Shareholders Company Law Past Papers Solving | University of London, Exercises of Law

Download Shareholders Company Law Past Papers Solving | University of London and more Exercises Law in PDF only on Docsity! SHAREHOLDERS 2021 Q:7 MAY/JUNE Session Zone:B1 In 2000, Ann and Carlos met at university. In 2004 they married. They immediately bought, and began running in partnership, a hotel. In 2010 they incorporated Hotelux Ltd, to take over the business of running the hotel. Ann and Carlos each owned 50% of the company’s shares and were the company’s only directors. They agreed they would share equally the running of the company. In 2018, the company needed to raise more finance to purchase another hotel. Ann’s accountant introduced her to Kambili, a venture capitalist who bought a 20% shareholding in Hotelux (leaving Ann and Carlos each owning 40% of the shares). Kambili was appointed a director but has never attended any board meetings. In 2019, it was agreed that Kambili’s son, Tayo, could work for Hotelux as a manager of one of its hotels. In 2020, Ann and Carlos’s marriage broke down. Ann became very depressed and stopped attending board meetings. Carlos persuaded Kambili to join with him in voting for Ann’s removal as a director, and Carlos continued running the company alone. Under Carlos’s sole management, the company’s fortunes have declined considerably. Carlos recently made a number of Hotelux’s employees redundant, including Tayo. Kambili complains that this goes against what the shareholders agreed in 2019. Carlos has offered to buy Ann’s and Kambili’s shares from them at a fair market price, to be determined by the company’s auditors. Advise Ann, and Kambili, whether each of them could bring successful proceedings under section 994 Companies Act 2006. Regarding Ann - She is complaining about her removal from the board hence the first point to succeed is that she must be complaining about ‘the way the company’s affairs are being conducted’ ( or about an act of omission of the company). She must not be complaining about merely private matters outside of the CONDUCT of the company’s affairs. Her complaint of removal from the board does surely concern the conduct of the company’s affairs. - Does this removal prejudice her interests? It clearly harms her but does it harm her interests? It probably does not harm – prejudice – any of Ann’s legal rights ( she has no right to be a director) . Also, note that interests may be broader than strict legal rights. They will do so in a quasi-partnership history, marriage, and participation in management (Ebrahimi v Westbourne Galleries Ltd; Re Westbourne Galleries Ltd ) . Explain well that in a quasi-partnership Ann’s interest will include her legitimate expectations based on informal agreements. Here there was an agreement to share equally the running of the company. - Thirdly is the prejudicing of her interests unfair? Bring the relevance of i) Her own non-participation in boards -might note rejection of ‘no-fault divorce’ in the case of O’Neil & ii) The offer made to her but this looks like an unreasonable offer given that it is based on auditors valuing rather than independent valuation – see rules in valuation in Bird Precision Bellows case , O’Neil case, Estera Trust case. Page 1 of 41 SHAREHOLDERS iii) Now discuss the likely remedy if she succeeds under s.994 . DETAILED ANSWER : Ann was a stakeholder and director of Hotelux Ltd. until Carlos, with Kambili's assistance, got rid of her. In light of her sadness, Ann would contend that losing her position as a director adversely prejudiced her interests as both a shareholder and a director. She can claim that she wasn't allowed to participate in company management and that the parties' agreement was broken by her absence from board meetings. Additionally, Ann might have a strong case for relief under section 994 if Carlos has mismanaged the business affairs, as shown by the downturn in the company's fortunes. Regarding Kambili - It is not clear if he is a quasi- partner at all ( remember that as per the case Waldron v Waldron, the quasi partnership relationship may not necessarily exist between all the shareholders). If he is not ask whether he can invoke the informal agreement regarding his son’s employment and even if he can whether this affects him qua shareholder. If he is not a QP then even if he can note remedy , valuation of shares in a non-QP and why the offer to him might be more reasonable . Detailed Answer : Kambili serves as a director and a minor shareholder of Hotelux Ltd. He could claim that Tayo's dismissal unduly prejudiced his interests as a shareholder and director. Kambili may depend on the fact that Tayo's employment by the business was promised to him in 2019 and that he may have relied on this assurance when deciding to invest in the business. Kambili may claim that Carlos, as the majority shareholder and director, engaged in unfairly discriminatory behaviour by deciding to fire Tayo in violation of the terms of the parties' agreement. Furthermore, Kambili may be eligible for compensation under section 994 if Carlos has improperly handled the business's affairs. Conclusion : The provisions of the shareholders' agreement, the behaviour of the parties, and the company's financial situation would all be taken into account by the court when deciding whether Ann and Kambili have a legitimate claim for relief under section 994. The particulars of the case and the evidence given to the court would ultimately determine whether or not they had a legal claim. Full ans Section 994 of the Companies Act 2006 provides protection to shareholders who have been unfairly prejudiced by the actions of a company's directors. Ann and Kambili may be able to bring proceedings under this section if they can establish that they have suffered unfair prejudice as a result of Carlos's actions. Ann may argue that she has been unfairly prejudiced by her removal as a director without proper notice or a fair hearing, especially given her agreement with Carlos to share equally in the running of the company. Her depression and absence from board meetings may not be sufficient grounds for her removal, and Carlos's actions may be viewed as a breach of their agreement. Additionally, Ann may Page 2 of 41 SHAREHOLDERS interests, this is to be done only to promote the success of the company & for the benefit of the members ( meaning shareholders). Creditor interests are somewhat higher, at least where insolvency is threatened ( for, e.g., s.172(3) & wrongful trading.  Section 172 of the UK Companies Act 2006 significantly influences company law, directors' responsibilities, corporate governance, enterprises, and ultimately the economy, society, and environment. The Better Business Act (BBA) coalition's proposed Better Business Act (BBA) ) shifts the emphasis of the director's obligation under Section 172 from "to promote the success of the company" to "to advance the purpose of the company." According to S172, a "director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard" to specified additional interests, impacts, and consequences. These statements have created a culture where shareholders come first. Some boardrooms believe that shareholder profits should be maximised at all costs, if not at the expense of other interests that directors may consider but ultimately decide to disregard. In our modern society, this way of thinking is no longer relevant. The syntax in s172 has outlived its usefulness and needs to be more accurate in light of the current business reality. The "triple bottom line" of the planet, people, and profit is becoming increasingly important due to the global financial crisis, the Covid-19 pandemic, the existential threats posed by climate change and biodiversity loss, and numerous other urgent environmental issues and social challenges.(Integrated Review Refresh 2023: Responding to a more contested and volatile world Presented to Parliament by the Prime Minister by Command of His Majesty)  According to the assertion that directors must only act in the best interests of shareholders under UK Company Law, the Companies Act 2006's S.172, however, paints a different picture here; it makes it apparent that this is not true. As per s.172, directors are required to act in the best interests of the firm as a whole, taking into account how their choices may affect a variety of stakeholders over the long term, including the environment, consumers, suppliers & employees. We know that the crucial factor here is shareholder interests; however, they are not the core factor, and directors must weigh shareholders' interests against those of other stakeholders.  Although Lord Goldring - In the case of Re Continental Assurance Co of London plc [2001] EWCA Civ 1977, Lord Goldring stated that Section 172 requires directors to have regard for the interests of all stakeholders, including shareholders, but that this does not mean that the interests of shareholders always come first. BT plc v. Telefónica O2 UK Ltd [2014] EWHC 1514 (Ch) - In this case, the court held that directors had breached their duty to promote the success of the company under Section 172 by prioritising short-term gains for shareholders over the long-term interests of the company and its employees.       Hence, considerable evidence notes how Section 172 prioritises shareholder interests on the surface; this is only part of the whole picture. The provision expressly calls for directors to consider the interests of other stakeholders, which is to be done to advance the firm's Page 5 of 41 SHAREHOLDERS performance rather than just checking a box. Lynn Stout - In her book "The Shareholder Value Myth," Stout argues that Section 172 does not go far enough in protecting the interests of stakeholders other than shareholders and that directors should be required to prioritise the interests of all stakeholders in the best interests of the company as a whole. Whereas Eilís Ferran - In her article "Directors' Duties and Stakeholder Interests: Law, Theory, and Evidence," Ferran argues that while Section 172 requires directors to consider the interests of other stakeholders, it does not necessarily require them to prioritise these interests over those of shareholders in all cases. Furthermore, Section 172(3) mentions that shareholder interests may occasionally precede creditors' interests in bankruptcy and illegal trading situations, but this is only sometimes true. When there is no risk of insolvency or illegal trading for the corporation, other stakeholders' interests may take precedence. - Explain s.172 and your understanding of it where you can explain relevant cases such as  Regentcrest plc v Cohen  Extrasure Travel v Scattergood Chatterbridge v Lloyds Bank Ltd  West Mercia Safetywear Ltd v Dodd  - Also, question how easily shareholders can enforce this provision against directors if the latter were determined to prioritise stakeholder interests. Note that S.172 entails a subjective element ( Regentcrest). It is for the directors themselves to judge what will best promote the company's success & it is difficult for shareholders to challenge that. Note also that the duty is owed to the company itself s.170(1), making enforcement more difficult still. Widen focuses on other elements of UK company law or corporate governance that also point to shareholder primacy(e.g. shareholders alone hire/fire directors; executive pay tends to be performance related) in terms of essentially shareholder value, the role of takeovers etc.   Even though s.172 requires directors to consider the interests of all stakeholders, including shareholders; it is challenging for shareholders to hold directors accountable if it turns out that they prioritise stakeholder interests. This is due to the subjective nature of s.172, which leaves it up to the directors to choose what will best advance the organisation's development. It is challenging for shareholders to contest the directors' judgement in this matter, as was highlighted in Regentcrest. According to the court, directors must operate in good faith and advance the company's success while considering the interests of all parties involved, including shareholders. In this instance, it was determined that the directors had violated s.172 by failing to consider the interests of minority shareholders while deciding to sell the firm. Extrasure Travel v Scattergood [2011] EWHC 1632 (Ch) is another case that deals with s.172. In this case, the court held that directors must consider the interests of shareholders rather than just those of a particular group of shareholders. Chatterbridge v Lloyds Bank Ltd [1996] BCC 849 is a case that deals with the relationship between s.172 and the duty of care owed by directors. The court held that directors must exercise reasonable care and skill in considering stakeholders' interests under s.172. West Mercia Safetywear Ltd v Dodd [1988] BCLC 250 is a case that deals with the duty of directors to act in the best interests of the company as a whole. The court held that directors must consider the interests of all stakeholders, including shareholders, and act in the best interests of the company as a whole.  