company because they are responsible for

the management of the company, but in some cases this

derivative right is also given to the shareholders. Basically

the purpose behind this is to solve the wrong done to the

company.52 Statutory Derivative Action also known

representative litigation, enacted by the statutes across the

world for the unveiling the mismanagement inside the Company

and the imbalance of power among the owners of the company.

51 See Re Sam Weller & Sons Ltd. [1990] Ch. 682.52 L.C.B. Gower, Principles of Modern Company Law, 5th ed., (London: Sweet &Maxwell, 1992), p. 645.

29

After the incorporation of the company it acquires a separate

legal entity. It has rights and duties of its own separate

from its directors and shareholders. It can sue and be sued

separately. However it cannot act on its own hence it has to

rely on its representatives. Hence the entire management is

bestowed with the responsibilities of the company.

Now coming to the shareholders, anyone who buys the shares of

the Company even if only one share becomes the shareholder of

the company. The shareholders, like the owner of the Company

must play an active role in the management of the Company.

It’s like becoming the part of the company in any of its

activity. The shareholders have been given many rights inside

the Company, such as they can convene general meetings, they

can speak or appoint a proxy to talk in the meeting. They can

vote in general meetings and they have the right to enforce

their rights as well. Statute empowers the shareholders also

to bring the derivative actions on behalf of the company.

Prior to legislature the only rule that was followed was the

rule given in 1942 in the most celebrated case on the

shareholders right to sue any person doing wrong to the

company, of Foss v Harbottle (1842).

There are two fundamental objections53 in principle to a

derivative action:

(a) The action is not authorized by the proper organs of

the company: it is as if individual A was brining an

action for the benefit of individual B without B’s

53 Robin Hollington, supra note 41 at p. 11.30

consent.

(b) The minority is seeking to escape from the principle

of majority Rule.

These principles may be described as the core of “the rulr in

Foss v. Harbottle”.54 If the Court is to allow a derivative

action to be brought, it must overcome the above objections

by, first, creating a procedure whereby the action is treated

as authorized by the company when it is not in fact so

authorized, and, secondly, recognizing an exception to the

general principle of majority rule.55

Derivative actions are allowed by the courts, generally

speaking, where the alleged wrongdoers are directors who would

otherwise be able to stifle an action by reason of their

control of the companies organs. It is not, however, every

wrong to the companies which justifies a derivative action.56

Furthermore, difficult questions arise as to whether the

alleged wrongdoers are stifling the action and whether and to

what extent the court should be guided by the views of the

untainted directors and shareholders. The following general

proposition may be derived from the authorities.

1. Cases are distinguished on the ground of the nature of

the cause of action that is alleged to lie by and on

behalf of the company against the shareholder or director

54 Ibid.55 Robin Hollington, supra note 41 at p. 12.56 i.e. there are wrongs which are rectifiable by the majority even if themajority are made up of the wrongdoers. See Robin Hollington, supra note 41at p. 13.

31

in question.57

2. Having held that a given cause of action triggers an

exception to the rule in Foss v. Harbottle, the court then

disregarded the votes of the alleged wrongdoers, without

an investigation of the claim save to the extent that a

prima facie case must be shown. In other words, the court

does not generally58 require, as precondition to a

derivative action, that it be positively shown that

certain shareholders have not voted bona fide for the

benefit of the company.

3. A derivative action will not be allowed where the alleged

wrongdoers are in a position to defeat any proposed

resolution of the directors of shareholders that the

company initiate proceeding against them.59

It is well established that action based on the allegation of

ultra vires application by the directors of the company’s fund may

be brought by any derivative action. It is well established

that the form of a minority shareholder’s action is one in

which the shareholder is the plaintiff suing on behalf of

himself and all other shareholders other than the defendants,

and that the company must be joined as defendant.

As appears from the judgment of the Court of Appeal in Prudential

v. Newman Industries (No. 2), the defendant are entitled to have

determined as a preliminary issue60 whether the plaintiff has

57 Simpson v. Westminster Place Hotel (1860) 8 H.L.C. 712. See also Smith v. Croft (No. 2)[1988] Ch. 114. 58 Prudential v. Newman Industries (No. 2) [1982] Ch. 204.59 Ibid.60 The Supreme Court Procedure Committee has proposed the addition of a newrule (R.S.C. Ord. 15 r. 12A) so a so as to make specific provisions for theprocedure governing derivative actions. Prior to any such proposed new rile

32

established:

“a prima facie case

(i) that the company is entitled to the relief claimed, and

(ii)that the action falls within the proper boundaries of

the exception to the rule in Foss v. Harbottle.”

A minority shareholder would, therefore, be well advised,

before commencing proceeding, to assemble his evidence in

support of the action against the defendants, and to invite

the board and a meeting of shareholders to consider initiating

an action on the basis of that evidence.

The potential defendants, if they were well advised, would

then either answers those allegation or commission an

independent report on them, and then attempt to persuade

meetings of the independent directors and share holders that

it would not be worthwhile litigating the matter.61

Two further points should be noted in respect of a derivative

coming into force, on onus lies on the defendant to a derivative action tochallenge the right of the plaintiff to bring the action, by makingapplication under R.S.C. Ord. 18 r. 19 and Ord. 33 r. 33: see Smith v. Croft(No. 1) [1986] 1 W.L.R. 580. If and when any such proposed new rules comesinto force, the onus will lie on the Plaintiff to apply for leave tocontinue the actions once the Defendants have given notice of intention todefend. On such an application for leave, the court may give direction forthe holding of shareholders’ meeting, and for discovery and cross-examination. The court will have power to grant leave to continue on termsas to costs or otherwise. If the plaintiff wishes to obtain an order thatthe company indemnify him as to the cost of the action, the Plaintiff shoulsuse an application for such order for hearing at the same time as theapplication for leave to continue. Reference should be made to the preciseterms of the new rule when it comes into force. See Robin Hollington, supranote 41 at p. 23.61 L.C.B. Gower, supra note 52 at p. 655.

33

action brought by a minority shareholder:

(i) in case of the majority shareholders stifling a

cause of action of the company against them it is not

necessary that the minority shareholder should have been

a shareholder at the time that the cause of action

accrued.62 It appears, however, that he must be registered

as a member at the time of the commencement of the

action.63

(ii) Since the court is granting the minority shareholder

an indulgence in equity to bring an action in the name of

the company, the minority shareholder must come with

“clean hands,” and the court may have regard to all the

circumstances in deciding whether it is just to allow the

derivative action. The court will also have regard to the

availability of other remedies to the minority

shareholder.64

62 Seaton v. Grant [1867] L.R. 2 Ch. App. 45963 Fulloon v. Radley (1991) 9 A.C.L.C. 1,434.64 Nurcombe v. Nurcombe [1985] 1 W.L.R. 370, and Barrett v. Duckett [1953] B.C.C.778,

34

Chapter IV

The Unfair Prejudice Remedy

Where the court is satisfied that the affairs of a company

have been conducted in a manner unfairly prejudicial to the

interest of its members, it may direct that the prejudiced

minority shall have the power to bring a derivative action. In

theory, however, a minority shareholder need not proceed

immediately to a derivative action but could apply first for

leave to do so on the unfair prejudiced ground. Since,

however, the remedies available to the court in an unfair

prejudice petition are almost limitless, it is very difficult

to conceive of circumstances where the court in such a

petition would find it necessary or desirable to direct the

commencement of a derivative action.65

In UK, one remedy specifically mentioned in Section 461(2) of

the Companies Act 1985 is the authorization of the petitioner

to bring civil proceedings on behalf of the company. There

appears little scope for making of such an order. First, the

petitioner may be able to begin a derivative action under one

of the exception to the rule in Foss v. Harbottle. Secondly,

the court could grant relief under Section 459 in the same

from as could be granted in a derivative action. In

particular, it appears that the court could order that the

petitioner receive in effect damages as compensation for any

diminution in the value of his shares caused by the unfairly

65 Robin Hollington, supra note 41 at p. 26.35

prejudicial conduct.66

4.1 Locus Standi

Section 233 read with Section 195 means that holders of one-

tenth of shares in the case of a company having a share

capital and in the case of a company not having a share

capital one-fifth of the members are eligible to apply. While

in England and Australia any shareholder can apply, Bangladesh

has followed the Indian principle and has restricted the right

to apply to a minimum ten percent shareholdings presumably to

avoid unnecessary litigations. In western countries the court

costs awarded to the winner are adequate and the loser will be

faced with a heavy burden thus discoursing frivolous

applications. In this country where the court costs are not

awarded adequately any shareholder can start a series of

litigations and cause the company a lot of trouble. However,

this detracts from the main rationale behind the sections,

namely to protect the minority shareholders whatever their

shareholdings may be. It is so illogical to say that a

minority has no right to protect itself unless it is at least

ten percent minority.67 The Calcutta High Court has held that

majority can apply for relief under this section.68 High Court

Division of Bangladesh has held that unless the applicants are

minority shareholders. i.e. less than fifty percent, they have

no right to apply for protection under this Sections.69 In

another case between the same parties another judge observed

66 Ibid, at p. 56.67 Dr. M Zahir, supra note 1 at p. 183.68 Ramshankar Peasad v. Sindhiri Iron Foundry (P) Ltd. AIR 1966 Cal 512.69 Moksudur Rahman v. Bashati Property Development Limited 49 DLR (1997) 539.

36

that casuse of action in matter under section 233 is

recurrent.70

The language of the section is clear that the applicant must

be a shareholder of the company. What happens in the personal

representatives of a deceased shareholder wants to complain?

Pennycuick J. made an obiter in Re Jermyn Street Turkish Baths Ltd.71

that even without registration as members, the personal

representatives of a deceased member had to be regarded as

members of a company for the purposes an application to

protect the minority shareholder rights. However, in view of

the requirement that in order to became a shareholder a

person’s name has to be entered in to the share register72 it

is doubtful whether a person whose name has not been entered

in the share register can directly apply under this section.

