#3575 - Minority Rights And Remedies Cases - Company Law

MINORITY RIGHTS AND REMEDIES

Personal Actions

Pender v Lushington [1877]

Chairman of a meeting of shareholders wrongfully refused to recognise votes of nominee shareholders. Held:

This refusal infringed the personal rights of nominee shareholders.

Thus could bring personal action.

Macdougall v Gardiner [1875]

Chairman of a meeting of shareholders wrongfully (i.e. in breach of articles) refused to call a poll when one was requested by a shareholder (C). Shareholder sued. Held:

Refusal did not infringe personal right of C.

Therefore C was not entitled to bring personal action

Rather the proper claimant was company.

Cinematic Finance v Ryder [2010]

Reforms in CA 2006 have not abolished “proper claimant” principle from Foss v Harbottle.

Thus individual claims by shareholders still possible

Re a Company [1987]

Hoffmann J

Where director allots shares solely for purpose of destroying a majority, the main basis of action is the wrong to shareholders

And not the wrong to company

This because members’ individual rights under articles have been infringed.

Thus members have personal right of action.

Johnson v Gore Wood [2001] (HL)

Lord Millett

Shareholders cannot recover for loss in value of shares which is reflective loss – (see notes)

This rule exists for policy reasons

Is principally for benefit of company’s creditors

i.e. Ensures loss is recovered by company and not shareholders

Giles v Rhind [2003] (CA)

D, a director, diverted company’s most lucrative contract away from company in breach of duty. As result of loss of this contract, company went into receivership and did not have enough money to launch proceedings against D. C, fellow shareholder in company, was in shareholders agreement with D; thus brought action against director for breach of duty. Held:

Shareholders agreement was designed to protect C’s investment and remuneration

And D’s breach of duty harmed both of these

Therefore C has right of action.

Reflective loss principle does not prevent shareholder recovering damages where director’s breach of duty has made it impossible for company to pursue its own cause of action against him

Even where loss suffered by shareholder reflects that of shareholder.

Thus C could recover his losses.

Heron International Ltd v Lord Grade [1983] (CA)

Were two takeover bids for a company; board of directors accepted lower bid and was able to take action to enforce this choice on shareholders. Shareholders sued for loss in value of shares. Held:

Company’s loss was distinct from that of shareholders:

1. Company’s assets were harmed as it was unclear that the relevant regulator would allow lower bidder to operate in that industry

2. Shareholder’s assets were harmed as they were unable to accept a higher offer for their shares

   Thus no reflective loss principle does not apply.

Perry v Day [2005]

Derivative Actions

Iesini v Westrip Holdings [2009]

Under s.263(2), court can only refuse leave for derivative action where satisfied that no director would seek to pursue the claim themselves.

Thus if some directors would seek to continue action, court cannot automatically refuse leave.

Franbar Holdings [2008]

Relevant test under s. 263(3)(b) is that of a hypothetical director.

i.e. if such a person would not attach very much importance to pursuing claim, no leave granted.

Factors which hypothetical director would take into account include:

1. Likelihood of claim being successful

• i.e. if breaches of duty not obvious, would not bring claim

2. Ability of company to recover any damages awarded

3. Costs of proceedings

4. Damage to company’s reputation

   Fact that C had alternative claim for unfair prejudice considered important to exercise of discretion under s.263(3)

Stainer v Lee [2010]

Under s.263(3)(b), may be appropriate to grant leave:

Where case is very strong, even if amount of recovery would not be large

Where case is weak, but where amount of potential recovery is very large

Fact that C had alternative claim for unfair prejudice not considered very important to exercise of discretion under s.263(3)

Unfair Prejudice Proceedings

Qua member

Re a Company [1986]

Was small private company; majority shareholders used their voting power to oust C from board of directors. C brought claim under old provision equivalent to s.994. Held:

Hoffmann J

In small company with only two or three members, is often case that each member has only invested in company on basis that each will earn their living by working for company as director.