The responsibility under s.172 is also owed to the corporation directly, making enforcement Page 6 of 41 SHAREHOLDERS even more challenging. Other aspects of UK corporate law or corporate governance, such as the fact that shareholders alone choose and remove directors, and the propensity for executive compensation to be performance-related, also contribute to shareholder primacy. Shareholder value is frequently prioritised in takeovers. S.172, on the other hand, seeks to strike a compromise between these factors by forcing directors to consider the interests of all parties involved rather than just shareholders. BTI 2014 LLC v Sequana SA is a recent case that addresses the duty of directors to act in the best interests of the company and the relationship between that duty and the interests of shareholders. In this case, Sequana SA, a company listed on the London Stock Exchange, was found to have unlawfully distributed £42m to its shareholders. The court held that the directors had breached their duties to the company by authorising the distributions, which had been made when the company was insolvent or on the verge of insolvency. The court noted that the directors had a duty under s.172 of the Companies Act 2006 to promote the company's success for the benefit of its members as a whole and that this duty required them to consider the interests of all stakeholders, including shareholders, employees, and creditors. However, the court also held that the directors' duty to consider the interests of shareholders did not override their primary duty to act in the company's best interests. In other words, the interests of shareholders were not the sole or primary concern of the directors but rather one of many factors that needed to be considered when making decisions. The judgment in BTI 2014 LLC v Sequana SA confirms that directors must balance all stakeholders' interests when making decisions rather than simply prioritising the interests of shareholders. However, it also highlights the difficulties in enforcing this duty, particularly in cases where directors may be motivated to prioritise the interests of shareholders over those of other stakeholders. This case is relevant to our essay because it highlights the importance of considering the interests of all stakeholders, not just shareholders. As noted earlier, s.172(3) requires directors to consider the interests of creditors when promoting the company's success. The BTI 2014 LLC v Sequana SA case further reinforces this duty and demonstrates that directors cannot simply prioritise the interests of shareholders to exclude all other stakeholders. In terms of how this case relates to our essay, it provides further evidence of the balancing act that directors must undertake when considering the interests of different stakeholders. While the law may prioritise shareholder interests, as noted earlier, other factors, such as s.172(3), require directors to consider the interests of other stakeholders, such as creditors. Overall, the BTI 2014 LLC v Sequana SA case highlights the importance of considering the interests of all stakeholders when making decisions and demonstrates the ongoing evolution of UK company law towards a more balanced approach that takes into account the interests of all stakeholders, rather than solely prioritising the interests of shareholders. - You can also mention making enforcement still difficult s.172(3) & the interests of creditors - Discussion of whether directors are indeed required to act only in the interests of the company's shareholders? - Secondly, should such a rule be regarded as a good thing- a 'great strength' of the law? - Or should directors sometimes put shareholders second & prioritise the interests of other stakeholders? Page 7 of 41 SHAREHOLDERS 2018 q:3‘Compare the regime for removing directors under S.168 of the Companies Act 2006 with the regime for disqualifying directors under the Company Directors Qualification Act 1986.’ Page 10 of 41 SHAREHOLDERS Describe and then compare the two regimes referred to. It would explain how s.168 addresses the removal from the office of a director by the company's shareholders, which means it would explain how the s.168 is an empowering provision designed to facilitate a majority of shareholders in removing a director they no longer wish to remain on the board which means it is designed to address the agency problem between shareholders & directors because it is a mandatory provision, but it is subject to several limitations. The Company Directors Disqualification Act of 1986 (CDDA) governs the disqualification of directors, whereas Section 168 of the Companies Act of 2006 outlines the procedure for removing directors from their positions. 1. Shareholders may remove a director from office by adopting an ordinary resolution under the director removal system established by Section 168 of the Companies Act of 2006. By giving shareholders a way to get rid of a director they no longer want on the board, the provision aims to solve the agency issue between shareholders and directors. This has furthermore been stated in "The removal of directors under the Companies Act 2006: an analysis" by Paul L Davies and Sarah Worthington, published in the Journal of Business Law (2010): "The Companies Act 2006 provides a comprehensive regime for the removal of directors by shareholders, replacing the complex procedures of the Companies Act 1985. The new regime under section 168 is an empowering provision designed to facilitate a majority of shareholders in removing a director they no longer wish to remain on the board. However, the right of directors to speak in their defence in section 169, and the contractual limits which may arise notwithstanding the mandatory nature of the section, mean that the power is subject to several limitations." This provision is, however, subject to several restrictions, including the right of directors to speak in their defence under section 169 and any contractual restrictions that may apply, such as the inclusion of weighted voting provisions in the articles, the existence of long-service contracts that may make exercising the power of removal expensive, and quasi-contractual legitimate expectations of participation in management that may serve as the basis for a challenge under section 169." Long-term employment contracts can constrain a company's ability to terminate a director's employment, thereby reducing the effectiveness of s. 168 as a means of removing underperforming directors. These long-term contracts may include golden parachutes, which provide significant financial compensation if the director is removed, making removal an expensive proposition. Moreover, such contracts may also include restrictive covenants that limit a director's ability to work for competitors or to disclose confidential information." Source: Banks, C. (2013). Corporate governance, principles, policies, and practices. Oxford University Press. Long-term employment agreements, which can make exercising the right to remove an employee expensive, and quasi-contractual, legally-binding expectations of management participation, Page 11 of 41 SHAREHOLDERS which could be the subject of a challenge under section 994 of the Companies Act 2006 or section 122(1)(g) of the Insolvency Act 1986. 1. Case: Eclairs Group Ltd v JKX Oil & Gas plc [2015] EWCA Civ 119 Comment: In this case, the Court of Appeal held that long-term employment contracts could create legitimate expectations that can be enforceable against the company and that the power of removal should be exercised in a manner consistent with the company's articles of association and the interests of its members. 2. Judge's comment: Lord Neuberger in Re Southern Counties Fresh Foods Ltd [2008] EWHC 739 (Ch) Comment: In this case, Lord Neuberger noted that long-term employment contracts could give rise to legitimate expectations of participation in management, which could be a basis for challenging the power of removal. 3. Academic extract: Boyle, A. (2019). Company Law. Oxford University Press. Comment: Boyle notes that long-term employment contracts and quasi-contractual participation expectations in management can create legal barriers to exercising the power of removal. The courts have been willing to intervene to protect such interests. 4. Academic extract: Worthington, S. (2017). Commercial Equity: Principles, Practice and Procedure. Oxford University Press. Comment: Worthington argues that long-term employment contracts and quasi-contractual expectations of management participation may limit the effectiveness of the removal power and that courts have developed various doctrines, such as the equitable duty to act in good faith, to protect such interests. Section 994 of the Companies Act 2006 provides a statutory remedy for minority shareholders who have been oppressed or unfairly treated by the majority shareholders or directors of the company. It allows them to apply to the court for an order under the section, which may include a buy-out of their shares, a change in the company's articles or even the winding-up of the company. Section 122(1)(g) of the Insolvency Act 1986 allows the court to wind up a company if it is equitable to do so. This can arise from various circumstances, such as shareholder disputes, mismanagement, or fraud. When making its decision, the court will consider the interests of all parties involved, including creditors, employees, and shareholders. Here are a few academic extracts related to these sections:  "Section 994 of the Companies Act 2006 is an important tool for minority shareholders to protect their rights in a company. It allows them to seek redress if they feel they have been unfairly treated or oppressed by the majority shareholders or directors. However, the section is not without its limitations, as the court will consider the interests of all parties involved and may not always grant the relief sought by the minority shareholders." (Source: "Minority Shareholder Protection in the UK: An Evaluation of Section 994 of the Companies Act 2006" by Tanya Shukla, International Company and Commercial Law Review, 2019)  "Section 122(1)(g) of the Insolvency Act 1986 is a powerful tool for the court to wind up a company where it is just and equitable to do so. This can arise from various circumstances, such as shareholder disputes, mismanagement, or fraud. However, the court will only exercise this power in exceptional circumstances and consider the interests of all parties involved before making its decision." (Source: "Just and Equitable Winding Up: A Comparative Study of English and Indian Law" by Akshaya Kamalnath, Journal of Business Law, 2017)  "Long-term employment agreements can create a barrier to removing employees or directors, as Page 12 of 41 SHAREHOLDERS One ground for disqualification is when a person is found unqualified to operate as a director, outlined in Section 6 of the CDDA. Those who participated in the management of an insolvent business and whose behaviour as a director renders them unfit to remain in that position are covered by this rule. It is up to the court to decide whether a director's actions warrant a disqualification order because the term "unfit" is not defined in the CDDA. When determining a director's fitness, the court will consider several issues, such as whether they have acted dishonestly or incompetently, if they have violated their obligations as directors, and how their actions have affected the firm, its creditors, and the general public. The court will also consider mitigating circumstances, like the director's participation in the insolvency procedure or their attempts to make up for whatever wrongs they may have done. Notably, the CDDA's disqualification criteria extend beyond section 6 and cover a wide range of offences. Convictions for specific criminal offences, failure to pay specific taxes, and noncompliance with other regulatory requirements are further reasons for disqualification. However, section 6 is frequently the cause for disqualification that is employed, particularly in situations involving insolvent corporations.  - Also note the consequences that follow from disqualification under CDDA compared to removal under s.168. A director disqualified under the CDDA faces a substantial penalty that might prevent them from serving as a director or participating in company management for up to 15 years. The court issues the disqualification order to shield the general public from potential harm by permitting the director to carry on with their duties. A director may still serve as a director of other companies after being removed under section 168 of the Companies Act of 2006. A director disqualified under the CDDA faces a substantial penalty that might prevent them from serving as a director or participating in company management for up to 15 years. The court issues the disqualification order to shield the general public from potential harm by permitting the director to carry on with their duties. 1. "The Consequences of Disqualification of Directors under the UK Company Directors Disqualification Act 1986" by Janet Dine, published in the International Company and Commercial Law Review (2018):  The author notes that disqualification under the CDDA can result in a director being banned from holding any directorship, including non-executive roles, for up to 15 years. Removal under s.168 does not necessarily prevent a director from being appointed to another company board.  The author also highlights that disqualification can have severe financial implications for a director, resulting in personal liability for company debts incurred while the director was disqualified. 1. The case of Re M C Bacon Ltd [1991] BCLC 103:  In this case, the court considered the different consequences of disqualification and removal in the context of a director disqualified under the CDDA and then removed under s.168.  The court held that the director was entitled to compensation for loss of office following his Page 15 of 41 SHAREHOLDERS removal under s.168, even though he was already disqualified from holding a directorship. These sources suggest that disqualification under the CDDA is more severe than removal under s.168 regarding the restrictions placed on the director and the potential financial and reputational consequences. 2017 Q:3 ‘Section 994 of the Companies Act 2006 is effective in protecting minority shareholders.’ Discuss . Cases - Ebrahimi v Westbourne Galleries - Oak Investment Partners v Boughtwood - O’Neill v Philips - Re R A Noble & Sons - Grace v Biagioli - Re Blue Index Ltd Bird Precision Bellows Ltd - Re Home & Office Fire Extinguishers Ltd - Re Blue Arrow - Re Elgindata Ltd - Fullham FC v Richards Mention might also be made of relevant reports addressing these statutory regimes such as Law Commission Report No 246 ( Shareholder Remedies) & relevant academic articles. Introduction: The argument under debate necessitates thoroughly examining the merits of one of the safeguards used to protect minority shareholders' interests, namely the unjust prejudice remedy found in Section 994 of the Companies Act 2006.  