To obviate this difficulty section 459(2) of the English

Companies extend this application of section 459(1) to a

person who is not a member of a company but to whom shares in

the company have been transferred or transmitted by operation

of law, as those provision apply to a member of the company;

and reference to a member or members are to be constructed

accordingly. The Companies Act, 1994 of Bangladesh should, but

does not, have such a provision.73

An application under this section is representative in

character and shareholders have right to be added as party to

70 Moksudur Rahman v. Bashati Property Development Limited 3 BLC (1998) 224.71 (1970) 1 W.L.R. 1194, reversed [1971] 3 All ER 18472 Section 32 (2) of The Companies Act, 199473 Dr. M Zahir, supra note 1 at p. 184.

37

the proceedings.74 When a shareholder’s rights as a director

are affected an application under this section is

maintainable.75

Having establish the locus standi, the petitioner must show

that the company’s affairs are being, or have been, conducted

in a manner which is prejudicial to one of its members or

there is a discrimination regarding the interests of a member

or debenture holder. Whereas subsection 1(a) and (b)

contemplate conduct in continuing nature sub-section (c)

speaks of a resolution that that may discriminate or is likely

to discriminate the interest of one or more of the members.

Section 210 of the English Companies Act, 1948 contemplate

conduct of continuing nature but the House of Lord has said in

Scotish Co-operative Wholesale Society v. Meyer that the court

in constructing this section had to have regard to business

realities and not legal technicalities.76

4.2 Unfair Prejudice

The English Act mentions ‘unfair prejudice’ to the members.

Our Act mentions only ‘prejudice’ to the members. This means

that the petitioner in Bangladesh should be put to less

rigorous proof of fraud or oppression on the minority. In Re a

Company (No. 00477 of 1986)77 Hoffman cited the case of Re Westbourne

Galleries Case78 and pointed out the number’s rights under the

74 Pramod Kumar Mittal v. Andhra Steel Corporation Limited (Cal) [1980] 2Comp.L.J.629, 65575 In Re Albert David Ltd. 68 CWN 163.76 Dr. M Zahir, supra note 1 at p. 184.77 [1986] BCLC 376, 37978 That he shareholders be allowed to take part in the management of the

38

articles of association and the Companies Act could be treated

as an exhaustive statement of his interests as a member.

Further equitable consideration might arise, e.g., a personal

between the shareholders involving mutual confidence, an

agreement that some or all should practice in the management

and restriction to the transfer of shares which would prevent

a member from realizing his investment. If the agreement to

run the company in a particular manner is incorporated outside

the articles this may be regarded as part of the member’s

rights under this section.79 However, this may not apply to

large public companies.80 If there is no agreement then it will

depend on the issues involved and the nature of the companies

in question, its pre-incorporation history.81 The petitioner’s

appointment as non executive director may give him a

legitimate exception to consulted on policy matter relating to

the company’s affairs.82

In the case of a public company, there is usually no

underlying personal relationship and shareholders are more

interested in dividend yield and less concerned with the day-

to-day running of the company. The interest of a member of a

quasi-partnership company are in employment and

participation.83 Lord. Hoffman and the House of Lords however

shifted from the purchase ‘legitimate exception’ to ‘equitable

consideration’ determined by reference to the bargain which

company is well established and judicially recognized as in “quasi-partnership concerni.” Ebrahimi v. Westbourne Galleries Ltd. [1973] A.C. 360; [1971]All E.R. 561.79 Russel v. Northern Bank Development Corp. Ltd. [1992] BCLC 1016, HL.80 Re Blue Arrow [1987] BCLC 585, 590.81 Murray’s Judicial Factor v. Murray and Sons [1993] BCLC 1437, 1449.82 Re Elgindata Ltd. [1991] BCLC 959. 83 Dr. M Zahir, supra note 1 at p. 187.

39

the members of the company had struck even in informal, non-

legally enforceable understanding between members.84

4.3 The Elements of Unfair Prejudice

In order to satisfy the statutory test of unfair prejudice it

must be shown that (i) the interest of (2) the members

generally or some part of the members, including the

petitioner, have been (3) prejudiced (4) unfairly. In

practice, however, it is often difficult or unhelpful to

attempt to isolate element (1) (i.e. what are the interests of

the petitioner deserving protection?) from element (4) (i.e.

has the petitioner been treated unfairly?). It is convenient,

nevertheless, to adopt these four elements for the purposes of

exposition.85

4.3.1 Interests

It was repeatedly held, that the oppression to members had to

be suffered by the petitioner in his capacity as member as

such and not, for example, as a director or creditor.

Furthermore, the courts drew a sharp distinction between

oppression suffered as a member as opposed to as a director.

Thus, a joint venture is a small private company could not

complain, for example, about his removal from the board by the

majority shareholders, since his position as a member was

regarded as unaffected. This distinction had become

established before the House of Lords decision in Re84 O’Neil v. Philips (1999) BCLC 1, H.L.; See also Re J E Cade and Sons Ltd. (1991) BCC360; (1992) BCLC 213 where J refused to superimpose further rights andobligations arising from its own concept of fairness.85 See Robin Hollington, supra note 41 at p. 60.

40

Westbourne Galleries, where the Lord Wilberforce took a wider

view of the interests of members in small private companies.

The hope was expressed that the courts would adopt a similarly

wide view in relation to the “unfair prejudice” remedy.86

The courts will, therefore, only in special circumstances

recognize the existence of legitimate exceptions which go

beyond the rights of the shareholders as set out in the

constitution of the company and will not interfere with

carefully drafted agreements which regulate the rights of the

shareholders.87 The principles underlying this approach appear

to be as follows:

(i) There can be usually no unfairness in a commercial

sense in holding business people to agreements freely

entered into.

(ii) The special case it may be unfair to hold the

parties to their strict legal rights. By analogy with the

equitable doctrine of estoppel, such unfairness would

commonly arise where one party had, by his words or

conduct, led the other party to understand the strict

legal position would not be enforced or relied upon, in

circumstances where it would be just to give effect to

those understandings.88

86 Ibid.87 Robin Hollington, supra note 41 at p. 66.88 For a discussion of the reasons why the court will sometimes recognize theexistence of legitimate exceptions, see the article of C. Riley,“Contracting out of Company Law: Section 459 of the Companies Act 1985 andthe Role of the Courts” [1992] M.L.R. 782. Although it has been held thatthe court does not sit under a palm tree when deciding a unfair prejudicepetitions (see per Warner J. at [1992] B.C.L.C. 213, 227d), it is difficultto avoid the conclusion the parliament, by enacting the unfair prejudiceremedy, has planted a judicial palm tree, the expense of which has been

41

A member’s legitimate exceptions are not necessarily

transmissible on his death.

4.3.2 The members generally or part of the members including

the petitioner

With effect from February 4, 1991, section 459 of the English

Companies Act, 1985 was amended so as to make it clear that it

was sufficient if the interests of “members generally” had

been unfairly prejudiced. It is thus no longer fatal to a

petition that the conduct complained of prejudiced all members

equally.89 It may, however, be an important factor to be taken

into account in assessing the fairness of the conduct of those

in control of the company whether that conduct is,

intentionally or unintentionally, discriminatory between

shareholder or classes shareholders.

4.3.3 Prejudice

The ways in which a member’s interests may be prejudiced are

almost unlimited. As has already been discussed, prejudice

include cases where, “the value of his shareholding in the

company has been seriously diminished or at least seriously

limited by judicial notions of fairness. In recognizing the existence oflegitimate exceptions in special circumstances, and thus giving a remedywhere there is no basis for such a remedy under ordinary legal and equitablerules, it is very difficult to see what principles the courts are applyingother than general notions of fairness. See Robin Hollington, supra note 41at p. 67.89 It is doubtful whether the absence of a discrimination effects onshareholder would have been fatal to a petition before the amendment ofsection 459 and in any event it was not difficult to find a discriminatingeffect: contrst Re A Company, ex p. Glossop [1988] 1 W.L.R. 1068, with Re Sam Weller& Sons Ltd. [1990] Ch. 682.

42

jeopardized.” A classic and extreme example of such diminution

in value is provided by the facts of Scotish Co-op Wholesale Society v.

Meyer (supra), where the majority shareholder had pursued a

policy of running down the business of the company to the

benefit of their own competing business, thereby drastically

reduce the value of the company.

4.3.4 Unfairness

The elements of unfairness is at the heart of the unfair

prejudice remedy. As peter Gibson J. held in Re Ringtower Holdings

Ltd. plc90.

“… (2) the [relevant] conduct must be prejudicial… to the

relevant interests and also unfairly so: conduct may be

unfair without being prejudicial or prejudicial without

being unfair and in neither case could the section be

satisfied;

(3) the test is so unfair prejudice, not of unlawfulness,

and conduct may be lawful but unfairly prejudicial…”

Whilst it is, therefore, essential, that the relevant

prejudice has been caused unfairly, the test of fairness is an

extremely wide one and allows the court to have regard to any

circumstances that it considers to be relevant. Save by

reference to decided cases, it is difficult to predict how the

court will exercise its discretion. For example, the court can

take into account any of the following factors91:

1. Any misconduct on the part of the petitioner.90 (1989) 5 B.C.C. 82, 90.91 Robin Hollington, supra note 41 at p. 69.

43

2. Any alternative remedy available to the petitioner.

3. Any offer made to the petitioner.

4. Any motives of those in control of the company.

5. Any delay in presenting the petition.

4.4 Applications of Unfair Prejudice Tests

4.4.1 Exclusion from Management

The petitioner must establish a clear link between his

capacity as member and his interest in management. Can a

husband who was a joint venturer in the company and whose

shares were temporarily registered in his wife’s name,

complain when he discharged as an employee?92 Not, Hoffman J.

held but “the jurisdiction to remedy the contract ‘unfairly

prejudicial’ to the interests of the members enables the court

to protect not only the rights of members under constitution

of the company but also the rights, expectation and

obligations of the individual shareholders inter see…”93

In Re Blue Arrow Plc.94 it was that it was impossible in public

companies to infer any legitimate exceptions to remain

president from arrangements outside those embodied in the

formal constitution of the company as outside investors are

entitled to assume that the whole of the constitution was

contained in the articles read with the companies Act.