Thus each member has a legitimate expectation he will continue to be employed as a director

Therefore where one member is dismissed as director, this affects him in his capacity as a member

i.e. as he only invested in company on basis he would receive remuneration from it as director

therefore his dismissal is unfairly prejudicial to his interests as a member

Gamlestaden Fatigheter AB v Baltic Partners [2007] (PC)

C, a company, was a shareholder in D but also a creditors of D. C sued D’s directors under Jersey version of section 994, alleging unfair prejudice caused by mismanagement. If action was successful, D would receive funds that were enough to pay off D’s creditors but not enough to allow for any distribution (in form of dividends) to D’s members. D sought to have action struck out on grounds that C was sung in capacity as a creditor. Held:

Lord Scott

C may sue for corporate relief (i.e. payment of money to company in which he is a member) only if there is some financial benefit to be derived from that by C.

However this financial benefit need not be in C’s capacity as a member

Suffices that it is in C’s capacity as a creditor.

Thus fact that any money received by D would be used to pay off C as a creditor (and that there would be none left to give to D’s shareholders) did not matter.

Thus C not barred from making s.994 application.

Clean Hands

Re London School of Electronics [1985]

Re Noble & Sons (Clothing) [1983]

Re Bird Precision Bellows [1986]

Unfair Prejudice

Re Elgindata [1991]

Warner J

Is no unfair prejudice to shareholder where those in control of company are merely NEGLIGENT

Unless the negligent misconduct amounts to breach of director’s duty of care and skill

C cannot sue where management of company simply turns out to be poor

Something more is required.

Re Macro (Ipswich) [1994]

C owned shares in two property-owning companies. These two companies had a property managing agent, the Thompsons. C believed two companies had suffered losses due to Thompsons committing various improprieties (e.g. charging excessive management charges to two companies). C therefore sued D, sole director of Thompsons, on grounds he had inadequately supervised his firm. Held:

Case distinguished from Re Elgindata

In Elgindata, management had simply been poor

Whereas in present case:

Were specific acts of mismanagement by Thompsons, which D failed to rectify

Some acts of mismanagement were repeated over many years

Thus on facts, acts of mismanagement were sufficiently serious to cause unfair prejudice to C.

Relevant here that D’s firm stood to gain from some the acts of mismanagement (e.g. the excessive charges). This possibly a key factor.

London School of Electronics [1986]

If C himself has behaved unreasonably, this is irrelevant to whether unfair prejudice has occurred.

Only relevance of C’s own conduct is in terms of remedy available.

O’Neill v Philips [1999]

D, who owned all the shares in a company, gave 25% share to C and appointed him as director; additionally allowed C to take 25% of profits of company. D told C that he hoped C would be able to take over whole day-to-day management of business, in which case C would be able to have a 50% shareholding. D did retire as director to allow C to run business, and discussion took place about increasing C’s shareholding to 50%; however company’s fortunes then declined, and D retook control of company and withdrew C’s portion of the profits. C sought buy-out on grounds that D had caused him unfair prejudice, by failing to allocate him extra 25% of shares and withdrawing profits from him. Held:

Lord Hoffmann

Is need for a balance between:

1. Court’s discretion under s.994

2. Need for legal certainty

“Unfair”

Relationship of parties is fundamentally contractual

Thus “unfairness” usually only arises

1. where there is breach of terms on which it was agreed company’s affairs should be conducted

• ‘terms’: i.e. as found in articles of associations/shareholder agreements

2. or where there are equitable restraints on exercise of a legal power by D (see below)

“Legitimate Expectations”

Phrase “legitimate expectations” is too broad

Better view is that where D has exercised a legal right, court will nevertheless find unfair prejudice if this exercise of rights should be subject to equitable restraints

Only here does C have legitimate expectation

i.e. expectation is a consequence, and not a cause, of the equitable restraint

To be equitable restraints, D’s exercise of his legal right must be contrary to what parties have earlier agreed, by words or conduct

however no need for this earlier promise to be independently enforceable as matter of contract

Facts

1. D never promised to increase C’s shareholding to 50%

   Thus although C had expectation of being given extra 25% of shares, this was not ‘legitimate’

   i.e. as D’s action in not giving C the shares was not unconscionable

   Therefore D did not behave unfairly by withdrawing from negotiations for increase in C’s shareholding

2. D never promised to continue sharing profits

   D had merely said C could take some profits whilst C managed the company

   However D...