This essay will first explain the remedy and its parts, emphasising the many obstacles a shareholder must overcome to successfully rely on this provision and the various remedies used by courts in such a scenario. The potential of the regulation to protect the rights of minority shareholders must be thoroughly analysed to support the claim made in this essay that in current company law, the unfair prejudice remedy offers the most effective form of protection for minority shareholders. This analysis is necessary to assess the provision's effectiveness, which is what an assessment of the statement primarily requires.  The unfair prejudice remedy, now a precious remedy available to minority shareholders in the UK, particularly those in small private enterprises, has developed over time. The unfair prejudice remedy is not without its issues, even though it is a broad application and adaptable remedies have significantly improved the protection of minority shareholders.  Harry McVea's paper "Section 994 of the Companies Act 2006 and the Primacy of Contract" Page 16 of 41 SHAREHOLDERS explores the conflict between the legislative protection provided to minority shareholders under s.994 and the idea of contract freedom in business law. According to the article, s.994 can erode the importance of contracts in company law. This tension is apparent when the interests of majority and minority shareholders conflict." Section 994 establishes a legal remedy that is not subject to the provisions of the shareholders' agreement or the corporation's bylaws. This violates the freedom of contract concept, a cornerstone of company law. (p. 1124) There are still several obstacles in the way of a successful claim, and the chance of success dramatically impacts how well the provision works to protect minority shareholders.  The oppression remedy found in section 210 of the Companies Act of 1948 is where the unjust prejudice remedy started. Before this clause was added, unhappy shareholders had two options: file a derivative claim under common law, or request that the firm be wound up on reasonable and equitable grounds. Due to the narrow judicial interpretation, the Jenkins Committee examined the remedy's operation in 1962 and advised that it be amended to include complaints where the company's business practices were unduly harmful to the petitioner's interests. Sections 459 of the Companies Act 1985 and 75 of the Companies Act 1980 accepted this. Section 994 of the Companies Act of 2006 now contains the remedies in a revised form. S.994 was created to safeguard the rights of minority shareholders and prevent them from being neglected or taken advantage of by the majority. A shareholder wishing to depend on s.994 must clear a number of obstacles. They must first demonstrate that the company's behaviour in its business is unreasonably adverse to their interests. This can involve shutting out minority shareholders from important corporate decisions or redistributing resources to the majority for their benefit. Second, the shareholder must demonstrate that their rights as a stockholder are being violated. This can encompass financial and non-financial interests, such as a dividend drop or a loss of power or reputation. The shareholder must also demonstrate that their interests are being unfairly prejudiced. This means that the behaviour complained of must be so extreme as to be judged unfairly rather than merely annoying or harmful to the interests of the shareholder. These obstacles are meant to ensure that s.994 is not used carelessly and that only actual instances of unfair bias are handled. The courts must fairly and consistently interpret and enforce these restrictions, weighing the rights of minority shareholders against the more extensive interests of the business and its stakeholders. Explain the purpose of s.994 to relieve any shareholder whose interests are being unfairly prejudiced. Explain the different hurdles that a shareholder seeking to rely on that provision must overcome: conduct in affairs of the company, what are the interests of a member, are those interests prejudiced: are they prejudiced unfairly? Then show the interpretation of these different hurdles by the courts. Attempt some overall analysis of how easily a minority shareholder can satisfy this statutory test and, thus, how readily she can invoke s.994 to protect herself.==================== A shareholder must clear three obstacles to rely on s.994. They must first demonstrate that the company's behaviour in its business is unreasonably adverse to their interests. They also Page 17 of 41 SHAREHOLDERS can file a petition, the courts have also been highly tolerant in using equitable principles to come to a fair and just conclusion for all parties. Exclusion from management, which covers the majority of petitions (Re BC & G Care Homes Ltd), is one example of unfairly prejudicial conduct that the court will accept in a petition under section 994. This is especially true when a small quasi-partnership company is involved (Brownlow v GH Marshall Ltd).  Other common allegations include violations of the company's articles of association, violations of directors' obligations involving theft of corporate assets (Re Little Olympian Each-Ways Ltd), improper share allocations (Dalby v. Bodilly), and allegations of managerial incompetence or mismanagement, the scope of which is constrained because courts have repeatedly emphasised that they would be hesitant to find that management decisions could amount to unfair conduct. According to Re Elgindata, a director's violation of his duty of skill and care is the only violation of duty that could justify a petition under section 994. Without violating those mentioned earlier, the court has been willing to find an unfair disadvantage, though only in unusual cases (Re Macro (Ipswich) Ltd). The courts are likelier to establish culpability if the directors violated their fiduciary duties (Re London School of Electronics Ltd, Re Elgindata). In cases where directors have received excessive salaries or neglected to pay dividends, they are also prepared to take such action (Re Cumana Ltd., Anderson v. Hogg). Then consider the form of relief that will be given, especially the prevalence of the buyout order. Note the terms of a buyout, whether this is sufficiently protective of the minority's interests and whether a buyout is, in any case, an effective way of resolving inter-shareholder disputes. ================= The court may order a buyout of the minority shareholder's shares by the majority shareholder(s) under Section 996 of the Companies Act of 2006 to repair the undue prejudice sustained by the shareholder. A buyout order mandates that the majority shareholder(s) acquire the minority shareholder's shares at a reasonable value, as evaluated by an impartial expert. Because it gives the minority shareholder a way to leave the company while receiving fair compensation for their shares, the buyout order can be a valuable tool for settling shareholder disputes. A buyout order's ability to adequately safeguard the interests of the minority will, however, rely on the particulars of each instance. For instance, the court declined to issue a buyout order in Oak Investment Partners v. Boughtwood [2011] because it determined that the interests of the minority shareholder could be safeguarded through other methods, such as a reorganisation of the company's share capital or the appointment of an independent director. Some comparison with other forms of minority protection (say, a just & equitable winding up, derivative proceedings or enforcement of the constitution) would be permissible but only provided it is being done to answer the question and thereby show effective or ineffective, s.994 is compared to alternative forms of minority protection._+++++++++++++ Understanding how well s.994 protects minority shareholders can be done by contrasting it with other minority protection measures. If the company's affairs are being managed in an oppressive or unfairly adverse way to the minority owners, for instance, a just and equitable winding-up would permit minority shareholders to request a court order to dissolve the Page 20 of 41 SHAREHOLDERS business. This cure, however, is frequently viewed as a last resort and may lead to the company's breakup, which may only be ideal for some stakeholders. Minority shareholders have the right to file derivative actions against directors or other parties who have violated their obligations to the company on behalf of the company. If the company's management cannot file such a claim, this remedy is possible. Derivative actions can be an excellent way to safeguard the interests of the firm and, in turn, safeguard the interests of minority shareholders. Still, they can also be difficult and time-consuming. 1. "The Evolution of the Unfair Prejudice Remedy: A Path Dependent Perspective" by Andrew Keay - published in the Journal of Corporate Law Studies in 2009.  "The unfair prejudice remedy has become a flexible and powerful tool for protecting minority shareholders in the UK."  "The provision of a buyout order is a common remedy in cases of unfair prejudice, but it is important to ensure that the terms of the buyout are fair to the minority shareholder."  "The development of the unfair prejudice remedy has been influenced by a range of factors, including the need to balance the interests of majority and minority shareholders and the desire to maintain the integrity of the corporate form." The interests of minority shareholders can also be safeguarded by constitutional enforcement. This can entail contesting the legality of specific business or management decisions that might unfairly harm minority shareholders. However, this remedy can be constrained by the provisions of the company's charter and the court's willingness to get involved in internal business matters. Overall, s.994 may provide a more simple and more approachable remedy for minority shareholders who are experiencing unfair discrimination than various alternative kinds of minority protection. However, the success of s.994 will ultimately rely on each case's particulars; in some circumstances, other remedies may be more suitable. The Modern Law Review published "The Unfair Prejudice Remedy: An Empirical Study" by John Armour and Michael J. Whincop in 2005. "The wide range of reliefs granted under s. 996 indicates that the unfair prejudice remedy can accommodate shareholders' varied interests and requirements." "Due to the court's discretion to grant a wide variety of reliefs, the unfair prejudice remedy has evolved into a versatile tool for resolving shareholder disputes." "However, the provision of a buyout mechanism under s. 996(2)(c) may not be sufficient to protect the minority shareholder's interests in all cases." In Sealy's opinion, the provision may be utilised as a tool of oppression by minority shareholders due to its extensive application and simple accessibility.  Recent examples reinforce the idea that the provision may encompass relief for corporate Page 21 of 41 SHAREHOLDERS wrongs; however, given that it is a personal remedy, it may be considered excessively broadly applied in some situations. It was decided in Clark v. Cutland that redress for a corporate wrong may be achieved. Similarly, the court acknowledged in Atlasview Ltd v. Brightview Ltd that a violation of duty would be a prime example of behaviour that unfairly prejudices members' interests "generally."  Accordingly, the court may grant corporate relief under the unjust prejudice remedy when the firm has been wronged. Hannigan contends that such a petition ought to be dismissed and that the claimant should be obliged to request authorisation to pursue a derivative claim under Part 11. Abuse of process could result from using Section 994 to correct corporate wrongs without having to navigate the difficulties of derivative procedures.  To protect minority shareholders from unfairly discriminatory conduct, the courts must balance doing so and preventing vexatious and malicious lawsuits. Accordingly, the court may grant corporate relief under the unjust prejudice remedy when the firm has been wronged. Hannigan contends that such a petition ought to be dismissed and that the claimant should be obliged to request authorisation to pursue a derivative claim under Part 11. Abuse of process could result from using Section 994 to correct corporate wrongs without having to navigate the difficulties of derivative procedures.  To protect minority shareholders from unfairly discriminatory conduct, the courts must balance doing so and preventing vexatious and malicious lawsuits. As a way to wrap up this paper, it can be claimed that the unfair prejudice remedy (Apex Global Management Ltd v. Fi Call Ltd (2013)) appears to be the most effective method of redress for minority shareholders in contemporary company law due to its broad application and adaptable forms of relief. For minority shareholders, section 994 offers a broader and more well-balanced range of options as opposed to the intricate processes involved in derivative actions and the severe repercussions of a winding-up order (section 122(1)(g) of the Insolvency Act 1986).  