Company - Minority protection & statutory remedies - Notes (1)
V. Minority Protection & Statutory Remedies
Winding up on the ‘Just & Equitable’ ground: IA 1986 s122(1)(g)
- Creditors, directors & ‘contributors’ can petition
- Shareholders can petition if she has a ‘tangible interest’ in the company, i.e. the company must be solvent
- Shareholders must have held shares for at least 6 months during the last 18 months: 6 month rule
What amounts to ‘just & equitable’ circumstances?
1. Contractual basis of jurisdiction
2. Breach of shareholders’ contract in the quasi-partnership
Ebrahimi v Westbourne Galleries 1972
- The company was treated as an incorporated partnership and wound up on the just and equitable ground
- 3 features of a quasi-partnership:
(i) A company formed on the basis of personal relationship between its members
(ii) Where all or some shareholders expect to participate in mgmt
(iii) Where there is a restriction on share transfers
- There is a wider equitable consideration: A limited company is more than a mere legal entry, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure
Re German Date Coffee 1882
- Wound up because of loss of company substratem
Re Brinsmead & Sons 1897
- Wound up because company was formed for a fraudulent purpose
Re Yenidje Tobacco 1916
- Wound up because the relationship between the company’s only two equal shareholders and directors broke down, leading to deadlock in management, and communications between them was only possible through a third party
Loch v John Blackwood 1924
- Wound up because of justifiable lack of confidence based on a lack of probity in the conduct and management of the company’s affairs, caused by a failure to hold meetings, prepare accounts and reports and to comply with audit requirement in the articles
O’Neill v Phillips 1999
- This is the first s459 case to be considered y HL
- This decision restricts the ability of members to bring an action under s459 CA 1985 to cases where there has been a breach of the company’s constitution, some other breach of duty or some other agreement which makes it inequitable to confine the members to their strict constitutional rights
- The ‘wider equitable considerations’ established by Ebrahimi case also apply to s459 actions
Secretary of State for Trade & Industry v Liquid Acquisitions 2002
- It was in public interest (IA s124A) to grant a winding up order when a company employed sales techniques involving misrepresentation and deceit
- Court ordered majority shareholder to pay the costs of the winding up. The shareholder was not a director but had been deeply involved in the misrepresentation and deceit
- If the company had to cover the costs of the winding up this would have the effect of taking money away from the creditors
- As such the majority shareholder – by virtue of his behaviour – should pay
IA 1986 s125: Offer to purchase a petitioner’s share must be a fair/ reasonable one:
(i) pro-rata & discounted offers
(ii) Bird Precision Bellows 1985
- The valuation was made as at the date of a consent order that the shares should be purchased at such price as the court should thereafter determine
(iii) Valuation of the company
Problems of valuation by auditors:
(i) Lack of independence (against the majority)
(ii) Lack of resource and power to investigate misconduct (compared to court)
(iii) Lack of transparency of valuation
Virdi v Abbey Leisure 1990 (?)
