This is an extract of our Minority Rights And Remedies document, which we sell as part of our Company law Notes collection written by the top tier of Oxford students.
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MINORITY RIGHTS AND REMEDIES
1. Minority shareholder; someone with not enough shares to be sure of being able to secure passing of a shareholder resolution
2. Danger is that dominant shareholder/bloc of shareholders will seek exercise "private benefits of control" Potential Solutions 1) Contracting
1. Shareholders may contract to ensure protection for vulnerable shareholders.
2. Documents which may provide legally enforceable rights and obligation include: i) Articles of association ( via s.33) ii) Shareholders' agreements
3. This solution more realistic in private companies
1. much easier to bargain: parties deal face to face
2. 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
4. Less realistic in public companies
1. Not possible: high turnover of shareholders, too many shareholders for there to be contract between each of them
2. 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
1. Is often case however that shareholders in private companies do not contract a) May be unkeen to raise contentious issues at start of company's existence b) Shareholders in Ltds may lack knowledge to know what sort of issues will arise c) Concerns about lawyers' fees
2. Whereas in public companies, directors' duties are hardly ever enforced by minority shareholders
1. Armour et al: found that prospect of directors being sued for breach of directors' duties was "virtually nil"
2. Is easy for minority shareholders in public companies to simply sell up and leave Conclusion
3. Thus is appropriate to allow litigation by minority shareholders
4. However at same time, is undesirable to make minority shareholders' rights too strong
1. Discourages reliance on contracting
2. Encourages opportunistic litigation
3. Put more cases into hands of judges (institutionally incompetent)
5. 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 i)
1. Foss v Harbottle laid down two key rules: "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 "Internal management" principle
- Board of directors decides on behalf of company whether company will sue a director or someone else o This reflected by Model Article 3
- and not the members
2. Is a procedural bar on shareholders bringing actions.
3. Designed to prevent wasteful litigation.
4. However problem is that directors are rarely willing to sue themselves. Modern Law
5. 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
1. 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
Claims by Shareholder Personally
6. Where director owes duties to shareholder individually, shareholder may sue director himself.
7. Here, is no need for derivative litigation
8. Section 260(1)(a): sections 260-264 only cover rights of action vested in the company.
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