Several recent decisions, including Thomas v. Dawson (2015), Wootliff v. Rushton-Turner (2016), Sikorski v. Sikorski (2012), Re Neath Rugby Ltd (No 2), and Patel v. Ferdinand (2016), show how the unfair prejudice provision is designed to protect minority shareholders broadly and flexibly effectively. The fundamental aim of the unfair prejudice remedy, according to Robin Hollington QC in Re City Index Limited (2014), "is to grant the oppressed minority a remedy which it would not otherwise  2017 Q4 A company’s stakeholders such as its employees or consumers can now insist under s.172 of the Companies Act 2006 that their interests are given the same importance as the interests of shareholders. Do you agree? Should stakeholders’ interests be treated in this way ? Page 22 of 41 SHAREHOLDERS A statutory contract between a corporation and its members is established by Section 33 of the Companies Act 2006 (CA 2006), which is meant to replace the common law notion of ultra vires. Some significant facets of the statutory contract, such as the enforcement of outsider rights, remain unresolved. Outsider rights are the legal entitlements of a third party, such as a creditor, to enforce a clause in the articles of association of the firm meant to be in their favour. Academic discussion has centred on the conflicting case law around implementing outsider rights. Outsider rights may only be enforced if specified explicitly in the articles of organisation, according to some instances. At the same time, other courts have taken a more liberal attitude and allowed outsider rights to be assumed under certain conditions. Eclairs Group Ltd v. JKX Oil & Gas plc [2015] EWHC 44 (Comm) is one example that exemplifies the inconsistent nature of the cases. In this instance, a clause in the JKX Oil & Gas plc's articles of association granted a particular shareholder the authority to select a director for the board. As an outsider right, Eclairs Group Ltd., a creditor of JKX, tried to enforce this clause. According to the court, Eclairs Group Ltd. was qualified to enforce the clause since it did create an outsider right. The court's rationale, however, was hazy, and it wasn't apparent if the judgement was founded on an inferred phrase or how the articles of association were to be interpreted. Bishopsgate Investment Management Ltd v. Homan [1995] Ch 211 is another instance that demonstrates the cases' inconsistency. In this instance, a clause in a company's articles of association stipulates that the board may not issue shares without the consent of a particular shareholder. As an outsider right, Bishopsgate Investment Management Ltd., a corporation creditor, tried to enforce this clause. According to the court, Bishopsgate Investment Management Ltd. was not permitted to enforce the clause since it did not create an outsider right. Based on a strict interpretation of the articles of organisation, the court's reasoning concluded that the clause was meant to safeguard shareholder investment rather than creditors' interests. The idea of implicit terms has been the subject of academic endeavours to clarify or address the contradictions in case law. Some academics contend that in cases where the corporation has generated an expectation that such rights exist, outsider rights should be implicit in the articles of association. Others contend that outsider rights should only be inferred when doing so serves a clear business purpose. 1. Paul Davies, "Outsider Rights and Enforcement of the Company's Constitution" (2007) 123 LQR 78 Davies argues that outsider rights should be implied in the articles of association where the company has generated an expectation that such rights exist. He suggests that this expectation can be created by the company's conduct or by a course of dealings between the company and the outsider. In his words, "The test should be whether the reasonable outsider, having regard to all the circumstances, would believe that the company had undertaken to act in a particular way, either by express representation, course of dealing or the general expectations generated by the company's conduct" (at 89). Page 25 of 41 SHAREHOLDERS 1. Jennifer Payne, "Corporate Law" (3rd ed, 2015) Payne takes a similar position to Davies, arguing that outsider rights should be inferred in the articles of association where it is necessary to give effect to the parties reasonable expectations. She suggests that this approach is consistent with the principles of contract law, which seek to give effect to the parties reasonable expectations. In her words, "Where an outsider can show that the company has created an expectation that a provision in the articles is for his benefit, the courts should be willing to imply an outsider's right to enforce that provision" (at 345). 1. John Birds, "Company Law" (9th ed, 2020) Birds take a more conservative approach than Davies and Payne, arguing that outsider rights should only be inferred where doing so serves a clear business purpose. He suggests that this approach is necessary to avoid imposing undue burdens on companies and to ensure that the articles of association are given their proper contractual effect. In his words, "The courts should only imply an outsider right where it is necessary to achieve a clear business purpose and where the implication is consistent with the overall scheme and language of the articles of association" (at 303). - A second area of uncertainty concerns the courts' refusal sometimes to enforce those breaches of duty, which are labelled as mere internal irregularities where the breach of the articles is said to be only a wrong to the company to be resolved by the operation of majority rule As a result, it was determined in Rayfield v. Hands that a contract inter se can be directly enforced by one member against another. However, Vaisey J. highlighted that this would only be applicable in situations where the company has a quasi-partnership structure and has a small number of participants who are familiar with one another. Lord Herschell's proclamations, with the quasi-partnership exemption offered by Vaisey J, according to Barc and Bowen (1988), constitute the proper stance, they claimed. Davies (2008), however, believed that a direct lawsuit between shareholders was viable and that if the law required litigation through the corporation, this would encourage a diversity of lawsuits and subject the firm to needless litigation. As a result, it was determined in Rayfield v. Hands that a contract inter se can be directly enforced by one member against another. However, Vaisey J. highlighted that this would only be applicable in situations where the company has a quasi-partnership structure and has a small number of participants who are familiar with one another. Lord Herschell's proclamations, with the quasi-partnership exemption offered by Vaisey J, according to Barc and Bowen (1988), constitute the proper stance, they claimed. Davies (2008), however, believed that a direct lawsuit between shareholders was viable and that if the law required litigation through the corporation, this would encourage a diversity of lawsuits and subject the firm to needless litigation. As a result, if the article had been violated, the member could not assert his rights. Browne v. La Trinidad backed this ruling. - Bring conflicting case laws such as Pender & MacDougall and Page 26 of 41 SHAREHOLDERS again note academic attempts to resolve this controversy - Analyse how easily the majority can alter the articles it would reference s.21 and analyse the judicial policing of alternations through the requirements that they are passed 'bona fide' for the company's benefit. Many times cited as a contradictory authority on the enforcement of outsider rights are the instances of Pender v. Lushington (1877) and MacDougall v. Gardiner (1875). The Court of Appeal determined in Pender that a shareholder may enforce an article of association clause requiring the corporation to distribute additional shares to existing owners proportionately. The House of Lords ruled in MacDougall that a shareholder could not enforce an article's restriction on the majority's ability to issue additional shares without the approval of the existing shareholders. The divergent viewpoints on whether an outsider can enforce a clause in the articles of association give rise to the disagreement between these cases. In her paper "Outsider Rights and the Problem of corporate purpose", published in 2013 Professor Lorraine Talbot. In the paper, Talbot makes the case that outsider rights should only be presumed in cases where the disputed section grants the shareholder a right. She proposes that outside parties should only be authorised to enforce negative limitation clauses when doing so serves a compelling commercial objective. Talbot's suggested strategy is founded on the dichotomy between "positive rights" and "negative restrictions." According to her definition, positive rights are clauses that give shareholders a benefit or advantage, like the pro rata right to take part in share issues. On the other side, negative constraints are clauses that restrict the authority of the majority, such as a prohibition on the issue of new shares without shareholder consent. Talbot's strategy has been referenced in several later scholarly publications, such as Andrew Keay's 2016 article "Shareholder Protection in the UK: A Model for Reform?" In the article, Keay mentions Talbot's distinction between positive rights and negative limits as a potential resolution to the debate about the application of outsider rights. - Explore the judicial construction & application of this test through the relevant case law - It is generally applied as a subjective test & the requirement of the benefit of the company as a whole has been construed as a relatively quickly satisfied requirement to avoid discrimination - Note a stricter approach in expropriation cases and the ability of well-advised minorities to prevent future alteration through the use of s.22 CA 2006 or the creation of class rights. Under Section 21 of the CA 2006, special resolution may make modifications. The courts have occasionally given more informal techniques of change permission to take place (Re Duomatic). Minority shareholders may be able to depend on s. 22 to enshrine some provisions in the Page 27 of 41 SHAREHOLDERS 2021 Q:7 MAY/JUNE Session Zone:B1 In 2000, Ann and Carlos met at university. In 2004 they married. They immediately bought, and began running in partnership, a hotel. In 2010 they incorporated Hotelux Ltd, to take over the business of running the hotel. Ann and Carlos each owned 50% of the company’s shares and were the company’s only directors. They agreed they would share equally the running of the company. In 2018, the company needed to raise more finance to purchase another hotel. Ann’s accountant introduced her to Kambili, a venture capitalist who bought a 20% shareholding in Hotelux (leaving Ann and Carlos each owning 40% of the shares). Kambili was appointed a director but has never attended any board meetings. In 2019, it was agreed that Kambili’s son, Tayo, could work for Hotelux as a manager of one of its hotels. In 2020, Ann and Carlos’s marriage broke down. Ann became very depressed and stopped attending board meetings. Carlos persuaded Kambili to join with him in voting for Ann’s removal as a director, and Carlos continued running the company alone. Under Carlos’s sole management, the company’s fortunes have declined considerably. Carlos recently made a number of Hotelux’s employees redundant, including Tayo. Kambili complains that this goes against what the shareholders agreed in 2019. Carlos has offered to buy Ann’s and Kambili’s shares from them at a fair market price, to be determined by the company’s auditors. Advise Ann, and Kambili, whether each of them could bring successful proceedings under section 994 Companies Act 2006. Regarding Ann - She is complaining about her removal from the board hence the first point to succeed is that she must be complaining about ‘the way the company’s affairs are being conducted’ ( or about an act of omission of the company). She must not be complaining about merely private matters outside of the CONDUCT of the company’s affairs. Her complaint of removal from the board does surely concern the conduct of the company’s affairs. - Does this removal prejudice her interests? It clearly harms her but does it harm her interests? It probably does not harm – prejudice – any of Ann’s legal rights ( she has no right to be a director) . Also, note that interests may be broader than strict legal rights. They will do so in a quasi-partnership history, marriage, and participation in management (Ebrahimi v Westbourne Galleries Ltd; Re Westbourne Galleries Ltd ) . Explain well that in a quasi-partnership Ann’s interest will include her legitimate expectations based on informal agreements. Here there was an agreement to share equally the running of the company. - Thirdly is the prejudicing of her interests unfair? Bring the relevance of i) Her own non-participation in boards -might note rejection of ‘no-fault divorce’ in the case of O’Neil & ii) The offer made to her but this looks like an unreasonable offer given that it is based on auditors valuing rather than independent valuation – see rules in valuation in Bird Precision Bellows case , O’Neil case, Estera Trust case. Page 1 of 41 SHAREHOLDERS iii) Now discuss the likely remedy if she succeeds under s.994 . DETAILED ANSWER : Ann was a stakeholder and director of Hotelux Ltd. until Carlos, with Kambili's assistance, got rid of her. In light of her sadness, Ann would contend that losing her position as a director adversely prejudiced her interests as both a shareholder and a director. She can claim that she wasn't allowed to participate in company management and that the parties' agreement was broken by her absence from board meetings. Additionally, Ann might have a strong case for relief under section 994 if Carlos has mismanaged the business affairs, as shown by the downturn in the company's fortunes. Regarding Kambili - It is not clear if he is a quasi- partner at all ( remember that as per the case Waldron v Waldron, the quasi partnership relationship may not necessarily exist between all the shareholders). If he is not ask whether he can invoke the informal agreement regarding his son’s employment and even if he can whether this affects him qua shareholder. If he is not a QP then even if he can note remedy , valuation of shares in a non-QP and why the offer to him might be more reasonable . Detailed Answer : Kambili serves as a director and a minor shareholder of Hotelux Ltd. He could claim that Tayo's dismissal unduly prejudiced his interests as a shareholder and director. Kambili may depend on the fact that Tayo's employment by the business was promised to him in 2019 and that he may have relied on this assurance when deciding to invest in the business. Kambili may claim that Carlos, as the majority shareholder and director, engaged in unfairly discriminatory behaviour by deciding to fire Tayo in violation of the terms of the parties' agreement. Furthermore, Kambili may be eligible for compensation under section 994 if Carlos has improperly handled the business's affairs. Conclusion : The provisions of the shareholders' agreement, the behaviour of the parties, and the company's financial situation would all be taken into account by the court when deciding whether Ann and Kambili have a legitimate claim for relief under section 994. The particulars of the case and the evidence given to the court would ultimately determine whether or not they had a legal claim. Full ans Section 994 of the Companies Act 2006 provides protection to shareholders who have been unfairly prejudiced by the actions of a company's directors. Ann and Kambili may be able to bring proceedings under this section if they can establish that they have suffered unfair prejudice as a result of Carlos's actions. Ann may argue that she has been unfairly prejudiced by her removal as a director without proper notice or a fair hearing, especially given her agreement with Carlos to share equally in the running of the company. Her depression and absence from board meetings may not be sufficient grounds for her removal, and Carlos's actions may be viewed as a breach of their agreement. Additionally, Ann may Page 2 of 41 SHAREHOLDERS interests, this is to be done only to promote the success of the company & for the benefit of the members ( meaning shareholders). Creditor interests are somewhat higher, at least where insolvency is threatened ( for, e.g., s.172(3) & wrongful trading.  