4.4.2 Excessive Remuneration

92 Dr. M Zahir, supra note 1 at p. 187.93 Re a Company (No. 003160 of 1986) [1986] 2 BCC 99, 276.94 [1987] BCLC 585.

44

Excessive remuneration is clearly detrimental to the interest

of the member. Although this is a matter of internal

management the courts have used this section to challenge this

payment. In re Cumana Ltd.95 the Court of Appeal agreed that

remuneration of 365,000 British Pounds over a 14 month period

was excessive and unfairly prejudicial to the interest of the

petitioner given the circumstances of the case.

4.4.3 Inadequate Dividends

Quite often investors in companies, especially members of

private company or a closely held public company come to a

lawyer’s office complaining that they have invested their but

get no dividend while those in control of the company seem to

living a comfortable life with the company’s money. The

question arises whether a shareholder has an interest in the

recommendation and declaration of dividends where funds are

available for that purpose? The Jenkins Committee of England

was of the opinion that such conduct should be within the

scope of the section.96

Where the company had not paid reasonable dividends to its

ordinary shareholders despite being able to do so minority

shareholders could not petition for relief under the statutory

provision. This was held to be so even though some of the

other ordinary shareholders who had suffered the same

deprivation of dividends had been compensated for this to some

extent by receiving reasonable but not excessive remuneration

as directors of the company. However, in similar case where

95 [1986] 2 BCC 99, 453.96 Dr. M Zahir, supra note 1 at p. 187.

45

the minority complained of inadequate dividends the minority

was held to be entitled to relief under section 459 of the

English Act. The Sam Weller case has more support in an earlier

House of Lords Case.97

A failure to declare and failure to pay a dividend after it

had been declared can both be unfairly prejudicial. It is

settled law however that in the absence of anything to the

contrary in the articles a company cannot be compelled to

declare a dividend and no action can be brought for its

recover until it has been declared.98

4.4.4 Take-over Situations

Hoffman J. held in Re a Company (No. 008699 of 1985)99 that the

director of the company had acted in a manner unfairly

prejudicial to the interest of the petitioner by favoring a

lower bid for the Company’s shares from a company promoted by

the directors in preference to a higher bid from a trade

competitor.100

4.4.5 Proportionate Shareholding

Section 155(1) of the Companies Act, 1994, requires directors

to make a proportionate offer to the existing shareholders

when the company makes a new issue of share capital. However,

sub-section (2) waters down the rigors of this section and

provides that further share can be offered to a person who is

not entitled to be offered under sub-section (1). There is no

97 Ibid.98 Robin Hollington, supra note 41 at p. 77, 78.99 [1986] BCLC 32, 387.100 Robin Hollington, supra note 41 at p. 79.

46

case law whether this sub-section will make the entire section

ineffective or sub-section (2) will apply only when sub-

section (1) is exhausted. In England where articles similar to

sub-section (1) are quite often found it has been held in

cased of attempted dilution that the proportionate

shareholding held by each shareholder is often of great

importance. Any attempt to dilute a shareholder’s holding in

the company will be prejudicial to his interest.101

4.4.6 Alteration of Articles of Association

A company can alter its articles of association by a special

resolution (Section 20). This must be done for the benefit of

the company as a whole. In Allen v. Gold Reefs of West Africa

it was held that a company could alter its articles so as to

impose a lien on hares of existing shareholders in respect of

existing debts.102

101 Dr. M Zahir, supra note 1 at p. 188.102 Ibid.

47

Chapter V

Personal Rights of Shareholders

As I have already discussed in the chapter of equitable

exceptions to the general principle of majority rule, the rule

of Foss v. Harbottle embrace the principle that an individual

shareholder cannot generally initiate proceeding on behalf of

the company. It is clear that this principle can have no

application to cases where the individual shareholder is

alleging that a wrong has been done personally, rather than to

the company.

The recognition that a shareholder’s personal rights have been

invaded is, however, obviously limited by the need to prevent

the rule in Foss v. Harbottle being outflanked. It is implicit in

the rule of Foss v. Harbottle that a company is a person distinct

from its members and that a wrong to the company is not in

itself a wrong to the shareholders. The recognition of

personal rights is also limited by the principle, which has

often been regarded as another facet of the rule in Foss v.

Harbottle, that the courts will not interfere in the “internal

management” of companies, whatever that might mean.103

There will, however, be cases where individual shareholders

suffer personal loss or prejudice to their personal financial

interests in the course of the conduct of the affairs of the

company. It may be difficult in some cases to disentangle the

103 Robin Hollington, supra note 41 at p. 103.48

loss suffered by the shareholders as distinct from the

company. The need for a minority shareholder to establish a

personal cause of action is now much diminished by the

availability of the broad statutory unfair prejudice remedy.

The personal rights of the shareholders may be said to have

been infringed when there has been a breach of the minimal

fiduciary duties owed by the certain shareholders to others.

The circumstances in which the wishes of majority shareholders

have been set aside for breach of these duties have been

examined in third chapter. The personal rights with which this

chapter is concerned fall into the following categories:

(i) Breach of the company’s memorandum or articles of

association. If the company, its directors or any of its

shareholders are acting in breach of its rules as set out

in the memorandum and articles, a shareholder in general

can bring proceedings to enforce these rules.104

(ii) Breach of duty by directors or indeed other

shareholders or the company itself or a third party which

results in loss or prejudice suffered by the aggrieved

shareholders. This is the most continuous area and the

law is still in the process of development.105

Of course, a minority shareholder can also protect his

interests by entering into a shareholders’ agreement. If the

agreement is broken, he can sue for breach of contract.

104 Robin Hollington, supra note 41 at p. 104.105 Ibid.

49

5.1 Breach of Memorandum and Articles of Associations

Prima facie, an individual shareholder can bring an action to

restrain any proposed breach of the company’s memorandum or

articles of association or to declare invalid any action based

on such a breach. In general, it may be said, there is no such

thing as an article, the breach of which can be waived by a

simple majority. If any shareholder or director wishes to act

in conflict with the existing memorandum or articles, he must

first alter them by special resolution in accordance with the

Companies Act, or by the procedure provided in the articles

themselves.

Where the breach of articles cannot be regularized¸ an

individual shareholder can bring an action to protect his

interests. In Rayfield v. Hands106 the company’s articles required

the shareholder/director to purchase an outgoing member’s

shares. The court held that it would, if necessary, make an

order for specific performance in favor of later against the

former. In Quin & Axtens Ltd. v. Salmon107 the company’s articles

provided that the company’s business should be managed by the

board and that no decision of the board should be valid on the

relevant issue if either of two particular director

dissented.108

There are, however, many well known authorities in which it

has been said:

106 [1960] Ch. 1., see also Heron International v. Grade [1983] BCLC 244; Tett v.Phoneix [1986] BCLC 149.107 [1909] 1 Ch. 311; see also Heron International v. Grade [1983] BCLC 244.108 Robin Hollington, supra note 41 at p. 108.

50

(i) an individual shareholder cannot maintain an action

for breach of the articles of association where the

breach can be ratified by a single majority, and;

(ii) this part of the rule in Foss v. Harbottle.

This analysis differs from the suggested in the previous

paragraph, but the result is the same.

In the leading case of MacDougall v. Gardiner109, the company’s

articles provided that a poll should be taken at a general

meeting if demanded by five members. At a general meeting, the

chairman ignore a proper demand for a poll and declared that

the meeting be adjourned. The meeting had been convened to

remove one of the directors and to appoint another, and the

requisionistss of the meeting had a majority on a poll (when

proxies would have been counted) but not on a show of hands.

By the time of the hearing before the Court of Appeal, the

matter was academic, since the requisionists were in control

of the company and the former director has resigned.110

In the early years of the company law there was considerable

uncertainty as to the precise effect of what is now section

14(1) of the English Companies Act, 1985, and there emerged a

curious rule, which has survived to this day, that

shareholders cannot rely on the section to enforce rights in

the company’s articles which do not affect them in their

capacity as members. The best known statement of this rule is

109 (1875) 1 Ch. 13.110 Robin Hollington, supra note 41 at p. 106.

51

to found in the judgment of Astbury J. in Hickman’s Case:

“… I think this much is clear, first, that no article can

be constitute a contract between the company and a third

person; secondly, that no right merely purporting to be

given by an article to a person, whether a member or not,

in as capacity other than that of a member, as for

instance, as solicitor, promoter, director, can be

enforced against the company and thirdly, that articles

regulating the rights and obligations of the members

generally as such do create rights and obligations

between them and the company respectively …”111

The company is also a party to the statutory contact and an

action by a shareholder to enforce that contact for the

company’s benefit (e.g., an action for compensation against

the directors for ultra vires use of the company’s funds) is

derivative, not a personal action.

An individual shareholder can enjoin the company from acting

in a manner which is ultra vires to the company. Where, however,

it is the company, as opposed to the shareholder, which

suffers the financial loss as a result of an ultra vires

transaction, then an individual shareholder cannot bring an

action to recover that loss, unless he can bring a derivative

action, because he would not seeking to protect his personal

interests in such an actions.112

111 [1915] 1 Ch. 881. See also Bratton Seymour v. Oxborough [1952] BCLC 693, 698,quoted from, Robin Hollington, supra note 41 at p. 110.112 Robin Hollington, supra note 41 at p. 109.

52

In Smith v. Croft (No. 2) it was alleged that the company had

suffered loss as a result of an ultra vires transaction

perpetrated by the majority shareholders/directors. Knox J.

accepted the plaintiff’s argument that an action to recover

such loss was different from an action to recover loss

suffered as a result of director’s breach of fiduciary duty,

since it was impossible in the former case for any majority of

shareholders to ratify the wrongful act retrospectively. As

has been noted, to pose the question of ratifiability of the

act in question is, it is submitted, unhelpful. A better way

of approaching the matter is to ask:

(i) is there any reason why the decision of the majority

of the shareholders not to sue in respect of a wrong to

the company should be overridden?

(ii) if the answer to the question is yes because the

wrongdoers are stifling a particular course of action,

then what is the will of the majority of independent

shareholders (and directors)?

