Shareholders’ remedies

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This topic is within Business Associations.

Contents

Required Reading

Redmond, Paul Corporations and Financial Markets Law 6th ed, 2013, LBC, pp. [8.05]-[8.10]; [8.45]; [8.55]-[8.135].

Introduction

There are many situations in companies where there are disagreements between the members. Especially in small private companies, the minority shareholders can often be oppressed by the majority (in public companies, dissatisfied members can often simply sell their shares in the market).

  • Because of the majority’s right to elect the board and to effect constitutional and capital changes, the minority have no assurance of proportionate participation in company management an affairs.
  • There is an equitable limitation which prevents majorities in a general meeting from acting oppressively towards the minority or using powers for an improper purpose. It is often called ‘fraud on the minority’.
  • The formulation of a general standard requires a distinction between conduct which is properly characterised as the legitimate exercise of majority power and that which may be treated as over-reaching and unfair.

Shareholder litigation

Minorities can be protected through the grant of legal standing to litigate not only in respect of wrongs done to them personally but also for certain wrongs to the company itself. There are two categories of suits:

  1. Personal, individual or direct:
    • No great difficulty beyond the characterization of the cause of action as personal rather than corporate
  2. Wrongs done to a company:
    • Difficulty as it displaces the rule that allocates to directors the corporate powers to litigate for the company

The shareholders are permitted to sue on behalf of the company in situations where:

  • When one of the wrongdoers is among the company’s directors.
  • Where the acts complained of are those of the company’s controllers and amount to fraud upon the minority.
  • Where the wrongdoer effectively controlled the company’s decision not to bring the suit itself.

Equitable limitations upon the voting powers of majorities

Traditionally, it has been understood that the power of the majority must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole, and it must not be exceeded: Allen v Gold Reefs of West Africa Ltd.

  • This limitation on majorities does not impose a fiduciary obligation towards the company or minority: Ngurli v McCann (1953).
  • The High Court, however, has rejected this test an inappropriate and adopted the language of oppression and improper purpose to define vitiating overreach by majorities: Gambotto v WCP Ltd (1995).

The major way in which majorities oppress the minorities is where they amend company constitutions (s 136) to prejudice shareholder rights. The difficulty is to distinguish between alterations which are proper notwithstanding that they prejudice or even extinguish shareholder rights, and those which offend the equitable limitation upon voting rights (eg, those which introduce machinery for the appropriation of members’ shareholdings).

This was discussed in Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286:

  • Facts: a company’s constitution specified that shares must be offered to existing members before they can be sold to outsiders. The defendant wished to sell his controlling interest in the company to an outsider, so he passed a special resolution to change the constitution so achieve his purpose. The plaintiff, a minority shareholder, alleged a fraud on the minority.
  • Held: The issue was whether the resolution was passed bona fide and in the interests of the company as a whole. This means “that the shareholder must proceed upon what is for the benefit of the company as a whole in his honest opinion”.
    • “Company as a whole does not mean the company as a commercial entity… It means the corporators as a general body… That is to say the case may be taken of an individual hypothetical member and whether what is proposed is for that person’s benefit”
    • “[A resolution] would be liable to be impeached if the effect of it were to discriminate between the majority shareholders and the minority shareholders, so as to give the former an advantage of which the latter were deprived”
    • Here, there was no discrimination between the types of shareholders - anyone who wanted to get out at that price could get out, and any who preferred to stay could stay in.
    • Thus, there were no grounds for saying the resolution can be impeached.

And also in Australian Fixed Trusts Pty Ltd v Clyde Industries Ltd (1959) 59 SR (NSW) 33:

  • Facts: the directors of CI gave notice of an extraordinary general meeting to consider a proposal to alter the company’s constitution by disenfranchising any member who held shares as trustee under a publicly held unit trust.
    • Such a member might not vote unless it had received direction of a majority of unit holders as to the manner in which the shares were to be voted
    • AFT sued as members of the company, to restrain the proposed alteration
  • Held: The alleged purpose of this resolution was that the affairs of the company should be in the hands of those who have a financial stake in the company and not be in the hands of those who have no financial stake (ie, trustees).
    • However, this purpose was not carried out - the actual effect of the resolution is to discriminate between the majority shareholders and the minority shareholders so as to give the former an advantage of which the latter are deprived.
    • The resolution was thus not for the benefit of the company as a whole and therefore impeached.

Test of validity

There have been several tests applied to the question of whether a resolution is valid or invalid for oppression of the minorities:

  1. Peter’s Case proposes a positive test of validity that “if a resolution is regularly passed with the single aim of advancing the interests of the company considered as a corporate whole, it would never be condemned as mala fides [bad faith]”
  2. Another approach describes invalidity in terms of the prejudicial effect of the resolution upon minority rights - “the purpose animating the resolution must not be simply the enrichment of the majority at the expense of the minority”: Peter’s
    • Alteration must not sacrifice the interests of the minority to those of a majority without any reasonable prospect of advantage to the company as a whole: Peter’s
  3. A third approach is that “the alteration may be so oppressive as to cause suspicion on the honesty of the persons responsible for it, or so extravagant that no reasonable man could really consider it for the benefit of the company”: Suttleworth v Cox Bros & Co (Maidenhead) Ltd (1927)
  4. Individual hypothetical member test: Greenhalgh v Arderne Cinemas
  5. Discriminatory effect of the challenged resolution: Greenhalgh v Arderne Cinemas
  6. The benefit of the company in Allen v Gold Reefs of West Africa is a general expression negativing purposes foreign to the company’s operation, affairs and organisations”: Australian Fixed Trusts.


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References

Textbook refers to Redmond, Paul Corporations and Financial Markets Law 6th ed, 2013, LBC.

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