Section 172 of the UK Companies Act 2006 significantly influences company law, directors' responsibilities, corporate governance, enterprises, and ultimately the economy, society, and environment. The Better Business Act (BBA) coalition's proposed Better Business Act (BBA) ) shifts the emphasis of the director's obligation under Section 172 from "to promote the success of the company" to "to advance the purpose of the company." According to S172, a "director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard" to specified additional interests, impacts, and consequences. These statements have created a culture where shareholders come first. Some boardrooms believe that shareholder profits should be maximised at all costs, if not at the expense of other interests that directors may consider but ultimately decide to disregard. In our modern society, this way of thinking is no longer relevant. The syntax in s172 has outlived its usefulness and needs to be more accurate in light of the current business reality. The "triple bottom line" of the planet, people, and profit is becoming increasingly important due to the global financial crisis, the Covid-19 pandemic, the existential threats posed by climate change and biodiversity loss, and numerous other urgent environmental issues and social challenges.(Integrated Review Refresh 2023: Responding to a more contested and volatile world Presented to Parliament by the Prime Minister by Command of His Majesty)  According to the assertion that directors must only act in the best interests of shareholders under UK Company Law, the Companies Act 2006's S.172, however, paints a different picture here; it makes it apparent that this is not true. As per s.172, directors are required to act in the best interests of the firm as a whole, taking into account how their choices may affect a variety of stakeholders over the long term, including the environment, consumers, suppliers & employees. We know that the crucial factor here is shareholder interests; however, they are not the core factor, and directors must weigh shareholders' interests against those of other stakeholders.  Although Lord Goldring - In the case of Re Continental Assurance Co of London plc [2001] EWCA Civ 1977, Lord Goldring stated that Section 172 requires directors to have regard for the interests of all stakeholders, including shareholders, but that this does not mean that the interests of shareholders always come first. BT plc v. Telefónica O2 UK Ltd [2014] EWHC 1514 (Ch) - In this case, the court held that directors had breached their duty to promote the success of the company under Section 172 by prioritising short-term gains for shareholders over the long-term interests of the company and its employees.       Hence, considerable evidence notes how Section 172 prioritises shareholder interests on the surface; this is only part of the whole picture. The provision expressly calls for directors to consider the interests of other stakeholders, which is to be done to advance the firm's Page 5 of 41 SHAREHOLDERS performance rather than just checking a box. Lynn Stout - In her book "The Shareholder Value Myth," Stout argues that Section 172 does not go far enough in protecting the interests of stakeholders other than shareholders and that directors should be required to prioritise the interests of all stakeholders in the best interests of the company as a whole. Whereas Eilís Ferran - In her article "Directors' Duties and Stakeholder Interests: Law, Theory, and Evidence," Ferran argues that while Section 172 requires directors to consider the interests of other stakeholders, it does not necessarily require them to prioritise these interests over those of shareholders in all cases. Furthermore, Section 172(3) mentions that shareholder interests may occasionally precede creditors' interests in bankruptcy and illegal trading situations, but this is only sometimes true. When there is no risk of insolvency or illegal trading for the corporation, other stakeholders' interests may take precedence. - Explain s.172 and your understanding of it where you can explain relevant cases such as  Regentcrest plc v Cohen  Extrasure Travel v Scattergood Chatterbridge v Lloyds Bank Ltd  West Mercia Safetywear Ltd v Dodd  - Also, question how easily shareholders can enforce this provision against directors if the latter were determined to prioritise stakeholder interests. Note that S.172 entails a subjective element ( Regentcrest). It is for the directors themselves to judge what will best promote the company's success & it is difficult for shareholders to challenge that. Note also that the duty is owed to the company itself s.170(1), making enforcement more difficult still. Widen focuses on other elements of UK company law or corporate governance that also point to shareholder primacy(e.g. shareholders alone hire/fire directors; executive pay tends to be performance related) in terms of essentially shareholder value, the role of takeovers etc.   Even though s.172 requires directors to consider the interests of all stakeholders, including shareholders; it is challenging for shareholders to hold directors accountable if it turns out that they prioritise stakeholder interests. This is due to the subjective nature of s.172, which leaves it up to the directors to choose what will best advance the organisation's development. It is challenging for shareholders to contest the directors' judgement in this matter, as was highlighted in Regentcrest. According to the court, directors must operate in good faith and advance the company's success while considering the interests of all parties involved, including shareholders. In this instance, it was determined that the directors had violated s.172 by failing to consider the interests of minority shareholders while deciding to sell the firm. Extrasure Travel v Scattergood [2011] EWHC 1632 (Ch) is another case that deals with s.172. In this case, the court held that directors must consider the interests of shareholders rather than just those of a particular group of shareholders. Chatterbridge v Lloyds Bank Ltd [1996] BCC 849 is a case that deals with the relationship between s.172 and the duty of care owed by directors. The court held that directors must exercise reasonable care and skill in considering stakeholders' interests under s.172. West Mercia Safetywear Ltd v Dodd [1988] BCLC 250 is a case that deals with the duty of directors to act in the best interests of the company as a whole. The court held that directors must consider the interests of all stakeholders, including shareholders, and act in the best interests of the company as a whole.  The responsibility under s.172 is also owed to the corporation directly, making enforcement Page 6 of 41 SHAREHOLDERS even more challenging. Other aspects of UK corporate law or corporate governance, such as the fact that shareholders alone choose and remove directors, and the propensity for executive compensation to be performance-related, also contribute to shareholder primacy. Shareholder value is frequently prioritised in takeovers. S.172, on the other hand, seeks to strike a compromise between these factors by forcing directors to consider the interests of all parties involved rather than just shareholders. BTI 2014 LLC v Sequana SA is a recent case that addresses the duty of directors to act in the best interests of the company and the relationship between that duty and the interests of shareholders. In this case, Sequana SA, a company listed on the London Stock Exchange, was found to have unlawfully distributed £42m to its shareholders. The court held that the directors had breached their duties to the company by authorising the distributions, which had been made when the company was insolvent or on the verge of insolvency. The court noted that the directors had a duty under s.172 of the Companies Act 2006 to promote the company's success for the benefit of its members as a whole and that this duty required them to consider the interests of all stakeholders, including shareholders, employees, and creditors. However, the court also held that the directors' duty to consider the interests of shareholders did not override their primary duty to act in the company's best interests. In other words, the interests of shareholders were not the sole or primary concern of the directors but rather one of many factors that needed to be considered when making decisions. The judgment in BTI 2014 LLC v Sequana SA confirms that directors must balance all stakeholders' interests when making decisions rather than simply prioritising the interests of shareholders. However, it also highlights the difficulties in enforcing this duty, particularly in cases where directors may be motivated to prioritise the interests of shareholders over those of other stakeholders. This case is relevant to our essay because it highlights the importance of considering the interests of all stakeholders, not just shareholders. As noted earlier, s.172(3) requires directors to consider the interests of creditors when promoting the company's success. The BTI 2014 LLC v Sequana SA case further reinforces this duty and demonstrates that directors cannot simply prioritise the interests of shareholders to exclude all other stakeholders. In terms of how this case relates to our essay, it provides further evidence of the balancing act that directors must undertake when considering the interests of different stakeholders. While the law may prioritise shareholder interests, as noted earlier, other factors, such as s.172(3), require directors to consider the interests of other stakeholders, such as creditors. Overall, the BTI 2014 LLC v Sequana SA case highlights the importance of considering the interests of all stakeholders when making decisions and demonstrates the ongoing evolution of UK company law towards a more balanced approach that takes into account the interests of all stakeholders, rather than solely prioritising the interests of shareholders. - You can also mention making enforcement still difficult s.172(3) & the interests of creditors - Discussion of whether directors are indeed required to act only in the interests of the company's shareholders? - Secondly, should such a rule be regarded as a good thing- a 'great strength' of the law? - Or should directors sometimes put shareholders second & prioritise the interests of other stakeholders? Page 7 of 41 SHAREHOLDERS 2018 q:3‘Compare the regime for removing directors under S.168 of the Companies Act 2006 with the regime for disqualifying directors under the Company Directors Qualification Act 1986.’ Page 10 of 41 SHAREHOLDERS Describe and then compare the two regimes referred to. It would explain how s.168 addresses the removal from the office of a director by the company's shareholders, which means it would explain how the s.168 is an empowering provision designed to facilitate a majority of shareholders in removing a director they no longer wish to remain on the board which means it is designed to address the agency problem between shareholders & directors because it is a mandatory provision, but it is subject to several limitations. The Company Directors Disqualification Act of 1986 (CDDA) governs the disqualification of directors, whereas Section 168 of the Companies Act of 2006 outlines the procedure for removing directors from their positions. 1. Shareholders may remove a director from office by adopting an ordinary resolution under the director removal system established by Section 168 of the Companies Act of 2006. By giving shareholders a way to get rid of a director they no longer want on the board, the provision aims to solve the agency issue between shareholders and directors. This has furthermore been stated in "The removal of directors under the Companies Act 2006: an analysis" by Paul L Davies and Sarah Worthington, published in the Journal of Business Law (2010): "The Companies Act 2006 provides a comprehensive regime for the removal of directors by shareholders, replacing the complex procedures of the Companies Act 1985. The new regime under section 168 is an empowering provision designed to facilitate a majority of shareholders in removing a director they no longer wish to remain on the board. However, the right of directors to speak in their defence in section 169, and the contractual limits which may arise notwithstanding the mandatory nature of the section, mean that the power is subject to several limitations." This provision is, however, subject to several restrictions, including the right of directors to speak in their defence under section 169 and any contractual restrictions that may apply, such as the inclusion of weighted voting provisions in the articles, the existence of long-service contracts that may make exercising the power of removal expensive, and quasi-contractual legitimate expectations of participation in management that may serve as the basis for a challenge under section 169." Long-term employment contracts can constrain a company's ability to terminate a director's employment, thereby reducing the effectiveness of s. 168 as a means of removing underperforming directors. These long-term contracts may include golden parachutes, which provide significant financial compensation if the director is removed, making removal an expensive proposition. Moreover, such contracts may also include restrictive covenants that limit a director's ability to work for competitors or to disclose confidential information." Source: Banks, C. (2013). Corporate governance, principles, policies, and practices. Oxford University Press. Long-term employment agreements, which can make exercising the right to remove an employee expensive, and quasi-contractual, legally-binding expectations of management participation, Page 11 of 41 SHAREHOLDERS which could be the subject of a challenge under section 994 of the Companies Act 2006 or section 122(1)(g) of the Insolvency Act 1986. 