Knox J. held that there was no difference between the action

before him and any other derivative action. 113

The court will enforce the memorandum and articles association

of the company on the application of a shareholder by

injunction or declaration. If the articles vest certain

financial rights in a shareholder, such as a right to receive

a dividend, then the court will of course enforce those rights

113 Ibid.53

against the company. In is nevertheless often said114 that the

court will not award damage against the company or a member in

the event of another member suffering loss as a result of a

breach of articles. There is no authority on this issue. It

is, however, difficult to see why a shareholder who, duffers

personal financial loss, as distinct from loss suffered by the

company, as a result of a breach of the articles, which loss

is not too remote on ordinary contractual principles, should

be denied a remedy in damages.115

5.2 Duties Owed to Shareholder Personally

A shareholder can, therefore, only pursue a personal cause of

action for breach of duty against the directors or other

shareholders or third parties, if he establishes that in the

special circumstances116 of the case:

(a) he has suffered personal loss distinct from the loss

suffered by the company and therefore indirectly by him

as a shareholder; and

(b) the defendants were in a sufficiently proximate

relationship to him that they owed him the duty whether

it be fiduciary duty or the common law duty of care which

they are alleged to have broken.

5.2.1 Personal Action against Directors

It is the law that the directors owe fiduciary duties to the114 L.C.B. Gower, supra note 52, p. 316.115 Robin Hollington, supra note 41 at p. 109.116 Ibid.

54

company, not generally to shareholders personally. It is

sometimes stated that the directors owe no fiduciary duties to

individual shareholders on the authority of Percival v. Wright. In

that case the directors were negotiating the sale of the

company’s undertaking to a third party and, without disclosing

the fact, accepted the several shareholder to sell their share

at stated price. The shareholders in question subsequently

learnt of the negotiations (which were abortive) and sought to

rescind the sale of their shares.117 Swinfen-Eady J. rejected

their claim, but it is noteworthy that he did so, not on the

ground that the directors’ duty to the company precluded any

duty to the shareholders I question, but on the ground that

there had been no breach duty in the case. It is arguable that

this case was wrongly decided on its facts, but it is

submitted that this case supports the proposition that

directors do owe duties to individual shareholders if there is

a close enough nexus between the action of the directors and

the individual interest of shareholders.118

Such a nexus was established in Allen v. Wyatt119 and Coleman v.

Myers120. In the former case the directors were negotiating the

amalgamation of the company with a third party and,

representing an effect that they would act as agents for the

shareholders concerned, took options from these shareholders

to purchase their shares. In the event, the directors

exercised the options at a profit and claimed to be entitled

to retain the profit. Not surprisingly, the Privy Council

117 L.C.B. Gower, supra note 52, p. 573.118 Robin Hollington, supra note 41 at p. 113.119 (1914) 30 T.L.R. 444.120 [1977] 2 N.Z.L.R. 225, 298.

55

rejected that claim and found in favor of the shareholders. In

the later case, the facts were less extreme, but nevertheless

unusual. The company was a family company, in which the

majority shareholders persuaded the minority shareholders to

sell out to them. In the New Zealand Supreme Court Woodhouse

J. held that “the standard of conduct required from a director

in relation to dealings with a shareholder will differ

depending upon all surrounding circumstances and the nature of

the responsibility which in a real and practical sense the

director has assumed towards the shareholder.” Cooke J rested

his judgment on general equitable principles which govern the

circumstances which a fiduciary relationship arises because of

such considerations as undue influence, trust and confidence

and inequality of bargaining power.121

All three cases referred to in the previous paragraph

concerned direct dealing between the directors and

shareholders in the shares of the company. Where there is no

such direct dealing, for example where the directors are

acting in the course of their duties as such and not in

private capacity as well, it will be much more difficult to

establish the existence of a fiduciary relationship with

individual shareholders. The issue arises in the context of

contested take-over bids. Suppose that a shareholder or an

outsider makes an offer to buy out the other shareholders in

the company. The director may be obliged or tempted to give

advice to shareholders in relation to the offer, and the

position of the directors may be complicated by the appearance

of a competing bid. The duties of directors in such cases have121 Robin Hollington, supra note 41 at p. 113.

56

considered in several cases.122

In summary, the directors are not allowed to issue shares for

the dominant purpose of creating a new majority- such conduct

on their part would be the exercise of their powers for

improper motive. Further-more, if they become involved in the

negotiations, and especially if they are shareholders

themselves, they must attempt to obtain the best price

available for shareholders. The particular circumstances of

the case may give rise to other duties. The relationship

between the directors and the shareholders is not as closed as

in the cases considered in the previous paragraph but it is

closer than that existing generally in the directors’

performance of their duties as such. In particular, any harm

done by the actions of the directors is likely to be suffered

by the individual shareholders, and it is somewhat artificial

to speak of the directors’ duty as being a duty owed to the

company to act in the interests of the company.

5.2.2 Personal Action against Non-Directors

A shareholder may be able to establish, upon the basis of the

test set out in Caparo v. Dickman123 that solicitor or

accountant or other professional person, who gives advice in

relation to the affairs of the company, owes him the common

122 Punt v. Symons [1903] 2 Ch. 506; Piercy v. Mills [1920] 1 Ch. 77; Hogg v. Cramphorn[1967] Ch. 254; Bamford v. Bamford [1970] Ch. 212; Smith v. Ampol [1974] A.C. 821;Heron International v. Grade [1983] B.C.L.C. 244; John Crowther v. Carpets International[1990] B.C.L.C. 460; Rackham v. Reck Foods [1990] B.C.L.C. 895; Lee Panavision v. LeeLighting [1991] B.C.C. 620; See Robin Hollington, supra note 41 at p. 114.123 See the original principles enunciated in Caparo v. Dichman [1990] 2 A.C.605.

57

law duty of care. The shareholder would also have to show that

he suffered loss distinct from that suffered by the company.

In Howard v. Woodman Matthews124 Staughton J. held that, on the

facts, a solicitor’s client was not only the company but also

its principal shareholder had suffered looses distinct from

those suffered by the company.

124 [1983] B.C.L.C. 11758

Chapter VI

Rights and Duties of Individual Shareholders

Section 71 of the Companies Act, 1994 protects the rights of

special classes of shares by requiring that to change their

rights there should be a provision to that extent in the

memorandum or articles of associations and that these should

be sanctioned by a specified majority of shareholders of that

class. Any number of dissenting members holding at least ten

percent of the issued shares of that class may within fourteen

days of the resolution apply to the court for cancellation of

the resolution and such resolution shall not be effective

until it is then confirmed by the court. The consideration

before the court will then be whether the variation will

unfairly prejudice the shareholder of the class.

Whereas, the English Companies Act, 1985 have a number of

provisions which are intended to protect the interest of

individual shareholders,

6.1 Alteration of Memorandum or Articles of Associations

of the Company

The rule, enriched in sections 4, 9 and 17 of the English

Companies Act, 1985, that nothing in the memorandum or

articles of association can be altered without the sanction of

a special resolution of the company in general meeting, is

fundamental to the position of individual shareholders. On the

59

one hand, the rule prevents a simple majority of members from

effecting such an alteration. On the other hand, it is an

exception to the general principle that contracts cannot be

varied without the unanimous consent of the parties thereto.

If the necessary special resolution for the alteration of the

contents of the memorandum of association is carried, holders

of not less than fifteen percent in normal value of the issued

share capital can apply to the court for an order cancelling

the alteration. On such application the court has power to

order that the dissentient shareholders be brought out.

The relevance of the statement of the objects of the company

in the memorandum of association and consequently of the

application of the ultra vires doctrine has been much diminished

in recent years, by the decision of the Court of Appeal in

Rolled Steel v. British Steel.125

Subject to the special protection which is accorded to the

rights of the rights of the classes shareholders, alteration

to the articles may be made by special resolutions, and,

unlike the case of alteration to the memorandum, there is no

provision for cancellation by the court. It is possible,

however, to make parts of the articles unalterable by

inserting them in the memorandum and providing them in the

memorandum that they are not to be altered. Thus, certain

parts of the memorandum can be entrenched. This entrenchment

of rights is permitted by the combined effect of section 9(1),

which provides that the power to alter the articles is subject125 [1986] Ch. 246

60

to the conditions in the memorandum, and section 17(2)(b),

which provides that the power to alter the conditions in the

memorandum which could have been contained in the articles

does not apply-

“… where the memorandum itself provides for or prohibits

the alteration of all or any of the conditions above

referred to, and does not authorize any variation or

abrogation of the special rights of any class of

members.”126

Shareholders’ rights can also be entrenched by private

agreement shareholders. For example, all the present

shareholders of a company could agree that none of them would

vote in favor of a variation of specified articles, and a

court will enforce such an agreement as between the

shareholders who were parties to that agreement by injunction

or otherwise, unless it conflicted with a specific statutory

126 It should be noted that a provision in the articles which purports tomake certain parts unalterable will be ineffective; see Walker v. London Tramways(1879) 12 Ch.D. 705; Allen v. Gold Reefs [1990] 1 Ch.D. 656; Furthermore, itappears that a contract not to alter the articles will not be enforced byinjunction against the company, but a breach of such a contract will giverise to a remedy in damages; Southern Foundries (1926) Ltd. v. Shirlaw [1940] A.C. 701;contrast British Murac Syndicate v. Alperton Rubber [1915] 2 Ch. 186. But see CumbrianNewspaper v. Cumberland Newspaper [1986] B.C.L.C. 286, 305h-306d. In this case,Scott J. held, obiter, that a company might be enjoined from initiation analteration of the articles by convening a meeting or that purpose, but noinjunction would be granted against the company from convening such ameeting, or against members from convening such a meeting pursuant to amember’s requisition. Compare section 303 of 1985 Act and Bushell v. Faith [1970]AC 1099. In Russell v. Northern Bank [1992] B.C.L.C. 1016, the House of Lords heldthat a shareholders’ agreement not to increase the company’s share capital,to which the company was a party, was enforceable against the shareholderswho were parties to the agreement (but not against company itself). Otherways of entrenching provisions in the articles are: (1) to create a specialclass of shares whose rights can only be varied by special resolution ofthat class; and (2) to give shareholders weighted voting rights on specificmatters. See Robin Hollington, supra note 41 at p. 120.

61

provision. There might be difficulties in enforcing such an

agreement against successors in title to the shares. The court

may also decline to enforce such an agreement if it is

commercially disreputable or encouraged breaches of fiduciary

duty.127

6.2 Class Rights

The power to vary rights of particular classes of

shareholders, in other words, those rights of the possession

of which distinguish certain shareholders as a class was

clarified by sections 125 to 127 of the English Companies Act,

1985.128 In summary, the law is as follows:

(1) If the class rights are defined in the articles and

the articles contain no provision for the variation of

those rights, the rights may be carried by the consent in

writing of three-quarters in nominal value of the issued

shares of that class or by an extraordinary resolution

passed at a meeting of the members of the class. If the

memorandum or articles impose any requirement in relation

to such a variation, that requirement must be complied

with.

(2) If the class rights are defined in the memorandum or

neither the articles contained any provision for the

variation of those rights, the rights cannot be varied

127 Wilton v. Abrams [1991] B.C.L.C. 315.128 Robin Hollington, supra note 41 at p. 121.

62

save with the unanimous consent of all the members of the

company.

(3) If the class rights are defined in the memorandum

and the articles at the time of incorporation contained

and the articles still contain provision for their

variation, or if the class rights are defined in the

articles and the articles contained such provision, the

rights may only be varied in accordance with such

provision.

Where the rights attached to any class of shares are varied

pursuant to a provision in the memorandum or articles or

pursuant to the statutory power summarized in the previous

paragraph, then the dissentient shareholders holding at least

15 percent of the relevant shares can apply to the court to

cancel the variation. The court can disallow the variation “if

satisfied having regard to all the circumstances of the case

that the variation would unfairly prejudice the shareholders

of the class represented by the applicant.”129

It might be thought that a “class” of shareholders would only

exist if the articles expressly divided the shares into

different classes with different rights. Thus, three might be

preference shares with a preferential right to the receipt of

dividends on the one hand and ordinary shares with no special

rights on the other hand. This is probably a too narrow a

129 See s.127 of the 1985 Act. It is difficult to see what s. 127(4) of theadds to the powers that the court has in any event under ss. 459. etc. underwhich the applicant would not need to have the support of any specifiedproportion of the class in any question. Ibid.

63

view. For example, it may be wished to give a particular

shareholder special voting rights on some issues. So long as

he held those shares, it would appear correct to regard that

shareholders as a separate class, for it would only have been

a matter of drafting to call his shares by special name and to

have attached special rights to those shares so long as he

held them. In Cumbrian Newspaper v. Cumberland Newspaper the

relevant article of a company provided that a named

shareholder had the right of pre-emption in respect of any

proposed transfer of shares.

6.3 Financial Assistance for and the Purchase of a

Company’s Share

When a private company passes a special resolution to permit

itself to give financial assistance for the purchase of its

own shares pursuant to the Companies Act, the holder of not

less than 10 percent in nominal value of the issued shares can

apply to the court for the cancellation of that resolution,

and the court has power to require the purchase of the

dissentient shareholders’ interest.130

In English Law, when a private company passes a special

resolution approving the purchases of its shares out of

capital pursuant to the Companies Act, any shareholder can

apply to the court for the cancellation of the resolution and

the court has power to require the purchase of the shares of

the dissentient.

130 Ibid.64

6.4 Duties of Minority Shareholders When Fraud Committed

Apart from voting rights and other duties, I would like to

give focus on “fraud on minority” in relation to company

affairs. The exact meaning of the expression is not ease to

determine. But at least it is clear that both “fraud” and

“minority” are used somewhat loosely. There need not be actual

deceit, if there were, those on whom it was practiced would

have a common law remedy against those who had willfully

deceived them. “Fraud” here connotes an abuse of power

analogous to its meaning in court of equity to describe a

misuse of fiduciary positions. Nor is it necessary that those

who are injured should be a minority, indeed, the injured

party will normally be the company itself, though sometimes

those who have really suffered will be a class or sections of

members, not necessarily a numerical minority, who are

outvoted by the controllers.131

It is tendered, that the twin concept of “fraud on the

minority” and “bona fide interest of the company” are obsolete

and meaningless in relation to activities by members. They

were invented by the judges to curb the worst excesses of

majority rule and at the time of their invention they were

needed in the light of the then statute law. Now, however,

because of statutory provision they are needed no longer. In

most cases anything that they achieve can be achieved better

by a petition under section 459. If the innate conversation of

members of English legal profession causes some of them to

continue to regard section 459 of the as providing a remedy of

131 L.C.B. Gower, supra note 52, p. 603.65

last resort only, it is high time that they were persuaded to

the contrary. The only advantage of applying directly for an

injunction or declaration rather than petition under section

459 is that, when suing in a derivative action on behalf of

the company, the plaintiff may be able to obtain immediate

security for his costs whereas under section 459 he apparently

cannot do so unless and until the court authorizes him as it

can to bring civil proceeding in the name and on behalf of the

company. That disadvantage can be removed by a simple

amendment to section 459 or to the rules of court. Unless and

until that is done there is no great harm in the following

proceedings for an injunction or declaration to continue, so

long as the court cease to base their decision on the vague

concept of fraud on the minority and the wholly unrealistic

pretence that it is meaningful to require members to ask

themselves when they vote whether they are doing so for the

benefit of the company as a whole.132

In all cases, referred above, if the courts, instead of having

to ask themselves whether there was a fraud on minority or

whether the resolution has been passed “bona fide in the

interest of the company” had simply had to consider whether

the member or some of them were being unfairly prejudiced, it

can scarcely be doubted that they would have found that an

easier question to answer. Indeed, in the cases referred above

they have come very close to asking themselves just that. In

many, perhaps most, of the cases results would have been the

same, but in some it would undoubtedly have been different and

preferable on policy grounds. What therefore is being132 Ibid.

66

suggested is that the true position can be summarized as

follows:133

1. Fraud on minority is a misleading concept which should be

abandoned.

2. There is no principle that members as such are ever

required to act “bona fide in what they believe to be in

the best interest of the company as a whole.” That is a

principle restricted to fiduciaries which members, as

opposed to directors, are not.

3. There is, however, a general principle that a resolution

of a general or class meeting or a written resolution is

invalid if it can be shown that it is unfairly

prejudicial to the whole or some part of the members of

the class.

4. If satisfied that the resolution is unfairly prejudicial

the court should so declare whether proceedings are

brought under section 459 or otherwise.

5. The onus of proof that the resolution is unfairly

prejudicial is on the plaintiff but the weight on the

burden varies according to the circumstances. It is light

in the case of class meetings where the resolution has

been passed by the votes of the members who were also

members of another class or, indeed, in the case of any

resolution which would not have been passed but for the

votes of the members shown to have personal interests

conflicting with that of the company. In other cases the

133 L.C.B. Gower, supra note 52, p. 603.67

burden is heavy if the resolution has been passed by a

clear majority.

This, it is tendered, would be a clarification and

rationalization towards which the courts are moving and which

they can reach without doing violence to any authoritative

decision.

68

Chapter VII

Comparative Analysis on Protection of MinorityShareholder between Bangladesh, India, UK, USA

and Australia

The Bangladesh law differs from the Indian, English and

Australian law (section 260 of the Australian Corporations and

securities legislation) in that those laws requires that

applicants to show that the affairs of the company or the act

complained of are likely to cause ‘unfair prejudice’ to the

petitioners whereas the Bangladesh law speaks only ‘prejudice’

to the petitioner. This, in theory, means that the Bangladesh

Court should be under less restraint in using the power under

the section. Further, Bangladesh law permits an action to be

brought when there is discrimination regarding the interest of

any member or debenture holder. The Australian law mentions

that an act or resolution of the company, if is ‘unfairly’

discriminatory, may cause the Court to interfere. The Indian

law does not mention anything about discrimination nor does

the English Law but it is clear that if discrimination is

proved then that would tantamount to oppression on members.

However, this chapter analyzes how shareholder protection has

developed in 20 countries since last 15 years. In contrast to

traditional legal research, it draws on a quantitative

methodology to law (“leximetrics”). Some of its results are

that in most countries shareholder protection has improved in

the last years; that developed countries perform better than

developing countries in protecting shareholders; that

shareholder protection in common law countries is relatively

69

similar whereas there is no comparable similarity within the

German and French civil law families; that German corporate

law is “more mainstream” and US corporate law is “more

eccentric” than the law of the other countries; and that in

general there has been convergence in the last decade. In

order to explain these results, the distinction between origin

and transplant countries can be useful. However, in contrast

to previous studies, this does not mean that all depends on

the distinction between English, French and German origin and

transplant countries like Bangladesh, India, etc. Rather it is

decisive (a) which “version” of the corporate law the

transplant country copied, (b) whether transplant countries

continue to take developments in the origin countries into

account and (c) whether transplant countries have left the

path of their (former) origin countries.

