RESEARCH MONOGRAPH ON CRITICAL ANALYSIS ON PROTECTION
OF MINORITY SHAREHOLDERS
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
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
to some part of the members including himself and the Court,
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 an3 Dr. M Zahir, supra note 1, p. 183.
2
end the matters complained of, make such order as it thinks
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
3
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
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
focus only on those issues which are closely connected
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
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abstract ideas or theory. It is used by jurist and
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
6
do this research paper. I also tried to show the limitations
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
7
finally concluded with few suggestions.
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:8
Finally, the eighth chapter concludes the paper with some
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.
9
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
13
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.
15
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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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.
84
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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Articles____________________________________________________
Mathew Berckhan, The Derivative Actions in Australia and New Zealand,[75]-[76], Massey University, [1998], viewed on 07 July 2013 http://www.sc.com.my/eng/html/resources/inhouse/shareholders.pdf
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This read “An Act for Establishing a Company for the Purpose ofLaying Out and Maintaining an Ornamental Park within the Townships ofRusholme, Charlton-upon-Medlock and Moss Side, in the County ofLancaster”. It received Royal assent on the 5 May 1837 (7 Will 4).See. < http://en.wikipedia.org/wiki/Foss_v_Harbottle> July 2013
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93
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Reports and Policy___________________________________________
Stefan Lo, ‘The continuing role of equity in restraining majorityshareholder power’[2006] 16 Australian journal of corporate law 96at 105
L S Sealy, Foss v Harbottle- A marathon where nobody Wins’, (1981),Modern Law review, Cambridge Law Journal, 202.
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Ian M Ramsay, ‘Litigation by the Shareholders and directors:empirical study of empirical derivative Action, University ofMelbourne’, [2006], viewed on 03 July 2012, http://www.google.co.in/url?sa=t&rct=j&q=derivative+action+of+shareholders&source=web&cd=8&ved=0CFUQFjAH&url=http%3A%2F%
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
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