1. Case: Eclairs Group Ltd v JKX Oil & Gas plc [2015] EWCA Civ 119 Comment: In this case, the Court of Appeal held that long-term employment contracts could create legitimate expectations that can be enforceable against the company and that the power of removal should be exercised in a manner consistent with the company's articles of association and the interests of its members. 2. Judge's comment: Lord Neuberger in Re Southern Counties Fresh Foods Ltd [2008] EWHC 739 (Ch) Comment: In this case, Lord Neuberger noted that long-term employment contracts could give rise to legitimate expectations of participation in management, which could be a basis for challenging the power of removal. 3. Academic extract: Boyle, A. (2019). Company Law. Oxford University Press. Comment: Boyle notes that long-term employment contracts and quasi-contractual participation expectations in management can create legal barriers to exercising the power of removal. The courts have been willing to intervene to protect such interests. 4. Academic extract: Worthington, S. (2017). Commercial Equity: Principles, Practice and Procedure. Oxford University Press. Comment: Worthington argues that long-term employment contracts and quasi-contractual expectations of management participation may limit the effectiveness of the removal power and that courts have developed various doctrines, such as the equitable duty to act in good faith, to protect such interests. Section 994 of the Companies Act 2006 provides a statutory remedy for minority shareholders who have been oppressed or unfairly treated by the majority shareholders or directors of the company. It allows them to apply to the court for an order under the section, which may include a buy-out of their shares, a change in the company's articles or even the winding-up of the company. Section 122(1)(g) of the Insolvency Act 1986 allows the court to wind up a company if it is equitable to do so. This can arise from various circumstances, such as shareholder disputes, mismanagement, or fraud. When making its decision, the court will consider the interests of all parties involved, including creditors, employees, and shareholders. Here are a few academic extracts related to these sections:  "Section 994 of the Companies Act 2006 is an important tool for minority shareholders to protect their rights in a company. It allows them to seek redress if they feel they have been unfairly treated or oppressed by the majority shareholders or directors. However, the section is not without its limitations, as the court will consider the interests of all parties involved and may not always grant the relief sought by the minority shareholders." (Source: "Minority Shareholder Protection in the UK: An Evaluation of Section 994 of the Companies Act 2006" by Tanya Shukla, International Company and Commercial Law Review, 2019)  "Section 122(1)(g) of the Insolvency Act 1986 is a powerful tool for the court to wind up a company where it is just and equitable to do so. This can arise from various circumstances, such as shareholder disputes, mismanagement, or fraud. However, the court will only exercise this power in exceptional circumstances and consider the interests of all parties involved before making its decision." (Source: "Just and Equitable Winding Up: A Comparative Study of English and Indian Law" by Akshaya Kamalnath, Journal of Business Law, 2017)  "Long-term employment agreements can create a barrier to removing employees or directors, as Page 12 of 41 SHAREHOLDERS One ground for disqualification is when a person is found unqualified to operate as a director, outlined in Section 6 of the CDDA. Those who participated in the management of an insolvent business and whose behaviour as a director renders them unfit to remain in that position are covered by this rule. It is up to the court to decide whether a director's actions warrant a disqualification order because the term "unfit" is not defined in the CDDA. When determining a director's fitness, the court will consider several issues, such as whether they have acted dishonestly or incompetently, if they have violated their obligations as directors, and how their actions have affected the firm, its creditors, and the general public. The court will also consider mitigating circumstances, like the director's participation in the insolvency procedure or their attempts to make up for whatever wrongs they may have done. Notably, the CDDA's disqualification criteria extend beyond section 6 and cover a wide range of offences. Convictions for specific criminal offences, failure to pay specific taxes, and noncompliance with other regulatory requirements are further reasons for disqualification. However, section 6 is frequently the cause for disqualification that is employed, particularly in situations involving insolvent corporations.  - Also note the consequences that follow from disqualification under CDDA compared to removal under s.168. A director disqualified under the CDDA faces a substantial penalty that might prevent them from serving as a director or participating in company management for up to 15 years. The court issues the disqualification order to shield the general public from potential harm by permitting the director to carry on with their duties. A director may still serve as a director of other companies after being removed under section 168 of the Companies Act of 2006. A director disqualified under the CDDA faces a substantial penalty that might prevent them from serving as a director or participating in company management for up to 15 years. The court issues the disqualification order to shield the general public from potential harm by permitting the director to carry on with their duties. 1. "The Consequences of Disqualification of Directors under the UK Company Directors Disqualification Act 1986" by Janet Dine, published in the International Company and Commercial Law Review (2018):  The author notes that disqualification under the CDDA can result in a director being banned from holding any directorship, including non-executive roles, for up to 15 years. Removal under s.168 does not necessarily prevent a director from being appointed to another company board.  The author also highlights that disqualification can have severe financial implications for a director, resulting in personal liability for company debts incurred while the director was disqualified. 1. The case of Re M C Bacon Ltd [1991] BCLC 103:  In this case, the court considered the different consequences of disqualification and removal in the context of a director disqualified under the CDDA and then removed under s.168.  The court held that the director was entitled to compensation for loss of office following his Page 15 of 41 SHAREHOLDERS removal under s.168, even though he was already disqualified from holding a directorship. These sources suggest that disqualification under the CDDA is more severe than removal under s.168 regarding the restrictions placed on the director and the potential financial and reputational consequences. 2017 Q:3 ‘Section 994 of the Companies Act 2006 is effective in protecting minority shareholders.’ Discuss . Cases - Ebrahimi v Westbourne Galleries - Oak Investment Partners v Boughtwood - O’Neill v Philips - Re R A Noble & Sons - Grace v Biagioli - Re Blue Index Ltd Bird Precision Bellows Ltd - Re Home & Office Fire Extinguishers Ltd - Re Blue Arrow - Re Elgindata Ltd - Fullham FC v Richards Mention might also be made of relevant reports addressing these statutory regimes such as Law Commission Report No 246 ( Shareholder Remedies) & relevant academic articles. Introduction: The argument under debate necessitates thoroughly examining the merits of one of the safeguards used to protect minority shareholders' interests, namely the unjust prejudice remedy found in Section 994 of the Companies Act 2006.  This essay will first explain the remedy and its parts, emphasising the many obstacles a shareholder must overcome to successfully rely on this provision and the various remedies used by courts in such a scenario. The potential of the regulation to protect the rights of minority shareholders must be thoroughly analysed to support the claim made in this essay that in current company law, the unfair prejudice remedy offers the most effective form of protection for minority shareholders. This analysis is necessary to assess the provision's effectiveness, which is what an assessment of the statement primarily requires.  The unfair prejudice remedy, now a precious remedy available to minority shareholders in the UK, particularly those in small private enterprises, has developed over time. The unfair prejudice remedy is not without its issues, even though it is a broad application and adaptable remedies have significantly improved the protection of minority shareholders.  Harry McVea's paper "Section 994 of the Companies Act 2006 and the Primacy of Contract" Page 16 of 41 SHAREHOLDERS explores the conflict between the legislative protection provided to minority shareholders under s.994 and the idea of contract freedom in business law. According to the article, s.994 can erode the importance of contracts in company law. This tension is apparent when the interests of majority and minority shareholders conflict." Section 994 establishes a legal remedy that is not subject to the provisions of the shareholders' agreement or the corporation's bylaws. This violates the freedom of contract concept, a cornerstone of company law. (p. 1124) There are still several obstacles in the way of a successful claim, and the chance of success dramatically impacts how well the provision works to protect minority shareholders.  The oppression remedy found in section 210 of the Companies Act of 1948 is where the unjust prejudice remedy started. Before this clause was added, unhappy shareholders had two options: file a derivative claim under common law, or request that the firm be wound up on reasonable and equitable grounds. Due to the narrow judicial interpretation, the Jenkins Committee examined the remedy's operation in 1962 and advised that it be amended to include complaints where the company's business practices were unduly harmful to the petitioner's interests. Sections 459 of the Companies Act 1985 and 75 of the Companies Act 1980 accepted this. Section 994 of the Companies Act of 2006 now contains the remedies in a revised form. S.994 was created to safeguard the rights of minority shareholders and prevent them from being neglected or taken advantage of by the majority. A shareholder wishing to depend on s.994 must clear a number of obstacles. They must first demonstrate that the company's behaviour in its business is unreasonably adverse to their interests. This can involve shutting out minority shareholders from important corporate decisions or redistributing resources to the majority for their benefit. Second, the shareholder must demonstrate that their rights as a stockholder are being violated. This can encompass financial and non-financial interests, such as a dividend drop or a loss of power or reputation. The shareholder must also demonstrate that their interests are being unfairly prejudiced. This means that the behaviour complained of must be so extreme as to be judged unfairly rather than merely annoying or harmful to the interests of the shareholder. These obstacles are meant to ensure that s.994 is not used carelessly and that only actual instances of unfair bias are handled. The courts must fairly and consistently interpret and enforce these restrictions, weighing the rights of minority shareholders against the more extensive interests of the business and its stakeholders. Explain the purpose of s.994 to relieve any shareholder whose interests are being unfairly prejudiced. Explain the different hurdles that a shareholder seeking to rely on that provision must overcome: conduct in affairs of the company, what are the interests of a member, are those interests prejudiced: are they prejudiced unfairly? Then show the interpretation of these different hurdles by the courts. Attempt some overall analysis of how easily a minority shareholder can satisfy this statutory test and, thus, how readily she can invoke s.994 to protect herself.==================== A shareholder must clear three obstacles to rely on s.994. They must first demonstrate that the company's behaviour in its business is unreasonably adverse to their interests. They also Page 17 of 41 SHAREHOLDERS can file a petition, the courts have also been highly tolerant in using equitable principles to come to a fair and just conclusion for all parties. Exclusion from management, which covers the majority of petitions (Re BC & G Care Homes Ltd), is one example of unfairly prejudicial conduct that the court will accept in a petition under section 994. This is especially true when a small quasi-partnership company is involved (Brownlow v GH Marshall Ltd).  