O’Neill v Phillips 1999
- See above
Unfairly Prejudicial Conduct CA 1985 s459 – 461
- Member and Transferee or shareholder by transmission can sue
- No definition of ‘interests of the members’: up to courts to determine
Re A Company (Lord Grantchester QC case) 1983
- s459 must be limited to conduct which is unfairly prejudicial to the interests of the members as members. It cannot extend to conduct which is prejudicial to other interests of persons who happen to be members: Restrictive start of the concept of a member’s interests
- However, now, it must take into account that the interests of a member are not necessarily limited to his strict legal rights under the constitution of the company. The use of the word ‘unfairly’ in s459 enables the court to have regard to wider equitable considerations
Re A Company (no 00447 of 1986) 1986
- This is an important decision on s459 as Hoffmann J relied on equitable considerations taken from the speech of Lord Wilberforce in Ebrahimi
- His Lordship has applied these equitable principles in O’Neill v Phillips as well
- Apply equitable considerations to s459 increases its flexibility, and removal as a director often forms a central plank of a petitioner’s allegation under it
Saul D Harrison & Sons 1995
- This is an important case on s459 for it develops the concept of unfairly prejudicial conduct. Hoffmann LJ was clearly not impressed by the ‘reasonable bystander test’ for the purposes of s459
- Articles of association are the starting points when deciding whether there has been unfairly prejudicial conduct, with legitimate expectations based on agreements outside the articles being taken into account in appropriate cases
- Followed Ebrahimi and applied ‘wider equitable principles’
- In deciding whether to continue the business of the company after its premises were compulsorily purchased, the directors took in to account the interests of the employees that they were required to do by s309 CA 1985
Citybranch Group , Gross v Rackind 2004
- CA s459 was sufficiently wide to encompass the situation: application of CA s459 to a holding company where the conduct complained of related to a subsidiary
- Interests were wider than rights and included ‘legitimate expectations’
Implied agreements for quasi-partnership – legitimate expectations found by courts on minority shareholder:
(i) To participate in management
(ii) To have the company properly run
Re London School of Electronics 1985
- Exploration of company assets, in this case students, can be unfairly prejudicial conduct
- It makes clear that a petitioner does not have to come to court ‘with clean hands’. This is in contrast with derivative (minority) actions
- Improver behaviour by the petitioner can, however, be taken into account when considering the relevant order to be awarded to the petitioner under s461 CA 1985
- The petitioner’s remedy was an order by the court under s461 that his shares be purchased by the respondents. However, in appropriate circumstances the court may order the majority shareholders to sell their shares to the petitioner
Re Elgindata Ltd. 1999
- There is little authority on the extent to which negligent or incompetent management of a company’s business may constitute conduct that is unfairly prejudicial to the interests of members for purposes of s459
- Two considerations are relevant: (1) It is not for the court to resolve disagreements between petitioners and respondents as to whether a particular managerial decision was, as a matter of commercial judgment, the right one to make, or as to whether a particular proposal relating to the conduct of the company’s business is commercially sound under s459; (2) Short of a breach y a director of his duty of skill and care there is prima facie no unfairness to a shareholder in the quality of the management turning out to be poor
(iii) To receive a reasonable return of their investment i.e. all the profits should not disappear in director’s fee, and some of the profits should be used to pay a dividend
Re Sam Weller & Son 1990
- The court would ordinarily be very reluctant to accept that managerial decision could amount to unfairly prejudicial conduct. On the other hand, conduct may be unfairly prejudicial to the interests of minority shareholders even if those responsible for that conduct may, as members of the company, have suffered the same or even greater prejudice
Re Jayflex Construction, McKee v O’Reilly 2003
- A breakdown in the relationship of trust and confidence in a quasi-partnership was not enough here to amount to unfairly prejudicial confidence. Both shareholders had unjustifiably charged personal expenses to the company and therefore the mutuality of the behaviour precluded either party relying on it for the purposes of s459
Backlash?
O’Neill v Phillips
- See above
Re Guidezone 2000
- The petitioner claimed that the company’s affairs were being conducted in a manner prejudicial to his interest as the remaining shareholders refused to sell the company’s principal asset, a hotel, so that he could realize his investment in the company. He based his argument on the ground that there was an understanding that the hotel was purchased on the basis that he should have the final say on running it, including when the hotel was to be sold and the company would up. The petition was dismissed. There was no unfairness and no agreement that the company would be run in the manner claimed by the petitioner
Remedies available:
Re Harmer 1959
- Court ordered an old, autocratic ‘governing director’ of a company he had found, and in which he retained voting control, to become a president for life, with no powers, and not to interfere in the mgmt of the company
- This sort of order is exceptional. Far more common is the order that the majority buy the shares of the minority petitioner
CA s459 Vs IA 125
- There is no obvious statutory rule that the petitioner must accept some ‘reasonable alternative remedy under CA s459
Re A Company (no 004377 of 1986) 1987 (?)
Decisions on right to leave of breakdown:
Re Yenidge Tobacco 1916
- See above
O’Neill v Phillips 1999- See above
Winding up on the ‘Just & Equitable’ ground: IA 1986 s122(1)(g)
- Creditors, directors & ‘contributors’ can petition
- Shareholders can petition if she has a ‘tangible interest’ in the company, i.e. the company must be solvent
- Shareholders must have held shares for at least 6 months during the last 18 months: 6 month rule
What amounts to ‘just & equitable’ circumstances?
1. Contractual basis of jurisdiction
2. Breach of shareholders’ contract in the quasi-partnership
Ebrahimi v Westbourne Galleries 1972
- The company was treated as an incorporated partnership and wound up on the just and equitable ground
- 3 features of a quasi-partnership:
(i) A company formed on the basis of personal relationship between its members
(ii) Where all or some shareholders expect to participate in mgmt
(iii) Where there is a restriction on share transfers
- There is a wider equitable consideration: A limited company is more than a mere legal entry, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure
Re German Date Coffee 1882
- Wound up because of loss of company substratem
Re Brinsmead & Sons 1897
- Wound up because company was formed for a fraudulent purpose
Re Yenidje Tobacco 1916
- Wound up because the relationship between the company’s only two equal shareholders and directors broke down, leading to deadlock in management, and communications between them was only possible through a third party
Loch v John Blackwood 1924
- Wound up because of justifiable lack of confidence based on a lack of probity in the conduct and management of the company’s affairs, caused by a failure to hold meetings, prepare accounts and reports and to comply with audit requirement in the articles
O’Neill v Phillips 1999
- This is the first s459 case to be considered y HL
- This decision restricts the ability of members to bring an action under s459 CA 1985 to cases where there has been a breach of the company’s constitution, some other breach of duty or some other agreement which makes it inequitable to confine the members to their strict constitutional rights
- The ‘wider equitable considerations’ established by Ebrahimi case also apply to s459 actions
Secretary of State for Trade & Industry v Liquid Acquisitions 2002
- It was in public interest (IA s124A) to grant a winding up order when a company employed sales techniques involving misrepresentation and deceit
- Court ordered majority shareholder to pay the costs of the winding up. The shareholder was not a director but had been deeply involved in the misrepresentation and deceit
- If the company had to cover the costs of the winding up this would have the effect of taking money away from the creditors
- As such the majority shareholder – by virtue of his behaviour – should pay
IA 1986 s125: Offer to purchase a petitioner’s share must be a fair/ reasonable one:
(i) pro-rata & discounted offers
(ii) Bird Precision Bellows 1985
- The valuation was made as at the date of a consent order that the shares should be purchased at such price as the court should thereafter determine
(iii) Valuation of the company
Problems of valuation by auditors:
(i) Lack of independence (against the majority)
(ii) Lack of resource and power to investigate misconduct (compared to court)
(iii) Lack of transparency of valuation
Virdi v Abbey Leisure 1990 (?)
O’Neill v Phillips 1999
- See above
Unfairly Prejudicial Conduct CA 1985 s459 – 461
- Member and Transferee or shareholder by transmission can sue
- No definition of ‘interests of the members’: up to courts to determine
Re A Company (Lord Grantchester QC case) 1983
- s459 must be limited to conduct which is unfairly prejudicial to the interests of the members as members. It cannot extend to conduct which is prejudicial to other interests of persons who happen to be members: Restrictive start of the concept of a member’s interests
- However, now, it must take into account that the interests of a member are not necessarily limited to his strict legal rights under the constitution of the company. The use of the word ‘unfairly’ in s459 enables the court to have regard to wider equitable considerations
Re A Company (no 00447 of 1986) 1986
- This is an important decision on s459 as Hoffmann J relied on equitable considerations taken from the speech of Lord Wilberforce in Ebrahimi
- His Lordship has applied these equitable principles in O’Neill v Phillips as well
- Apply equitable considerations to s459 increases its flexibility, and removal as a director often forms a central plank of a petitioner’s allegation under it
Saul D Harrison & Sons 1995
- This is an important case on s459 for it develops the concept of unfairly prejudicial conduct. Hoffmann LJ was clearly not impressed by the ‘reasonable bystander test’ for the purposes of s459
- Articles of association are the starting points when deciding whether there has been unfairly prejudicial conduct, with legitimate expectations based on agreements outside the articles being taken into account in appropriate cases
- Followed Ebrahimi and applied ‘wider equitable principles’
- In deciding whether to continue the business of the company after its premises were compulsorily purchased, the directors took in to account the interests of the employees that they were required to do by s309 CA 1985
Citybranch Group , Gross v Rackind 2004
- CA s459 was sufficiently wide to encompass the situation: application of CA s459 to a holding company where the conduct complained of related to a subsidiary
- Interests were wider than rights and included ‘legitimate expectations’
Implied agreements for quasi-partnership – legitimate expectations found by courts on minority shareholder:
(i) To participate in management
(ii) To have the company properly run
Re London School of Electronics 1985
- Exploration of company assets, in this case students, can be unfairly prejudicial conduct
- It makes clear that a petitioner does not have to come to court ‘with clean hands’. This is in contrast with derivative (minority) actions
- Improver behaviour by the petitioner can, however, be taken into account when considering the relevant order to be awarded to the petitioner under s461 CA 1985
- The petitioner’s remedy was an order by the court under s461 that his shares be purchased by the respondents. However, in appropriate circumstances the court may order the majority shareholders to sell their shares to the petitioner
Re Elgindata Ltd. 1999
- There is little authority on the extent to which negligent or incompetent management of a company’s business may constitute conduct that is unfairly prejudicial to the interests of members for purposes of s459
- Two considerations are relevant: (1) It is not for the court to resolve disagreements between petitioners and respondents as to whether a particular managerial decision was, as a matter of commercial judgment, the right one to make, or as to whether a particular proposal relating to the conduct of the company’s business is commercially sound under s459; (2) Short of a breach y a director of his duty of skill and care there is prima facie no unfairness to a shareholder in the quality of the management turning out to be poor
(iii) To receive a reasonable return of their investment i.e. all the profits should not disappear in director’s fee, and some of the profits should be used to pay a dividend
Re Sam Weller & Son 1990
- The court would ordinarily be very reluctant to accept that managerial decision could amount to unfairly prejudicial conduct. On the other hand, conduct may be unfairly prejudicial to the interests of minority shareholders even if those responsible for that conduct may, as members of the company, have suffered the same or even greater prejudice
Re Jayflex Construction, McKee v O’Reilly 2003
- A breakdown in the relationship of trust and confidence in a quasi-partnership was not enough here to amount to unfairly prejudicial confidence. Both shareholders had unjustifiably charged personal expenses to the company and therefore the mutuality of the behaviour precluded either party relying on it for the purposes of s459
Backlash?
O’Neill v Phillips
- See above
Re Guidezone 2000
- The petitioner claimed that the company’s affairs were being conducted in a manner prejudicial to his interest as the remaining shareholders refused to sell the company’s principal asset, a hotel, so that he could realize his investment in the company. He based his argument on the ground that there was an understanding that the hotel was purchased on the basis that he should have the final say on running it, including when the hotel was to be sold and the company would up. The petition was dismissed. There was no unfairness and no agreement that the company would be run in the manner claimed by the petitioner
Remedies available:
Re Harmer 1959
- Court ordered an old, autocratic ‘governing director’ of a company he had found, and in which he retained voting control, to become a president for life, with no powers, and not to interfere in the mgmt of the company
- This sort of order is exceptional. Far more common is the order that the majority buy the shares of the minority petitioner
CA s459 Vs IA 125
- There is no obvious statutory rule that the petitioner must accept some ‘reasonable alternative remedy under CA s459
Re A Company (no 004377 of 1986) 1987 (?)
Decisions on right to leave of breakdown:
Re Yenidge Tobacco 1916
- See above
O’Neill v Phillips 1999- See above
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