Recently, the question whether and how shareholders should be

protected has been intensively debated. Lucian Bebchuk found

that shareholders hardly ever use the power to challenge

directors.134 He suggested that this should be remedied by

reducing impediments to replace directors and by improving

shareholders power to change the company’s charter.135 This has

evoked many critical comments. These critics bring forward

that shareholders lack proper incentives to act for the

corporation as a whole,136 that board control is beneficial to134 Lucian A. Bebchuk, The Myth of Shareholder Franchise, 93 VA. L. REV. 675 (2007).135 Lucian A. Bebchuk, The Case for Increasing Shareholder Power, 118 HARV. L. REV. 835(2005); Lucian A. Bebchuk, Letting Shareholders Set the Rules, 119 HARV. L. REV. 1784(2006). See also Lucian A. Bebchuk, The Case for Shareholder Access: A Response to theBusiness Roundtable, 55 CASE W. RES. L. REV. 557 (2005); LUCIAN A. BEBCHUK & JESSE M.FRIED, PAY WITHOUT PERFORMANCE: THE UNFULFILLED PROMISE OF EXECUTIVE COMPENSATION(2004).136 See Iman Anabtawi, Some Skepticism about Increasing Shareholder Power, 53 UCLA L.REV. 561 (2006); Leo E. Strine, Towards a True Corporate Republic:A Traditionalist

70

the shareholders137 and that the director primacy of US law has

worked well in the last decades.138 However, there has also been

some support for a strengthening of shareholder rights. For

instance, it has been said that the existing rights have to be

made more effective139 and that “shareholders would enjoy

greater, longer lasting happiness by using their shares to

have a participatory role”.140 Outside the US, the protection of

shareholders is also topical. In the EU, the European

Parliament has just approved a Directive on Shareholder

Rights.141 Here, critics object that this Directive addresses

topics which should better be left to the companies

themselves, such as, for example, the use of the new media in

the run-up and at the general meeting.142 Furthermore, this

Directive may also be an unnecessary irritant to national

corporate laws, which may already protect shareholders

sufficiently.143 Internationally, the OECD Principles of

Response to Bebchuck’s Solution for Improving Corporate America, 119 HARV. L. REV. 1759(2006); Simon Deakin, Book Review of Bebchuk & Fried, Pay WithoutPerformance, 44 BRITISH J. INDUSTRIAL RELATIONS 257 (2006).137 Lynn A. Stout, The Mythical Benefits of Shareholder Control, 93 VA. L. REV. 789(2007).138 Stephen M. Bainbridge, The Case for Limited Shareholder Voting Rights, 53 UCLA L.REV. 601 (2006); Stephen M. Bainbridge, Director Primacy and ShareholderDisempowerment, 119 HARV. L. REV. 1735 (2006).139 Julian Velasco, Taking Shareholder Rights Seriously (Notre Dame Legal StudiesPaper No. 06-03), available at http://ssrn.com/abstract=886340. See alsoJulian Velasco, The Fundamental Rights of the Shareholder, 40 U.C. DAVIES L. REV. 407(2006).140 James A. McConvill, Shareholder Empowerment as an End in Itself: A New Perspective onAllocation of Power in the Modern Corporation, OHIO N.U. L. REV.141 Directive 2007/../EC of the European Parliament and the Council on the exercise of certain rights of shareholders in listed companies, provisional text available at http://ec.europa.eu/internal_market/company/docs/shareholders/dir/draft_dir_en.pdf.142 Mathias M. Siems, The Case Against Harmonisation of Shareholder Rights, 6 EUR. BUS.ORGANIZATION L. REV. 539 (2005).143 For the UK see Richard Nolan, Shareholder Rights in Britain, 7 EUR. BUS.ORGANIZATION L. REV. 549 (2006).

71

Corporate Governance emphasize that “the corporate governance

framework should protect and facilitate the exercise of

shareholders’ rights”.144 These principles are important because

IMF and World Bank as well as investors use them as a

benchmark for good corporate governance.145 However, critics may

here refer to the fact that these principles are based on a

Western model of corporate law which may not be suitable in

other parts of the world.146

144 For details see OECD Principles of Corporate Governance, pp. 32-39(2004), available at ttp://www.oecd.org/dataoecd/32/18/31557724.pdf.145 Supra Note, 137.146 For a related point see Cally Jordan, The Conundrum of CorporateGovernance, 30 BROOK. J. INT’LL. 983 (2005).

72

Variables on shareholder protection:

Variables Description and Coding1. Powers of the

general meeting

for de facto

changes

If the sale of more than 50 % of the company’s

assets requires approval of the general meeting

it equals 1; if the sale of more than 80 % of the

assets requires approval it equals 0.5; otherwise

0.2. Agenda setting

power147

Equals 1 if shareholders who hold 1 % or less of

the capital can put an item on the agenda; equals

0.75 if there is a hurdle of more than 1 % but

not more than 3%; equals 0.5 if there is a hurdle

of more than 3 % but not more than 5%; equals

0.25 if there is a hurdle of more than 5% but not

more than 10 %; equals 0 otherwise.3. Anticipation of

shareholder

decision

facilitated

Equals 1 if (1) postal voting is possible or (2)

proxy solicitation with two way voting proxy

form148 has to be provided by the company (i.e.

the directors or managers); equals 0.5 if (1)

postal voting is possible if provided in the

articles or allowed by the directors, or (2) the

company has to provide a two-way proxy form but

not proxy solicitation; equals 0 otherwise.4. Prohibition of

multiple voting

rights (super

voting rights)149

Equals 1 if there is a prohibition of multiple

voting rights; equals 2/3 if only companies which

already have multiple voting rights can keep

them; equals 1/3 if state approval is necessary;

147 If the law of a country does not provide the right to put an item on theagenda of a general meeting (including the annual general meeting), theright to call an extraordinary general meeting was coded, provided theminority shareholders can utilize this right to discuss any agenda.148 A two-way proxy form refers to a form which can be used in favor andagainst a proposed resolution.149 This can also be regulated in securities law (including listingrequirements).

73

equals 0 otherwise.5. Independent

board members150

Equals 1 if at least half of the board members151

must be independent; equals 0.5 if 25 % of them

must be independent;152 equals 0 otherwise6. Feasibility of

director’s

dismissal

Equals 0 if good reason is required for the

dismissal of directors;153 equals 0.25 if

directors can always be dismissed but are always

compensated for dismissal without good reason;154

equals 0.5 if directors are not always

compensated for dismissal without good reason but

they could have concluded a non-fixedterm

contract with the company;155 equals 0.75 if in

cases of dismissal without good reason directors

are only compensated if compensation is

specifically contractually agreed; equals 1 if

there are no special requirements for dismissal

and no compensation has to be paid.7. Private Equals 0 if this is typically excluded (e.g.,150 This can also be regulated in a corporate governance code. If there is no“comply or explain” requirement, this may, however, justify a lower score.151 Notes: (1) In a two-tier system this concerns only member of thesupervisory board (not the management board). (2) If the law of a countrydid not require that a certain percentage of the board must be“independent”, however, if it provided that the members of some specialcommittees of the board needed to be independent (e.g., compensation andaudit committee), so that it indirectly prescribed that some of the boardmembers were “independent”, a lower score was assigned.152 Other intermediate scores are also possible. They are calculated in thesame way, i.e. score = percentage of independent board members/2. If the lawrequires a fixed number of independent directors (e.g., always 2 independentdirectors), the (estimated) average size of boards was used in order tocalculate the score.153 For two-tier-systems both the management and the supervisory board wereaddressed.154 This can be based on a specific provision in statutory or case law. Itcan also be based on contract, for instance, if the company has to concludean employment contract with the director and this contract cannot beterminated without good reason.155 This restricts dismissal because either (1) an immediate unilateraltermination of this contract may not be possible or (2) the directors haveto be compensated in case of immediate unilateral termination of thiscontract.

74

enforcement of

directors duties

(derivative

suit)156

because of strict subsidiarity requirement,

hurdle which is at least 20 %); equals 0.5 if

there are some restrictions (e.g., certain

percentage of share capital;157 demand

requirement); equals 1 if private enforcement of

directors duties is readily possible.8. Shareholder

action against

resolutions of the

general meeting158

Equals 1 if every shareholder can file a claim

against a resolution by the general meeting;159

equals 0.5 if there is a threshold of 10 % voting

rights;160 equals 0 if this kind of shareholder

action does not exist.9. Mandatory bid Equals 1 if there is a mandatory public bid for

the entirety of shares in case of purchase of 30%

or 1/3 of the shares; equals 0.5 if the mandatory

bid is triggered at a higher percentage (such as

40 or 50 %); further, it equals 0.5 if there is a

mandatory bid but the bidder is only required to

buy part of the shares; equals 0 if there is no

mandatory bid at all.10. Disclosure of

major share

ownership

Equals 1 if shareholders who acquire at least 3 %

of the companies capital have to disclose it;

equals 0.75 if this concerns 5 % of the capital;

equals 0.5 if this concerns 10 %; equals 0.25 if

this concerns 25 %; equals 0 otherwise

The choice of these variables was, first, based on the aim to

156 Variables 7 and 8 only concern the law on the books and not theefficiency of courts in general.157 We have also given intermediate scores, e.g., ¾ for a 1 % hurdle, ¼ for a10 or 15 % hurdle. A 5 % hurdle led to the score ½.158 Supra Note 156.159 The substantive requirements for a lawful decision of the general meetinghave not been coded.160 We have also given intermediate scores, e.g., ¼ for a 33 % hurdle and Lfor a 20 % hurdle.

75

get a representative mixture of legal rules. Thus, the index

includes: variables on the power of the general meeting and on

who decides about its topics (variables 1 and 2); on how

voting takes place (variables 3 and 4); on whether directors

take the shareholders interests into account (variables 5 and

6); on which legal actions shareholders can file (variables 7

and 8), and on how shareholders are protected in the event of

a change of corporate control (variables 9 and 10). Second, it

had to be decided which specific legal questions to code.

Here, it may be seen as a surprise that, for instance, the

index includes the “powers of the general meeting for de facto

changes” (variable 1) but not the more ordinary powers to

elect the directors, amend the articles or decide about

mergers. However, as it is the aim of this index to examine

differences, variables had to be chosen where differences

could be expected. This can also be seen in other variables.

For example, it was examined whether the ability of

shareholders to anticipate a decision of the directors was

facilitated (variable 3). Conversely, it would have been

uninteresting just to examine whether anticipation is

“possible” because some kind of proxy voting is admissible in

all countries. Third, not all legal questions are codeable.

For instance, it is difficult to code case law on fiduciary

duties because this crucially depends on the facts of the

specific cases. Thus, variables were chosen for which

consistent coding could best be achieved. It may be objected

that some of the variables do not really protect shareholders.

For instance, the mandatory bid (variable 9) protects

shareholders because it gives them an opportunity to exit the

company for compensation; but indirectly it may be harmful76

because it may discourage takeover activity.161 However, that is

not a relevant point here. The purpose of the index is “just”

to provide a description of the legal rules on shareholder

protection and not to answer the normative question whether

and how shareholders should be protected. This will, however,

be examined in the future as this index will constitute a

basis for an econometric study to find statistical

relationships between legal and economic data.162

Coding:

The description of the variables contains some explanation of

how the variables have been coded. In other respect, the

coding follows the methodology developed in Lele and Siems.

The main points are as follows. The index coded the law

applicable to listed companies. Mandatory as well as default

rules, and statutory as well as case law were taken into

account. Listing rules, takeover codes and corporate

governance codes were also considered. The US coding was based

on Delaware corporate law (USA) and the Canadian coding was

based on federal corporate law. Finally, non-binary coding (½,

¼, L, ¾ etc.) was allowed if this was necessary to provide an

accurate picture of the law. The full text of the index (10

variables, 11 years, 20 countries = 2200 observations) plus

the explanations have led to a document of 104 pages which

161 See, e.g., Luca Enriques, The Mandatory Bid Rule in the TakeoverDirective: Harmonization Without Foundation?, EUR. COMPANY & FINANCIAL L.REV. 440 (2004); Lucian A. Bebchuk, Efficient and Inefficient Sales ofControl, 109 QUART. J. ECON. 957 (1994).162 This article is part of the project on Law, Finance and Development at the Centre for Business Research, University of Cambridge, UK. For further information seehttp://www.cbr.cam.ac.uk/research/programme2/project2-20.htm.

77

will be published on the Internet.163 Thus, only four brief

points are highlighted here. First, the variables on

independent board members and on mandatory bid (variables 5

and 9) have improved most significantly in most countries.164

Second, the variables on feasibility of directors’ dismissal

and on shareholder action against the general meeting

(variables 6 and 8) have, by contrast, hardly changed in any

of the countries.165 Third, the variables on shareholder action

against the general meeting and on disclosure of major

shareholder ownership (variables 8 and 10) display the best

scores in most of the countries. Fourth, by contrast, the

variables on anticipation of shareholder decision facilitated

and on independent board members (variables 3 and 5) are on

average the weakest variables.

163 At http://www.cbr.cam.ac.uk/research/programme2/project2-20output.htm.164 For variable 5 see for China: Donald C. Clarke, The Independent Directorin Chinese Corporate Governance, 36 DELAWARE JOURNAL OF CORPORATE LAW 125(2006); for France: French Corporate Governance Principles, no. 8.2; forGermany: German Corporate Governance Code, no. 5.4.2; for India: Clause 49.I(A) of the Listing Agreement (since 2000); for Malaysia: Listing Requirement3.14 of the Kuala Lumpur Stock Exchange (KLSE); for Mexico: Article14.bis.3.IV of the former 1975 SMA, introduced in 2001; for South-Africa:King Report II 2001, no. 2.2; for Spain: 1998 Olivencia Code, no. 2.2; forthe UK: Combined Code 2003, s. A.3.2; for the US: NYSE Manual, § 303A.01(since 2002). For variable 9 see for Argentina: regulation 401/2002(following the general mandate established in the article 23 of the 677/2001Decree); for Brazil: CVM Instruction 299/1999 and art. 354 A introduced byLaw 10303/01; for Chile: 19705/2000 Act, article 2.18 which led to newarticle 69ter of the 18046/1981 Act; for the Czech Republic: CommercialCode, s. 183b(1) (since 1996); for Germany: §§ 35(1), 29(2) WpÜG (since2001); for Italy: Art. 106 d. lgs. n. 58/1998 (TUF), and regulated by Reg.CONSOB 11520/1998; for Latvia: Law of the Financial Instrument Market, s. 66(since 2004); for Pakistan: Regulations 5 and 12 of the Listed Companies(Substantial Acquisition of Shares and Takeovers) Regulations, 2000; forSwitzerland: Federal Act on Stock Exchanges and Securities Trading (since1998).165 With respect to variable 6 there has only been a minor change in the UKin 1996 due to the Code of Best Practice 1995, s. D2 (applied since 1996),and with respect to variable 8 there has only been a minor change in Mexicoin 2001 due to the new article 14.bis.3VI.f of the Stock Markets Act.

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79

Chapter VIII

Conclusion

8.1 Findings

8.1.1 The contents of the rule i.e., Memorandum of Associationand Articles of Association of a company and of any

shareholders’ agreement will necessarily be determined by the

circumstances of every case and the bargaining position of the

parties.

8.1.2 Even before the introduction of the section 233 of the

Companies Act, 1994, Justice Mustafa Kamal made a forward

looking statement in 1985 that ‘although there is no provision

in our Companies Act analogous to section 210 of the Companies

Act, 1994 of UK and section 397 of the Companies Act of India,

still ex debito justiciae this court can be pass appropriate orders

for mitigating oppression of minority shareholders.166’

8.1.3 An auditor can be appointed for past years by the court

in an application under section 233 of the Companies Act.167

8.1.4 The duty of a member and a director has with regard to

the affairs of the company by saying that the act must be

“bona fide in the interest of the company” does not meant they

ignore their own interest and raises a question on the

relationship between fraud on the minority and acting bona

166 Motiur Rahman v. May Industries, 37 DLR (1985) 4, 46167 Md. Faruk v. Abdul Hamid, BLD (1998) (AD) 236.

80

fide in the interest of the company.

8.1.5 A minority shareholder has no right to invoke protection

under this section if his complaint is based solely on a lack

of business ability on the part of the company’s director and

their carelessness in conducting the company’s business. A

decision by the company’s directors to change or expand the

company’s business despite trading looses, or despite the fact

that its profit are attributable wholly to its investment

income and not to carrying on the business for which it was

formed, will not induce the court to give relief to a minority

shareholder, nor the allegation that the shareholders as a

whole would benefit from the company be wound up.

8.1.6 The petitioner must prove conduct or an omission which

is prejudicial to the interest of the petitioner as a member

of the company. Thus, the petitioner cannot complain that the

company must purchase his shares under statutory powers

because then he is complaining as potential seller of shares

and not as a member of the company.

8.1.7 If directors want to have a particular transaction

ratified by the company in general meeting son that they are

liable for any loss caused to the company then they must show

that all material facts are disclosed to the members attending

the meeting and that the resolution is passed in the interest

of the company.

8.1.8 Where an act of the Board is not a fraud on the

minority, the act is raifiable. If duly ratified by the81

general meeting, the minority has no derivative action under

exception to the rule in Foss v. Harbottle, as the members in the

general meeting can vote for their own personal interests. If

however the act complained of is prejudicial and if a

reasonable man would consider the action to be to the

detriment of the company, the action is unfair and even if

duly ratified, minority can still come under this section to

the court for protection. Even if the unfairly prejudicial

conduct has been put right retrospectively it would still be

unfairly prejudicial.

8.2.1 Recommendations

8.2.1.1 Whilst it is essential that the relevant prejudice has

been caused unfairly, the test is an extremely wide one and

allows the court to have regard to any circumstances that it

considers to be relevant. It is difficult to predict how the

court will exercise its discretion. The court can take into

account any of the following factors:

1. Any misconduct of the part of the petitioner.

2. Any alternative remedy available to the petitioner;

indeed requiring a petitioner to accept a reasonable

offer for his shares or to submit to the procedure of

pre-emption provisions in the articles, the court is

holding that the petitioner has another, more appropriate

remedy.

3. Any offer made to the petitioner.

4. The motives of those in the control of the company. Even

82

though discrimination between shareholders, whether

intentional or not is an essential ingredients of

unfairness many types of conduct will be unfairly

prejudicial if the purpose or effect thereof is

discriminatory in some way between shareholders but will

not be so if those concern have made a bona fide

commercial decision in the interest of the company.

5. Any delay in presenting the petition. Delay may be a

factor in granting relief to the petitioner. A reasonable

period of time considering delay may be excused for the

ends of justice.

8.2.1.2 The contents of the rule i.e., Memorandum of

Association and Articles of Association of a company and of

any shareholders’ agreement will necessarily be determined by

the circumstances of every case and the bargaining position of

the parties. To that end I would like to put forward the

following recommendations for the concerns based on my

findings from the research:

1. The memorandum can be used as means of entrenching rules

and regulations which would otherwise have been alterable

if contained in the articles. Conversely, if it is

intended to give some protection to minority

shareholders, but to make allowance for future change of

circumstances, it may be preferable to make provisions

for that protection in the articles by creating a class

right, rather than in the memorandum or a shareholders’

agreement for change in the light of those future

circumstances.83

2. Things a Minority Shareholder Should Look Out for in a

Shareholder's Agreement:

a. Director and Officer Rights: The right to appoint a

director or a group of directors protects your

interest in the company as it grows.

b. Warranty: As a minority shareholder, it's useful to

know the total number of shares outstanding, and the

percentage of ownership held by other shareholders.

c. Specific Management Issues: If anyone has particular

insight into the business, use the shareholder's

agreement to list specific issues that can be foresee

occurring for the business.

d. Pre-Emptive Rights: With pre-emptive rights, a

minority shareholder is guaranteed the right to

purchase any new shares issued.

e. "Shotgun" Clause: A shotgun clause gives the right to

buy or sell your shares to another shareholder if

anyone cannot resolve an issue regarding the company's

operations or sale.

f. Right of First Refusal: Right of first refusal is

similar to pre-emptive rights. However, right of first

refusal focuses on existing stock, not the issuance of

new shares. With first refusal rights, any stock sold

by an existing shareholder must first be offered to

other existing shareholders on a pro-rated basis to

maintain percentage ownership.

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g. Piggyback Rights: When a majority shareholder sells

his shares, a minority shareholder has the right to be

included in the deal. This is called "piggybacking."

It protects your investment should the company be

sold. Piggybacking requires that any party considering

the purchase of the business be able to buy 100

percent of the outstanding shares.

h. Valuation Method: When it comes time to sell the

stock, a fair valuation is critical to a transfer of

the shares to minimize rancor or resentment,

especially in a private, family-run business. Specify

the valuation method in the shareholder agreement to

protect your rights when you or your heirs are ready

to sell.

i. Capital Expenditure Approval: Capital expenditures

lock up large sums of money. In a small business,

minority shareholders may require that they approve

any significant expenditure of capital to protect

their investment in the business.

8.2.2 Remedies

8.2.2.1 Remedies are mentioned in sub-section (3) of section

233 of the Companies Act, 1994. When an application is

admitted the same is not liable to be dismissed and or

rejected summarily without hearing on merit, unless such

application is absolutely incompetent being without

jurisdiction. The court may make such order as prayed for or

as it deems fit including a direction to cancel or modify any

85

resolution or transaction or to regulate the conduct of the

company’s affair or to amend the provisions of the memorandum

or articles of association.

8.2.2.2 Under parallel provisions the English Companies Act

the court ordered or appointing or removing directors. This

power includes appointing a receiver to manage the company’s

business temporarily and such orders that alter the voting and

other rights of classes of members. The court has wide

discretions and the only limitation is that the order it makes

must be relevant and appropriate in order to give relief from

the matters complained of. That such limitation on the court’s

inventiveness in devising an appropriate remedy to relieve the

prejudicial conduct of a company’s affairs seems to be that it

cannot alter rights held by the parties in capacities other

than those of members or directors of the company. Thus,

controlling shareholders found guilty of oppression could not

be compelled to submit to a variation of rights conferred by

the debentures of the company which they held, even though

their oppressive conduct had been facilitated by their also

being debenture holders. The petitioner must however, ask for

specific relief. Where as a result of oppression company has

been brought to a stage where it has to be wound up, wronged

shareholder are still entitled to the remedy, i.e., by making

oppressor buy their shares at a fair price.

8.2.2.3 Section 233 of the Companies Act does not mention that

the court may order the purchase of the complaining

petitioner’s shares by others or the company and this seems to

be a serious lapse. This provision is found in English86

Companies Act, 1985 as amended and is obviously a saving

provision. The High Court Division ordered in a particular

case directing majority shareholders to purchase the shares of

the minority where the court found that the minority was

locked out of management. The court also explained in a great

detail the scope of application of this section is the

background of English, Indian and Australian law and gave a

liberal interpretation to the section.168 The same judge however

in an earlier case refused to go into factual dispute and

avoided the issue of fraud by holding the court is to see

whether the resolutions adopted are unfair to the company or

minority. He held that power given to managing director to

operate the account in Bangladesh and abroad is prejudicial to

the interest of the company and its members.169 In the same case

the Hon’ble Company Judge Mr. Justice K. M. Hasan made an

unwarranted comments that a prior board resolution is needed

before articles are amended. This, it is submitted is not a

requirement of law and has no support in any of the legal

literatures in UK, Australia, India and other Countries.

8.2.2.4 Majority shareholders against whom allegations of

oppression have been made can be given first option to

purchase shares.170

8.2.2.5 The court jurisdiction is equitable in character

168 Homera Ahmed and others v. Nahar Shipping Lines Ltd. and others, 22 BLD (HCD) 67, 7 BLC(HC) 107. The Appellate Division refused to grant leave against the decision9 MLR (AD) 58, 56 DLR (AD) 36.169 Md. Shahadat Hossain v. Base Textile Ltd., 21 BLD (HCD) 585, 54 DLR 583.170 KL Ahuja v. SK Ahuja [1983] 53 Com. Cas 60 (Delhi); Chander Krishna Gupta v. PannalalGirdhari Lal (p) Ltd. (1984) 55 Com. Cas 702 (Delhi); Also see Re a Company ExpSchwrez Noz [1989] BCLC 427.

87

although originating in a statutory provision this is because

the concept of prejudicial (in the UK it is ‘unfairly

prejudicial’) conduct towards the petitioner is akin to the

equity notions of oppression, unfair and in equitable conduct

and taking improper advantage of the petitioner’s vulnerable

position. The elements which induce the court to give or

withhold equitable remedies are therefore relevant, and the

elasticity of the remedies which may be given is as great, if

not greater, than that of equitable remedies in general.

8.2.2.6 A minority shareholder can petition to the court for

relief if there has been fundamental breach of the rules and

where the majority endeavoring directly or indirectly to

appropriate to themselves money, property, or advantages with

belonged to the company. The court may make any just order

beyond the relief sought for, to bring the affairs of the

company to its right track to safeguard the interest of

minority shareholders.

8.2.2.7 The court may decide to give relief even if the person

responsible for the prejudicial conduct have transferred their

shares but may refuse to interfere if the petitioner is the

transferee of shares or a quasi partnership company and

complains of unfair or discriminatory treatment of the

original shareholders. If the majority commits an act of

oppression in a capacity other than as a member then also the

court may give relief.

8.3 Conclusion

88

A minority shareholder owns less than half of a company. As a

result, if a dispute arises over the sale or distribution of

assets, or another issue requiring shareholder votes, a

minority shareholder doesn't have voting strength on his own.

This type of shareholder relationship is typically established

in a small business, where initial funding comes from a group

of friends or family. In exchange for the investment, a

business owner gives you a percentage of ownership through

stock. As the company grows, so does the value of your

investment. However, the rights of a minority shareholder must

be stated in the shareholder's agreement first to protect the

initial investment of minority shareholder. And then in future

complication regarding protection of minority shareholder

section 233 would the next resort.

Unfortunately, a petition to the court is not a particularly

speedy remedy. It can take a year or more from presentation of

the petition until full trial, although various interlocutory

orders may be sought in the mean time. However, they do

represent a forceful means of exerting pressure for a

negotiated settlement, particularly in the case of a petition

for a compulsory winding up.

Litigation in this area must remain a hazardous and expensive

business. Even if, a petitioner’s claim is well founded, the

disruption it causes can only be detrimental to the company.

Wherever it is intended that a minority should have some

special rights of participation in a company it will be

advisable to set out those rights in a well drawn

Shareholders’ Agreement. As well as protecting the minority89

this can also benefit the majority because a Shareholders’

Agreement will usually be expressed to be an exclusive

settlement of the rights and obligations of the parties and

the court are unlikely to interfere with that arrangement save

in special circumstances. A Shareholders’ Agreement may also

confer rights which do not have to be exercised. This would

enable a shareholder to vacillate in taking an interest in the

company’s affairs.

The existence of Shareholders’ Agreement or specially drawn

articles may, however, have an impact on the statutory

remedies, i.e., (i) where the parties have spelt out in detail

agreements all the matters which are to govern their

relationship it is unlikely that the court will find that a

shareholder has any legitimate exception beyond these rights

under those agreements, (ii) if a petitioner already has an

appropriate remedy under an existing agreement it is unlikely

that his petition will be allowed to proceed, and (iii) if

there is already a mechanism for valuing petitioner’s shares on

a transfer to another member he may have to accept that

procedure provided it is fair in the circumstances.

Finally, it should not be overlooked that a right conferred by

a Shareholders’ Agreement will be much easier to enforce than

the statutory remedies. The plaintiff merely has to show a

breach of the provision in question; it is not necessary to

show unfair prejudice or satisfy some other test.

90

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93

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Statutes and Documents______________________________________

The Companies Act, 1994 (Act No. XVIII of 1994)

The English Companies Act, 1985

The India Companies Act, 1986

The Australian Companies Act, 200694

The New Zealand Companies Act, 2006

Cases ____________________________________________________

Allen v. Gold Reefs [1990] 1 Ch.D. 656Atwool v. Merryweather (1867) LR 5 EQ 464, and Gambotto v. WCP Limited(1995) 182 CLR 432 (Aus).Bratton Seymour v. Oxborough [1952] BCLC 693, 698.Caparo v. Dichman [1990] 2 A.C. 605.Chander Krishna Gupta v. Pannalal Girdhari Lal (p) Ltd. (1984) 55 Com. Cas702 (Delhi); Ebrahimi v. Westbourne Galleries Ltd. [1973] A.C. 360; [1971] All E.R. 561.Edwards v. Halliwell [1950] 2 All ER 1064.Fulloon v. Radley (1991) 9 A.C.L.C. 1,434.Heron International v. Grade [1983] BCLC 244Hogg v. Cramphorn [1967] Ch. 254; Bamford v. Bamford [1970] Ch. 212; Homera Ahmed and others v. Nahar Shipping Lines Ltd. and others, 22 BLD(HCD) 67, 7 BLC (HC) 107KL Ahuja v. SK Ahuja [1983] 53 Com. Cas 60 (Delhi); Md. Faruk v. Abdul Hamid, BLD (1998) (AD) 236.Moksudur Rahman v. Bashati Property Development Limited 3 BLC (1998) 224.Moksudur Rahman v. Bashati Property Development Limited 49 DLR (1997) 539.Motiur Rahman v. May Industries, 37 DLR (1985) 4, 46Murray’s Judicial Factor v. Murray and Sons [1993] BCLC 1437, 1449.Nurcombe v. Nurcombe [1985] 1 W.L.R. 370, and Barrett v. Duckett [1953]B.C.C. 778.O’Neil v. Philips (1999) BCLC 1, H.L.Pender v. Lushington (1877) 6 Ch D 70.Pramod Kumar Mittal v. Andhra Steel Corporation Limited (Cal) [1980] 2Comp.L.J.629, 655Prudential v. Newman Industries (No. 2) [1982] Ch. 204.Punt v. Symons [1903] 2 Ch. 506; Piercy v. Mills [1920] 1 Ch. 77; Ramshankar Peasad v. Sindhiri Iron Foundry (P) Ltd. AIR 1966 Cal 512.Re a Company (No. 003160 of 1986) [1986] 2 BCC 99, 276.Re A Company, ex p. Glossop [1988] 1 W.L.R. 1068Re Albert David Ltd. 68 CWN 163.Re Blue Arrow [1987] BCLC 585, 590.Re Elgindata Ltd. [1991] BCLC 959.Re J E Cade and Sons Ltd. (1991) BCC 360; (1992) BCLC 213Re Sam Weller & Sons Ltd. [1990] Ch. 682.Re Sam Weller & Sons Ltd. [1990] Ch. 682.RE Swindon Town F.C. [1990] B.C.L.C. 467, 468h. Contrast in the case ofRegal (Hastings) Ltd. v. Gulliver [1942] 1 All E.R. 378,Russel v. Northern Bank Development Corp. Ltd. [1992] BCLC 1016, HL.

95

Seaton v. Grant [1867] L.R. 2 Ch. App. 459.Simpson v. Westminster Place Hotel (1860) 8 H.L.C. 712. See also Smith v.Croft (No. 2) [1988] Ch. 114.Smith v. Croft (No 2) and Cockburn v. Newbridge Sanitary Steam Laundry Co.[1915] 1 IR 237, 252-59.Smith v. Croft (No. 1) [1986] 1 W.L.R. 580.Tett v. Phoneix [1986] BCLC 149.Walker v. London Tramways (1879) 12 Ch.D. 705

96