Other common allegations include violations of the company's articles of association, violations of directors' obligations involving theft of corporate assets (Re Little Olympian Each-Ways Ltd), improper share allocations (Dalby v. Bodilly), and allegations of managerial incompetence or mismanagement, the scope of which is constrained because courts have repeatedly emphasised that they would be hesitant to find that management decisions could amount to unfair conduct. According to Re Elgindata, a director's violation of his duty of skill and care is the only violation of duty that could justify a petition under section 994. Without violating those mentioned earlier, the court has been willing to find an unfair disadvantage, though only in unusual cases (Re Macro (Ipswich) Ltd). The courts are likelier to establish culpability if the directors violated their fiduciary duties (Re London School of Electronics Ltd, Re Elgindata). In cases where directors have received excessive salaries or neglected to pay dividends, they are also prepared to take such action (Re Cumana Ltd., Anderson v. Hogg). Then consider the form of relief that will be given, especially the prevalence of the buyout order. Note the terms of a buyout, whether this is sufficiently protective of the minority's interests and whether a buyout is, in any case, an effective way of resolving inter-shareholder disputes. ================= The court may order a buyout of the minority shareholder's shares by the majority shareholder(s) under Section 996 of the Companies Act of 2006 to repair the undue prejudice sustained by the shareholder. A buyout order mandates that the majority shareholder(s) acquire the minority shareholder's shares at a reasonable value, as evaluated by an impartial expert. Because it gives the minority shareholder a way to leave the company while receiving fair compensation for their shares, the buyout order can be a valuable tool for settling shareholder disputes. A buyout order's ability to adequately safeguard the interests of the minority will, however, rely on the particulars of each instance. For instance, the court declined to issue a buyout order in Oak Investment Partners v. Boughtwood [2011] because it determined that the interests of the minority shareholder could be safeguarded through other methods, such as a reorganisation of the company's share capital or the appointment of an independent director. Some comparison with other forms of minority protection (say, a just & equitable winding up, derivative proceedings or enforcement of the constitution) would be permissible but only provided it is being done to answer the question and thereby show effective or ineffective, s.994 is compared to alternative forms of minority protection._+++++++++++++ Understanding how well s.994 protects minority shareholders can be done by contrasting it with other minority protection measures. If the company's affairs are being managed in an oppressive or unfairly adverse way to the minority owners, for instance, a just and equitable winding-up would permit minority shareholders to request a court order to dissolve the Page 20 of 41 SHAREHOLDERS business. This cure, however, is frequently viewed as a last resort and may lead to the company's breakup, which may only be ideal for some stakeholders. Minority shareholders have the right to file derivative actions against directors or other parties who have violated their obligations to the company on behalf of the company. If the company's management cannot file such a claim, this remedy is possible. Derivative actions can be an excellent way to safeguard the interests of the firm and, in turn, safeguard the interests of minority shareholders. Still, they can also be difficult and time-consuming. 1. "The Evolution of the Unfair Prejudice Remedy: A Path Dependent Perspective" by Andrew Keay - published in the Journal of Corporate Law Studies in 2009.  "The unfair prejudice remedy has become a flexible and powerful tool for protecting minority shareholders in the UK."  "The provision of a buyout order is a common remedy in cases of unfair prejudice, but it is important to ensure that the terms of the buyout are fair to the minority shareholder."  "The development of the unfair prejudice remedy has been influenced by a range of factors, including the need to balance the interests of majority and minority shareholders and the desire to maintain the integrity of the corporate form." The interests of minority shareholders can also be safeguarded by constitutional enforcement. This can entail contesting the legality of specific business or management decisions that might unfairly harm minority shareholders. However, this remedy can be constrained by the provisions of the company's charter and the court's willingness to get involved in internal business matters. Overall, s.994 may provide a more simple and more approachable remedy for minority shareholders who are experiencing unfair discrimination than various alternative kinds of minority protection. However, the success of s.994 will ultimately rely on each case's particulars; in some circumstances, other remedies may be more suitable. The Modern Law Review published "The Unfair Prejudice Remedy: An Empirical Study" by John Armour and Michael J. Whincop in 2005. "The wide range of reliefs granted under s. 996 indicates that the unfair prejudice remedy can accommodate shareholders' varied interests and requirements." "Due to the court's discretion to grant a wide variety of reliefs, the unfair prejudice remedy has evolved into a versatile tool for resolving shareholder disputes." "However, the provision of a buyout mechanism under s. 996(2)(c) may not be sufficient to protect the minority shareholder's interests in all cases." In Sealy's opinion, the provision may be utilised as a tool of oppression by minority shareholders due to its extensive application and simple accessibility.  Recent examples reinforce the idea that the provision may encompass relief for corporate Page 21 of 41 SHAREHOLDERS wrongs; however, given that it is a personal remedy, it may be considered excessively broadly applied in some situations. It was decided in Clark v. Cutland that redress for a corporate wrong may be achieved. Similarly, the court acknowledged in Atlasview Ltd v. Brightview Ltd that a violation of duty would be a prime example of behaviour that unfairly prejudices members' interests "generally."  Accordingly, the court may grant corporate relief under the unjust prejudice remedy when the firm has been wronged. Hannigan contends that such a petition ought to be dismissed and that the claimant should be obliged to request authorisation to pursue a derivative claim under Part 11. Abuse of process could result from using Section 994 to correct corporate wrongs without having to navigate the difficulties of derivative procedures.  To protect minority shareholders from unfairly discriminatory conduct, the courts must balance doing so and preventing vexatious and malicious lawsuits. Accordingly, the court may grant corporate relief under the unjust prejudice remedy when the firm has been wronged. Hannigan contends that such a petition ought to be dismissed and that the claimant should be obliged to request authorisation to pursue a derivative claim under Part 11. Abuse of process could result from using Section 994 to correct corporate wrongs without having to navigate the difficulties of derivative procedures.  To protect minority shareholders from unfairly discriminatory conduct, the courts must balance doing so and preventing vexatious and malicious lawsuits. As a way to wrap up this paper, it can be claimed that the unfair prejudice remedy (Apex Global Management Ltd v. Fi Call Ltd (2013)) appears to be the most effective method of redress for minority shareholders in contemporary company law due to its broad application and adaptable forms of relief. For minority shareholders, section 994 offers a broader and more well-balanced range of options as opposed to the intricate processes involved in derivative actions and the severe repercussions of a winding-up order (section 122(1)(g) of the Insolvency Act 1986).  Several recent decisions, including Thomas v. Dawson (2015), Wootliff v. Rushton-Turner (2016), Sikorski v. Sikorski (2012), Re Neath Rugby Ltd (No 2), and Patel v. Ferdinand (2016), show how the unfair prejudice provision is designed to protect minority shareholders broadly and flexibly effectively. The fundamental aim of the unfair prejudice remedy, according to Robin Hollington QC in Re City Index Limited (2014), "is to grant the oppressed minority a remedy which it would not otherwise  2017 Q4 A company’s stakeholders such as its employees or consumers can now insist under s.172 of the Companies Act 2006 that their interests are given the same importance as the interests of shareholders. Do you agree? Should stakeholders’ interests be treated in this way ? Page 22 of 41 SHAREHOLDERS A statutory contract between a corporation and its members is established by Section 33 of the Companies Act 2006 (CA 2006), which is meant to replace the common law notion of ultra vires. Some significant facets of the statutory contract, such as the enforcement of outsider rights, remain unresolved. Outsider rights are the legal entitlements of a third party, such as a creditor, to enforce a clause in the articles of association of the firm meant to be in their favour. Academic discussion has centred on the conflicting case law around implementing outsider rights. Outsider rights may only be enforced if specified explicitly in the articles of organisation, according to some instances. At the same time, other courts have taken a more liberal attitude and allowed outsider rights to be assumed under certain conditions. Eclairs Group Ltd v. JKX Oil & Gas plc [2015] EWHC 44 (Comm) is one example that exemplifies the inconsistent nature of the cases. In this instance, a clause in the JKX Oil & Gas plc's articles of association granted a particular shareholder the authority to select a director for the board. As an outsider right, Eclairs Group Ltd., a creditor of JKX, tried to enforce this clause. According to the court, Eclairs Group Ltd. was qualified to enforce the clause since it did create an outsider right. The court's rationale, however, was hazy, and it wasn't apparent if the judgement was founded on an inferred phrase or how the articles of association were to be interpreted. Bishopsgate Investment Management Ltd v. Homan [1995] Ch 211 is another instance that demonstrates the cases' inconsistency. In this instance, a clause in a company's articles of association stipulates that the board may not issue shares without the consent of a particular shareholder. As an outsider right, Bishopsgate Investment Management Ltd., a corporation creditor, tried to enforce this clause. According to the court, Bishopsgate Investment Management Ltd. was not permitted to enforce the clause since it did not create an outsider right. Based on a strict interpretation of the articles of organisation, the court's reasoning concluded that the clause was meant to safeguard shareholder investment rather than creditors' interests. The idea of implicit terms has been the subject of academic endeavours to clarify or address the contradictions in case law. Some academics contend that in cases where the corporation has generated an expectation that such rights exist, outsider rights should be implicit in the articles of association. Others contend that outsider rights should only be inferred when doing so serves a clear business purpose. 1. Paul Davies, "Outsider Rights and Enforcement of the Company's Constitution" (2007) 123 LQR 78 Davies argues that outsider rights should be implied in the articles of association where the company has generated an expectation that such rights exist. He suggests that this expectation can be created by the company's conduct or by a course of dealings between the company and the outsider. In his words, "The test should be whether the reasonable outsider, having regard to all the circumstances, would believe that the company had undertaken to act in a particular way, either by express representation, course of dealing or the general expectations generated by the company's conduct" (at 89). Page 25 of 41 SHAREHOLDERS 1. Jennifer Payne, "Corporate Law" (3rd ed, 2015) Payne takes a similar position to Davies, arguing that outsider rights should be inferred in the articles of association where it is necessary to give effect to the parties reasonable expectations. She suggests that this approach is consistent with the principles of contract law, which seek to give effect to the parties reasonable expectations. In her words, "Where an outsider can show that the company has created an expectation that a provision in the articles is for his benefit, the courts should be willing to imply an outsider's right to enforce that provision" (at 345). 1. John Birds, "Company Law" (9th ed, 2020) Birds take a more conservative approach than Davies and Payne, arguing that outsider rights should only be inferred where doing so serves a clear business purpose. He suggests that this approach is necessary to avoid imposing undue burdens on companies and to ensure that the articles of association are given their proper contractual effect. In his words, "The courts should only imply an outsider right where it is necessary to achieve a clear business purpose and where the implication is consistent with the overall scheme and language of the articles of association" (at 303). - A second area of uncertainty concerns the courts' refusal sometimes to enforce those breaches of duty, which are labelled as mere internal irregularities where the breach of the articles is said to be only a wrong to the company to be resolved by the operation of majority rule As a result, it was determined in Rayfield v. Hands that a contract inter se can be directly enforced by one member against another. However, Vaisey J. highlighted that this would only be applicable in situations where the company has a quasi-partnership structure and has a small number of participants who are familiar with one another. Lord Herschell's proclamations, with the quasi-partnership exemption offered by Vaisey J, according to Barc and Bowen (1988), constitute the proper stance, they claimed. Davies (2008), however, believed that a direct lawsuit between shareholders was viable and that if the law required litigation through the corporation, this would encourage a diversity of lawsuits and subject the firm to needless litigation. As a result, it was determined in Rayfield v. Hands that a contract inter se can be directly enforced by one member against another. However, Vaisey J. highlighted that this would only be applicable in situations where the company has a quasi-partnership structure and has a small number of participants who are familiar with one another. Lord Herschell's proclamations, with the quasi-partnership exemption offered by Vaisey J, according to Barc and Bowen (1988), constitute the proper stance, they claimed. Davies (2008), however, believed that a direct lawsuit between shareholders was viable and that if the law required litigation through the corporation, this would encourage a diversity of lawsuits and subject the firm to needless litigation. As a result, if the article had been violated, the member could not assert his rights. Browne v. La Trinidad backed this ruling. - Bring conflicting case laws such as Pender & MacDougall and Page 26 of 41 SHAREHOLDERS again note academic attempts to resolve this controversy - Analyse how easily the majority can alter the articles it would reference s.21 and analyse the judicial policing of alternations through the requirements that they are passed 'bona fide' for the company's benefit. Many times cited as a contradictory authority on the enforcement of outsider rights are the instances of Pender v. Lushington (1877) and MacDougall v. Gardiner (1875). The Court of Appeal determined in Pender that a shareholder may enforce an article of association clause requiring the corporation to distribute additional shares to existing owners proportionately. The House of Lords ruled in MacDougall that a shareholder could not enforce an article's restriction on the majority's ability to issue additional shares without the approval of the existing shareholders. The divergent viewpoints on whether an outsider can enforce a clause in the articles of association give rise to the disagreement between these cases. In her paper "Outsider Rights and the Problem of corporate purpose", published in 2013 Professor Lorraine Talbot. In the paper, Talbot makes the case that outsider rights should only be presumed in cases where the disputed section grants the shareholder a right. She proposes that outside parties should only be authorised to enforce negative limitation clauses when doing so serves a compelling commercial objective. Talbot's suggested strategy is founded on the dichotomy between "positive rights" and "negative restrictions." According to her definition, positive rights are clauses that give shareholders a benefit or advantage, like the pro rata right to take part in share issues. On the other side, negative constraints are clauses that restrict the authority of the majority, such as a prohibition on the issue of new shares without shareholder consent. Talbot's strategy has been referenced in several later scholarly publications, such as Andrew Keay's 2016 article "Shareholder Protection in the UK: A Model for Reform?" In the article, Keay mentions Talbot's distinction between positive rights and negative limits as a potential resolution to the debate about the application of outsider rights. - Explore the judicial construction & application of this test through the relevant case law - It is generally applied as a subjective test & the requirement of the benefit of the company as a whole has been construed as a relatively quickly satisfied requirement to avoid discrimination - Note a stricter approach in expropriation cases and the ability of well-advised minorities to prevent future alteration through the use of s.22 CA 2006 or the creation of class rights. Under Section 21 of the CA 2006, special resolution may make modifications. The courts have occasionally given more informal techniques of change permission to take place (Re Duomatic). Minority shareholders may be able to depend on s. 22 to enshrine some provisions in the Page 27 of 41 SHAREHOLDERS b) In addition explain whether your answer would be any different in EACH of the following situations: i) If Darren were Bik’s husband ii) If the company’s articles contained a clause saying that the objects of the company were limited to running a hostel for the victims of domestic violence. Answer structure : a) Note that board normally enjoys authority to exercise all powers of the company ( for eg: Model Constitution, Reg.3) giving the sisters power to decide that the company shall change its line of business and to contract for the conversion works . Shareholders can instruct their boards to do/ refrain from doing something but only by passing a special resolution (Reg.4) . Mei does not have sufficient votes to pass such a resolution. However the constitutional provision ( no contract for more than GBP 100,000…’etc) means here that the directors lack actual authority to enter that contract which in consequence would be void . Note that a contract void for lack of authority can still be ratified by the company – but such ratification must be passed by those who has the actual authority to make the contract in the first place so presumably ratification would require the consent of Mei. All this would seem to permit M to argue that the contract is void ( not legally binding )but so what? What can M do about it? Bring in s.33 CA 2006 where it would explain how under s.33 a shareholder such as Mei has an individual , personal right to enforce the articles ( against the company ). So M would be able to under s.33 to enforce the provision that requires her consent to such a contract and by enforcing it obtain an injunction to prevent the company going ahead with the contract . However we must now note the effect of s.40 probably prevents Mei exercising this right under s.33 . Explain what s.40 says and means. Explain the preconditions for it to apply . Note the requirement of good faith and discuss whether D’s knowledge of the articles and of M’s lack of consent prevent his claiming good faith. Finally note that the sisters probably breach s.171 if the proceed , disregarding the articles but that duty is owed to the company & it is difficult for M to use that breach to prevent to prevent the conversion going ahead. ANSSSSSSSSSSSSSSSSSSSS FOR AAAAAAAAAAAAAAAAAAA a) As a director and shareholder of Safehomes Ltd, Mel has a personal right to enforce the provision in the company's articles that requires her consent for contracts over GBP 100,000. Under section 33 of the Companies Act 2006, she can seek an injunction to prevent the company from going ahead with the contract for the conversion works. However, the sisters, Bik and Chun, as fellow directors and shareholders, have the authority to decide the company's business direction and enter into contracts on behalf of the company. They passed a resolution to convert the hostel into a luxury hotel, which gives them the power to contract with Darren for the conversion works. But, the company's articles provide that no contract for more than GBP 100,000 can be entered into without Mel's consent. This means that the directors lack actual authority to enter into the contract, and the contract would be void. Page 30 of 41 SHAREHOLDERS Although a contract void for lack of authority can still be ratified by the company, such ratification must be passed by those who have the actual authority to make the contract in the first place. Presumably, ratification would require Mel's consent, which she is unlikely to give. Bi) If D were B’s husband then two consequences would follow . First the contract requires shareholder approval under s.190. Since the sisters own over 50 per cent of the shares they can secure such consent. So s.190 of the CA 2006 would still not allow M to prevent the company going ahead with the conversion works . However , secondly and more helpfully for Mei , s.41 now applies .It renders the contract voidable . Explain whether this would not enable Mei to take steps under s.33 to have the contract set aside. Based on the information, if D were B's husband, the contract in question would become voidable under section 41 of the Companies Act 2006. This means that the contract would be considered legally unenforceable and open to being rescinded by Mei. However, it is essential to note that section 33 of the Companies Act 2006 only applies in cases where the company has entered into a contract and a director or connected person is without the necessary shareholder approval. In this case, the shareholders would have approved the contract, so section 33 would not apply. Instead, if Mei wished to have the contract set aside, she would need to rely on section 42 of the Companies Act 2006. This section allows a shareholder to apply to the court to have a contract that is voidable under section 41 set aside. Mei would need to show that the contract was entered into in a way that unfairly prejudiced her interests as a shareholder and that setting it aside would be just and equitable in the circumstances. While section 41 would render the contract voidable if D were B's husband, Mei would need to rely on section 42 rather than section 33 to set the contract aside. Bii) If the articles contained a limit on the company’s capacity then the conversion & the subsequent running of the hotel would arguably be ULTRA VIRES . Note that this the first time corporate capacity & ultra vires really becomes relevant in this question. However note that s.39 renders an ultra vires contract valid & enforceable , although again the sisters would be in breach of duty ( under s.171) if they failed to observe them of the articles. How s.41 is relevant here If the company's articles contain a limit on the company's capacity, then any action taken by the company that exceeds that capacity would be considered ultra vires. Ultra vires actions are those that go beyond the powers of the company as defined in its constitution (i.e., its memorandum and articles of association). In this case, if the company's articles contain a limit on its capacity, then the conversion and subsequent running of the hotel could be considered ultra vires. However, it is important to note that section 39 of the Companies Act 2006 renders an ultra vires contract valid and enforceable, except where the contract is illegal. This means that even if the conversion and operation of the hotel were considered ultra vires, the contract entered into with the builders would still be legally binding and enforceable. It is also worth noting that the directors of the company would be in breach of their duty under section 171 of the Companies Act 2006 if they were to act in breach of the company's articles. This duty requires directors to act in accordance with the company's constitution and to exercise their powers only for the purposes for which they are conferred. Therefore, if the company's articles contain a limit on its capacity Page 31 of 41 SHAREHOLDERS and the directors were to act in breach of this limit, they could be held liable for breaching their duty under section 171. Overall, while the conversion and operation of the hotel could potentially be considered ultra vires if the company's articles contain a capacity limit, the contract entered into with the builders would still be legally binding and enforceable under section 39. However, the directors would need to be mindful of their duty under section 171 to act in accordance with the company's articles. Anssssssssssss bbbbbbbbbbbbbbbbbbbbbb b) i) If Darren were Bik's husband, this would not change the analysis. Darren's relationship with Bik does not affect the fact that the contract for the conversion works is void for lack of authority, and Mel can still seek an injunction under section 33 of the Companies Act 2006. ii) If the company's articles contained a clause saying that the objects of the company were limited to running a hostel for victims of domestic violence, this would change the analysis. The company would be limited in its business activities, and the resolution passed by Bik and Chun to convert the hostel into a luxury hotel would be ultra vires. This means that the company would lack the power to enter into the contract with Darren for the conversion works, and the contract would be void. In this case, Mel would not need to rely on the provision requiring her consent for contracts over GBP 100,000. Instead, she could challenge the validity of the resolution under section 39 of the Companies Act 2006, which allows shareholders to challenge ultra vires acts of the company. If successful, Mel could seek an injunction to prevent the conversion works from going ahead. Regarding section 41, it is relevant in this context because it renders the contract voidable if it was entered into by a director or connected person without obtaining the necessary shareholder approval. In this case, if the conversion and operation of the hotel were considered ultra vires due to a capacity limit in the company's articles, then any director or connected person who entered into the contract with the builders without obtaining the necessary shareholder approval would have acted in breach of section 41. This would make the contract voidable, which means that it would be legally unenforceable and open to being rescinded by Mei. However, as previously mentioned, section 39 of the Companies Act 2006 would still apply, which would render the contract valid and enforceable, except where the contract is illegal. Therefore, even if the contract was considered voidable under section 41, it would still be legally binding and enforceable under section 39, except where it is illegal. In summary, section 41 would be relevant in this context because it could render the contract voidable if it was entered into without obtaining the necessary shareholder approval. However, section 39 would still apply, which would make the contract legally binding and enforceable, except where it is illegal. Additionally, the directors would need to be mindful of their duty under section 171 to act in accordance with the company's articles, especially if they contain a limit on the company's capacity. