Minority Rights And Remedies Notes

MINORITY RIGHTS AND REMEDIES

Minority shareholder; someone with not enough shares to be sure of being able to secure passing of a shareholder resolution

Danger is that dominant shareholder/bloc of shareholders will seek exercise “private benefits of control”

Potential Solutions

1. Contracting

   Shareholders may contract to ensure protection for vulnerable shareholders.

   Documents which may provide legally enforceable rights and obligation include:

1. Articles of association ( via s.33)

2. Shareholders’ agreements

   This solution more realistic in private companies

   much easier to bargain: parties deal face to face

   much more incentive to bargain: parties cannot simply sell their shares if they are unhappy, as no one wants to buy shares in company in which majority shareholder is abusing power

   Less realistic in public companies

   Not possible: high turnover of shareholders, too many shareholders for there to be contract between each of them

   Disputes less likely: disputes normally arise due to personal dislike between shareholders; this less likely in Plc where company is run by directors

2. Shareholder Remedies

   Is often case however that shareholders in private companies do not contract

1. May be unkeen to raise contentious issues at start of company’s existence

2. Shareholders in Ltds may lack knowledge to know what sort of issues will arise

3. Concerns about lawyers’ fees

   Whereas in public companies, directors’ duties are hardly ever enforced by minority shareholders

   Armour et al: found that prospect of directors being sued for breach of directors’ duties was “virtually nil”

   Is easy for minority shareholders in public companies to simply sell up and leave

Conclusion

Thus is appropriate to allow litigation by minority shareholders

However at same time, is undesirable to make minority shareholders’ rights too strong

Discourages reliance on contracting

Encourages opportunistic litigation

Put more cases into hands of judges (institutionally incompetent)

Shareholders’ options include:

1. Action for breach of shareholders’ agreement

2. Personal action (where member is “proper claimant”)

3. Derivative Claim

4. Unfair Prejudice Claim

5. “Winding Up” Claim

Foss v Harbottle

Foss v Harbottle laid down two key rules:

1. “Proper claimant” principle

• Company is “proper claimant” where directors have allegedly breached duties

• Thus not open to shareholders to sue for breach of directors’ duties

2. “Internal management” principle

• Board of directors decides on behalf of company whether company will sue a director or someone else

  • This reflected by Model Article 3

• and not the members

  Is a procedural bar on shareholders bringing actions.

  Designed to prevent wasteful litigation.

  However problem is that directors are rarely willing to sue themselves.

Modern Law

CA 2006 replaced common law principles derived from Foss v Harbottle.

1. Has NOT abolished proper claimant principle

2. But has reworked internal management principle

   Under modern law:

1. Where directors have breached a duty towards a shareholder, shareholder may sue under “proper claimant” principle

2. Where directors have breached duty to their company, Foss v Harbottle rules have been displaced by Companies Act section 260-264

1. Claims by Shareholder Personally

   Where director owes duties to shareholder individually, shareholder may sue director himself.

   Here, is no need for derivative litigation

   Section 260(1)(a): sections 260-264 only cover rights of action vested in the company.

   Hence statutory reforms have not abolished proper claimant principle from Foss

   Cinematic Finance v Ryder [2010]

Application

Director owes duties to shareholders e.g. where:

1. Shareholder has personal rights under articles

• e.g. director allots shares solely for purpose of destroying a majority

  • Here, director infringes members’ contractual rights under articles

  • Re a Company [1987]

2. Director assumes a duty towards a shareholder due to conduct in general meetings

   director refuses to acknowledge C’s votes in a general meeting

   • Pender v Lushington [1877]

     director undertakes to give shareholder advice in relation to shares

     HOWEVER director’s refusal to call a poll at a general when one is requested by member might not give rise to personal right

   • Macdougall v Gardiner [1875] (internal irregularity)

Restrictions

Shareholders cannot sue where ‘no reflective loss’ principle applies; i.e.:

1. shareholder and company have claim against directors arising out of same set of facts

2. part or all of loss for which shareholder seeks to recover merely mimics that of company

• Johnson v Gore, Wood & Co [2002] (HL) (existence of principle affirmed)

  As basic principle, any claim relating to diminution in value of shares is barred.

Extent of Principle

Reflective loss principle prevents recovery by shareholder even where:

1. Company chooses not to sue director

2. Company settles with D on terms with which shareholder does not agree

3. Director has defence to company’s claim (but not the shareholder’s); etc.

• Johnson v Gore [2002]

  Principle applies even where shareholder holds 99% of shares

  Johnson v Gore [2002]

Exceptions

Principle does not apply even if shareholder and company both have legal claims arising from same set of facts where:

1. D owes no duty to company

• Johnson v Gore [2002]

2. Shareholder’s loss is distinct to that of company

• Heron International Ltd v Lord Grade [1983]

3. Company is unable to pursue claim against D due to act of D himself

• E.g. where director’s breach of duty has resulted in company going into receivership (so that cannot afford to sue)

• Giles v Rhind [2002]

4. D has improperly pressured company into settling its claims against D

• Perry v Day [2005]

2. Derivative Claims

   Developed as common law exception to rule in Foss v Harbottle.

   Put into statutory from by Companies Act 2006.

Application

Allows shareholder to seek leave from court to bring derivative action against director.

Two hurdles for C:

1. section 261(2):...

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