Protection of Minority Shareholders: Legal Developments and Statutory Interventions, Study notes of Law

Download Protection of Minority Shareholders: Legal Developments and Statutory Interventions and more Study notes Law in PDF only on Docsity! PROTECTION OF MINORITY SHAREHOLDERS A feature of twentieth century company law has been the increased attention paid to the protection of minority shareholders. Fundamentally, two developments have taken place in this area. (The first is the increased equitable limitations l placed upon the powers conferred on the majority in general meeting.J Coupled with this has been the relaxation of previously very rigid rules relating to standing. The second phenomenon has been the growth of statutory intervention to supplement and replace the general law in relation to protection of minority shareholders. In regard to the first mentioned development the foundation of Ithese equitable limitations is expressed to be that the majority must act for the benefit of the company as a whole~; Although this language is reminiscent to that of directors' duties no fiduciary obligation is owed by the majority shareholders. Conduct which violates the majority's dut.y constitutes "fraud on the minority".: The doctrine of fraud on the minority is intertwined with the topic of locus standi for actions regarding minority protection. In relation to the equitable limitations on the voting power of the majorities two conflicting principles have sought supremacy The first principle permits the complete utilization of the powers attached to the chose in action; the share. As Hellish L. J. in Menler v Hoopers Telegraph Works (1984) LR 9 ch app 350 at page 354 stated: "shareholders of a company may vote as they please." 25 This notion is the consequence of the emphasis being focused on tbe share, devoid of considering its surrounding circumstances. The leading Australian statement supporting this view is to be found in Peters' American Delicacy Co Ltd v Heath (1939) 61 CLR 457 at page 504. There Dixon J, as he was then, held:- "[the shareholders) vote in respect of their shares, which are property and the right to vote is attached to the share itself as an incident of property to be enjoyed and exercised for the owner's personal Cl.dvantage. " The earliest English authority for this contention is contained in Pender v Lushington (1877) 6 Ch. D. 70 at pages 75-76. The principle t.hat collides with this unfettered freedom is contained in the statement of doctrine by Lindley MR in Allen v Gold Reefs of Wester Africa Ltd (1900) 1CH 656 at page 671. The Master of the Rolls held: "[the power of the majority must) like all powers, be exercised subject to those general principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities. It must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company a.s a whole, and it must not be exceeded". The focus of this principle is wider than the first as it takes account of more factors, such as the effects of using the property rights on other shareholders. The resulting friction generated by the competing principles has been the evidence for this century's struggle for protecting minority shareholders. The ascendary of the second principle over the first has been reflected in the expansion of tbe doctrine of fraud on the minority. To take the analysis further the cases on this equitable limitation require 26 tne contrary is to be found in the charter or iw:;trument by which the company is incorporated, the resolution of a majority of the shareholders duly convened, upon any question with which the company is legally competent to deal, is binding upon the minority, and consequently upon the company, and every shareholder has a perfect right to vote upon such a question, although he may have a personal interest in t.he subject matter opposed to, or different from, the general or particular interests of the company. On the other hand, a director is precluded from dealing, on the behalf of the company with himself, and from entering into engagements in which he has a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound by fiduciary duty to protect; and this rule is as applicable to the case of one of several directors as to a managing or sole director. Any such dealing or engagement may, however, be affirmed or adopted by the compa.ny, provided such affirmance or adoption is not brought about by unfair or improper means, and is not illegal or fraudulent or oppressive towards those shareholdel's who oppose it." On t.he question of whether the general meeting can ratify a breach of the duty to exercise the powers for a proper purpose Ngurli Ltd v McCann (1953) 90 CLR 425 held thatl._~here the directors have acted in their own interests rather than in the interests of the company ratification is open to challenge by the minority. Bamford v Bamford (supra) should be noted on this point. It held that the majority can ratify an improper exercise of powers by the directors where the directors honestly believed their actions were in the best interests of the company. The case of Winthrop Investments Limited v Winns Limited [1975) 2NSWLR 666 held that the majority is capable of prospectively ratifying a breach of directors' duties unless it can be shown that the majority in ratifying failed in their duty to act bona fide for the benefit of the company. Once again the test is vague and so leaves the court with much discretion. The possibility of ratification of a director's breach 29 of the duty to exercise reasonable care and diligence was considered in Pavlides v Jensen [1956) Ch 565. In that case the court found that the majority could release the directors after they had acted negligently. However, this should be contrasted with Daniels v Daniels [1978) 2 WLR 73 where no release was allowed as the directors negligence resulted in a benefit to themselves. Thus a distinction must be drawn between where a benefit is a consequence of this breach. The third grouping of case law recognised as constituting fraud on the minority is the\power of the majority ~ to vote for alteration of the articles. I Ford, at page 467, -J considers whether or not this grouping now, as S.73 allows the memorandum to be altered, applies to alterations to the memorandum. As S73(8)(10) only allows the Supreme Court to cancel such an alteration to the memorandum on the application of persons with an interest of not less than 10 percent, it would appear logical that this grouping could be appropriate to any attempts to alter the memorandum. In Brown v British Abrasive Wheel Co. I.td [1919] 1 Ch 290 an attempt was made to alter the articles so that the majority could acquire the shares of the minority. Ashbury J. held that the proposed alteration would be invalid, and an injunction to prevent the alteration was granted. Jacobs J. in crumpton v Morrine Hall pty. Ltd [1965) NSWR 240 allowed relief where alterations were proposed in a horne unit company to restrict sub-letting of a shareholder's unit as it was fraud on the minority. However, when the High Court considered this 30 matter iniPeters' American Delicacy it upheld an alteration \.-- which had the effect of depriving holders of partly-paid shares to the advantage of holders of fully-paid shares. Therefore, Fort at page 472, suggests that discrimination is not a sufficient test in this area~but because of lack of consistency shown in the cases no suitable test of a concrete nature can be supplied. At this point the case of Phillips v Manufacturers' Securities Ltd (1971) 116 LT 290 should be noted. It held that a company may, from its inception, have valid articles capable of discriminating against the minority. It would be interesting to speculate what would the result be if this was litigated today. It could be argued that the minority shareholder knows of the unfavourable articles and it is their responsibility if they should purchase the shares. This is analogous to the notion of freedom of contract. The reference to contract law is also instructive in the likely outcome of such litigation. As thelscope of freedom of contract has been narrowed and the court \.~ been exercising an increasing remedial role, likewise it might be presumed with original discriminatory articles. After an examination of the equitable limitations on the power of the majority and an attempt at categorization it must be stated that the area of general law protection of minorities is unclear. It's lack of clarity is the function of two factors, of which the second is really a consequence of the first. This initial point is that two opposed principles are in direct conflict within this area. The second point is that with 31 t.'i1e minority shareholder by finding that if the d~rivative suit is properly and reasonably brought then usually the company will be ordered to pay the plaintiff's costs~c Another exception to the strict standing rule of Foss v Harbottle was mooted in that case by Wigram V-C at pages 202-203. This possible exception is where justice requires. This notion has received further support in Edwards v Halliwell [1950) 2 ALL ER 1064 and in Hodgson v NALGO [1970) 1 WLR 130. Such an exception must be seen as assisting the minority shareholder. However, the English Court of Appeal inL!~Udential Assurance Co. Ltd v Newman Industries Ltd (No.2) cast doubt on this exception by considering it impractical~ Ford, at page 479 and following, has an intersection of the cornmon law developments resulting in the protection of minority shareholders and the statutory intervention to the same end. This cornmon ground occurs in the, member's personal ~' action. In cases such as Ngurli v McCann (supra) and Howard Smith v Ampol Petroleum [1974) AC 821 the High Court recognised wrongs done to the shareholders personally, and not to the company. As these cases dealt with the capital structure of the companies it may be suggested that Australian actions relating to the capital nature of the company will give rise to a personal action by shareholders. In this way the~nority shareholder is not confined or restricted by the Foss v Harbottle rule/as it has no ambit of operation . ...J ~~further area in which the proper plaintiff rule, 34 stemming from Foss v Harbottle ceases tobe relevant is in the ~~atutory contract contained in the memorandum and articl~~j Hickman v Kent or Romney Marsh Sheep Breeders Association [1915) 1 Ch 881 held that the memorandum and articles of association constitute a statutory contract. section 78 declares that the memorandum and articles have the effect of a contract between the company and each member, between the company and each officer, and between a member and each other member. Ford at page 483 suggests that the language of this new s.78 may mean that a member can enforce an obligation such as that involved in Eley v Positive Life Assurance Company (1874) LR 9 CP503 where the articles required the member to be appointed the company's solicitor. I I A fetter upon the minorities reliance upon the statutory contract is, as Ford details from page 483 onwards, is the presumption of ratification by the maj ori ty.J Thus, another flaw is evident in the protection of minorities. The importance of statutory modifications to the general law protection of minorities becomes increasingly relevant. The protection offered by the general law to minorities is although it has been extended, haphazard and less than comprehensive in its coverage. The initial point is that the cases in this area articulate no single test, and thus the scope of the protection is uncertain. This imprecision is a function of the application of ever changing views of what behaviour of the majority ,will and will not be tolerated. Further, a strict application of Foss v Harbottle would often make it impossible 35 for minorities to seek protection. The severity of this standing rule has been mitigated by the introduction of exceptions and the expansion of the availability of personal actions. The statutory provisions for protecting minorities fulfil two functions; a supplement to the general law and a wide expansion of the protection of the minority shareholder. The two primary statutory remedies which avail themselves to minority shareholders are the compulsory liquidation remedies and the provisions for oppression. standing is given to the individual in these cases. The problem associated with Foss v Harbottle is thus avoided. 'rhe oppression remedy was inserted to the English Companies Act following the recommendations of the Cohen Committee [Cmnd 6659 of 1945). Section 186 was introduced to t.he Australian Uniform Companies Legislation of 1961. The initial English provision, S.210 of the Companies Act (UK), was comprehensively reformed in 1980 and is now contained in ss 459-461 of the Companies Act 1985 (UK). The Australian section was expanded and became S.320. This was amended in 1983. The overall effect of these changes has been to overcome some of the judicial limitations placed upon the protection of minority shareholders. Nothing in s.320 prevents it's application to any type of company. The court may make remedial orders if it is of the opinion that the affail"s of the company are being conducted in a manner that is "oppressive", "unfairly prejudicial" or "unfairly discl"iminatory" against a member. The concept of "unfairly" in 36 diorectors have acted in the affairs of the company in their own interests rather than in the interests of the members as a whole, or in any other manner whatsoever that appears to be unfair or unjust to other members (5.364(1)(£), affairs of the company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against a member or in a manner that is contrary to the interests of the members as a whole (S.365(1)(fa», or an act or omission, by or on behalf of the company, or a resolution or proposed resolution of a class of members of the company, was or would be oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or was or would be contrary to the interests of the members as a whole (S. 364(1)(fb)). By simply examining the language of this section it is apparent that the legislature has attempt to provide a comprehensive remedy to the shareholder. Re Tivoli Freeholds [1972] VR 445 is a case involving winding up under the just and equitable ground. Here a company whose main objects were to carryon an entertainment business with associated acti.vities and to acquire land on which theatres 'flere to be erected came under the majority shareholding of a corporat.e raider. The company sold off its links to the ent.ertainment business, and subsequently lent money to other companies to finance corporate raids. A minority shareholder petitioned for winding up under S.186 UCA (now S.320) or 8.222(1)(h) UCA (now S.364(1)(j)). Menhennitt J. ordered winding up as it was just and equitable. These two primary statutory remedies reflect the desire 39 to provide protection to members, which includes minority shareholders. The remedies available, especially S.320(2)(j) and (k) which allows the court to or"der requiring a person to do or not to do a specified act or thing, have given the court much discretion. These remedies are not automatically available. However, the tests that must be satisfied do appear sufficiently elastic to allow changes in what the court will and will not permit the majority shareholders to do. Although these are the primary stat.utory protective devices extended by the legislation they are not the totality of the statutory remedies available. Under 5.574(1) any person whose interests are affected by the conduct of a person which constitutes a contravention of the Code, may apply to the court for an injunction restraining that person from engaging in the conduct. The court may also order that the person acting in contravention of the Code be required to do any act or thing. Section 241 requires the directors to convene a general meeting on the l-equisition of not less than 200 members is company not having a share capital, not less than 100 members holding shares in a company with a share capital on which there has been paid up an average sum per member of not less than $200, or members holding at least 5 per cent of the paid capital, or who are entitled to at least 5 per cent of the voting rights. In this brief overview of the protection afforded to minority shareholders three central features have become apparent. The first is that much of the general law has been 40 confused by the search for highly specific tests relevant to each grouping of cases. It needs to be recognised that such searching is futile, and indeed, irrelevant. A general test of the act being bona fide for the benefit of the company as a whole should be stated, and the individual application of this should be made by the judge in the particular case, utilizing its own facts to a great degree to determine the outcome. (1) The second main feature has been the advent of large scale and important legislation dealing with this area. The final observation has been the noting of the vast increase, by the greater availability of common law remedies, the easing of standing requirements and the extension of statutory remedies, in the protection of minority shareholders. (1) Legal principle should remain at high abstract level. 41