Shareholder Remedies Notes

Supervision 7 - Shareholder Remedies 1. 2. Shareholder Remedies a. Derivative Action s263 CA 2006? b. Unfairly Prejudice Action s994 CA 2006? Derivative Action a. There are two elements to the rule in Foss v Harbottle: i. The "proper plantiff" in respect of a wrong done to a company by TP is the company? ii. Only a majority of members, not an individual, can bring an action on behalf of the company b. This rule is premised on (i) Respecting independent legal personality? (ii) Respecting principle of majority rule. c. A statutory derivative claim may be brought under s263 CA. d. It may be brought against a director, shadow director, are a third party assistant. e. There are two stages to a claim: i. Threshold Stage Leave can only be granted if there is a prima facie case s261(2). ii. Proceedings The court must consider a variety of factors some of which oblige the court to dismiss the claim (s263(2)). f. Bars to a Derivative Action i. The court must consider factors in s263 as to whether to grant leave: 1. s262(2)(a) Hypothetical Director acting compatibly with s172 wouldn't bring the claim? 2. s262(2)(b)(c) Authorisation/Ratification of the (ratifiable) act. No A/R of breaches of articles Though some matters of internal management are within the control of the majority (MacDougall v Gardiner) whilst rights conferred by the constitution qua member are not within the control of the majority (Pender v Lushington). Can't authorise "fraud on the minority" (aka fraud on the company) 3. s262(3)(a) Member acting in good faith in interests of company? 4. s262(3)(e) Why has company not pursued? 5. s262(3)(f) Does member have personal action in own right? ii. The court should pay regard to the views of disinterested shareholders per s263(4). g. Costs? i. Where SH has, in gf and on reasonable grounds, brought DC, any successful action accrues to Company? but Co should pay C's costs if a reasonable board ought to have brought the action judicial discretion to avoid vexatious claims Wallersteiner v Moir (No 2). ii. Company may also fund Director's legal costs, though Director must repay per s205(1)(2). iii. Thus pretty expensive for Co fund SH under Wallersteiner Order, and Directors by insurance or legal loans. h. Loss? i. The Rule against Reflective Loss In Prudential Assurance Co v Newman Industries CA held that Member cannot sue for diminution of value of his shareholding by loss to the company... This is because shareholders' loss is reflective of loss suffered by Co, and loss remedied if Co sues. Affirmed by HL in Johnson v Gore Wood & Co. Hannigan states this reflects the first limb of Foss v Harbottle of respecting Company's autonomy to bring claim. ii. The only exception is the qualification Lord Millett's dicta in Giles v Rhind where Company is disabled from bringing the claim by the very wrongdoing 52 3. complained about by the shareholder. 1. E.G.: In Gardner v Parker Co suffered significant losses due to breach of duty by Director. Liquidator settled Company's claim against Director. Minority shareholders sought to bring DC. HELD: Claim barred due to "reflective loss" principle. The Unfairly Prejudicial Remedy a. s994 CA states Member may apply for an order on the ground: i. Company's affairs are conducted in a manner unfairly prejudicial to the SHs generally or in part? or ii. Actual or proposed act or omission is or would be so prejudicial. b. NB: In Fulham FC v Richards CA held there is no express or implied statutory right of access to the court... Thus this power is subject to "arbitration agreements." c. "Conduct" must be acts of the company i. In Re Unisoft Harman J noted "the vital distinction between acts or conduct of the company and the acts or conduct of the shareholder in his private capacity must be kept clear. The first type of act will found a petition under [s994]? the second type of act will not." Thus shareholders' disputes in their private capacities are not part of the conduct of the company's affairs, and thus not within the section. 1. In Arrow Nominees v Blackledge Majority SH were lenders/suppliers to the company. The complaints related to SH's conduct as a lender and supplier, and did not relate to the conduct of the company's affairs by the majority. This would only arise if the majority used their position to compel the company to accept their rates of interest/prices by preventing it securing more favourable funding/suppliers. 2. In Partners XII v Boughtwood Majority SH's conduct in carrying out the company's affairs (i.e by management or control) could amount to "unfairly prejudicial conduct" and thus fell within s994. ii. NB The application must not be premature In Re Astec majority had only made statements about proposed conduct, but had not taken any definitive steps, thus dismissed. d. "Prejudicial" takes into account Members' Entire interests i. Lord Hoffman in O'Neill v Phillips states "prejudice" must not be "too narrowly or technically construed" E.G.: If a SH is entitled to engage in management, SH's removal as director without cause is a prejudice suffered in his capacity as a member per O'Neill v Phillips. ii. The leading authority on "unfairly prejudicial" is O'Neill v Phillips. C was given 25% issued shares and appointed as director. C and D agreed that D would retire and C would take 50% profits, and negotiations for 50% shareholding began but no agreement concluded. Later, D returned as MD, stopped C receiving 50% profits, but only paid a salary and dividends on his 25% share. C severed links and petitioned for "unfairly prejudicial" conduct against his interests. HELD: Lord Hoffman stated a member will not ordinarily be entitled to complain of unfairness unless there has been: 1. Some breach of the terms on which Member agreed the company's affairs should be conducted I.E The Articles, Shareholders' Agreements, Contracts or Statute? or 2. Use of the rules in such a manner which equity would regard as contrary to good faith (Hannigan states this only applies really to smaller quasipartnership companies as it is more personal? a purely commercial venture/PLC is confined to the first ground) In this case, D had not acted in breach of the terms of how the company's affairs should be conducted? nor was it contrary to equity to renege on a gentleman's agreement for 50% profits. Thus C's claim dismissed. 53 

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