LAWS10083 Company law Minority rights protection- just and equitable winding up, Study notes of Law

Download LAWS10083 Company law Minority rights protection- just and equitable winding up and more Study notes Law in PDF only on Docsity! RULE OF MAJORITY: FOSS V. HARBOTTLE- internal management principle; irregular routine principle; and the principal claimant principle. The basic principle relating to the administration of the affairs of a company is that “the courts will not, in general, intervene at the instance of shareholders in matters of internal administration; and will not interfere with the powers conferred on them under the articles of the company". [3] This is mainly the underlying principle governing the rule of majority. The rule of company governing by majority and ‘supremacy of majority’ has been settled in the very old landmark common law judgment of Foss v. Harbottle [4] . In the instant case, an action was brought by two shareholders of a company for the illegal transactions made by the directors and solicitors, whereby the property of the company was misapplied and wasted. The plaintiffs pleaded that the losses caused thereafter to the company be made good by the defendants. In ruling over the case, the Court opined that such an action cannot be brought by minority shareholders. The claim was rejected in respect of those transactions which a majority of the shareholders of the company had the power to confirm or ratify. Thus, an action, if any, can be brought in only by the company, as company is the proper plaintiff for wrongs done to the company. [5] Since the company acts through majority, the majority should have the power to decide whether to initiate proceedings against the directors or not. “The Conduct With Which The Defendants Are Charged Is An Injury Not To The Plaintiffs Exclusively, It Is An Injury To The Whole Corporation. In Such Cases The Rule Is That The Corporation Should Sue In Its Own Name And In Its Corporate Character. It Is Not A Matter Of Course For Any Individual Members Of A Corporation Thus To Assume To Themselves The Right Of Suing In The Name If The Corporation. In Law The Corporation And The Aggregate Of Members Of The Corporation Are Not The Same The Thing For Purposes Like This." Therefore, summarising ‘the majority rule’ governing decision-making among shareholders of a company, it is important to understand that a company is a legal person separate from its members. Although its members invest in the company, and so have a stake in it, the law does not recognise that they have even an insurable interest in its assets. If therefore, the company’s property is misappropriated or lost or if its affairs are mismanaged, the company alone is the person who should bring legal proceedings against those who have caused it damage. [12] If an individual shareholder seeks to bring such a complaint, he should do so by bringing it before a general meeting and persuade other shareholders to adopt the course of action he thus proposes. [13] Limits to this rule: Acts ultra vires – A shareholder can bring an action against the company in matters which are ‘ultra vires’ and which no majority shareholders can sanction. The rule from Foss v. Harbottle is not applicable in cases where the company exceeds its powers. Fraud on minority – A majority carrying out a fraud on the minority is also an exception to the majority rule. his concept has been best explained in Menier v. Hooper’s Telegraph Works [18] , wherein there were two companies A and B, with the majority of the members of company A also being members of company B. Now, company A commenced an action against company B and at a meeting of company A, the majority passed a resolution that was ultimately favourable to company B and not to company A. When the minority initiated an action, the impugned resolution was held invalid. The court ruled that the majority putting something in their pockets at the expense of the minority would be “a shocking thing". [19] The rule subsequent to this case is that the court may interfere to protect the minority where the majority of a company propose to benefit themselves at the expense of the minority. This principle was reiterated in Cook v. Deeks. [20] The majority cannot appropriate either the property of the company or the interest of the minority shareholders, which includes appropriating property to another company where majority shareholders are in control and passing resolution for compulsory acquisition of shares of minority shareholders, respectively. Acts requiring special majority – Certain acts call for passing of a special resolution (i.e. at least 75% majority) at a general meeting of shareholders. In such a case, if the majority purport to do any act by merely passing an ordinary resolution or do not pass a special resolution in keeping with the law, the majority cannot enforce their decision on others and any member may bring an action restraining the majority. The reasoning behind this is that if such an act is permitted, the statutory requirement of 75% majority is defeated. Just and equitable winding up Under S.122(1)(g) of the Insolvency Act 1986 a company may be wound up by the court if: “the court is of the opinion that it is just and equitable that the company should be wound up”. Where relations between directors / shareholders have hit rock bottom then this is really the nuclear option. A shareholder is entitled to apply for such a winding up where they have a sufficient interest in the winding up. This means in practice that a fully paid up shareholder must show that there will be monetary surplus after winding up for distribution amongst the company’s members. There is also a requirement in most instances that shares have been held for at least 18 months (S.124(2)(b)). There is no easy definition of what circumstances make it “just and equitable” for a court to wind up a company. Each case is looked at on its own merits. A petitioner seeking to bring a winding up petition on just and equitable grounds must either be the only shareholder of the company, an original allottee of shares or have been registered as a member for at least 6 months out of the 18 months preceding the date of presentation of the petition. Furthermore, a petitioner must show an interest in having the relevant company wound-up. application of the just and equitable clause to prove cases of mala fides would be to negative the generality of the words. Lord Wilberforce claims that the clause just and equitable is interpreted widely. In using the case of Wondoflex Textiles Pty. Ltd. [1951] V.L.R. he claimed that generally speaking, a petition for winding up, based upon the partnership analogy, cannot succeed if what is complained of is merely a valid exercise of powers conferred in terms by the articles: ... To hold otherwise would enable a member to be relieved from the consequences of a bargain knowingly entered into by him: ... But this, I think, is subject to an important qualification. Acts which, in law, are a valid exercise of powers conferred by the articles may nevertheless be entirely outside what can fairly be regarded as having been in the contemplation of the parties when they became members of the company; and in such cases the fact that what has been done is not in excess of power will not necessarily be an answer to a claim for winding up. Indeed, it may be said that one purpose of [the just and equitable provision] is to enable the court to relieve a party from his bargain in such cases.' The words just and equitable, are a recognition of the fact that a limited company is more than a mere legal entity, 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. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The 'just and equitable' provision does not, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way. It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence - this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be 'sleeping' members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members' interest in the company - so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere. The question is, as always, whether it is equitable to allow one (or two) to make use of his legal rights to the prejudice of his associate(s). The just and equitable provision nevertheless comes to his (Ebrahimi’s) assistance if he can point to, and prove, some special underlying obligation of his fellow member(s) in good faith, or confidence, that so long as the business continues he shall be entitled to management participation, an obligation so basic that, if broken, the conclusion must be that the association must be dissolved. and the principles on which he may do so are those worked out by the courts in partnership cases where there has been exclusion from management (see Const v. Harris (1824) Tur. & Rus. 496, 525) even where under the partnership agreement there is a power of expulsion Factual circumstances to show that it was fair and equitable to order a winding up of the company: First, Mr. Nazar made it perfectly clear that he did not regard Mr. Ebrahimi as a partner, but did regard him as an employee. But there was no possible doubt as to Mr. Ebrahimi's status throughout, so that Mr. Nazar's refusal to recognise it amounted, in effect, to a repudiation of the relationship. Secondly, Mr. Ebrahimi, through ceasing to be a director, lost his right to share in the profits through directors' remuneration, retaining only the chance of receiving dividends as a minority shareholder. It is true that an assurance was given in evidence that the previous practice (of not paying dividends) would not be continued, but the fact remains that Mr. Ebrahimi was thenceforth at the mercy of the Messrs. Nazar as to what he should receive out of the profits and when. He was, moreover, unable to dispose of his interest without the consent of the Nazars. All these matters lead only to the conclusion that the right course was to dissolve the association by winding up.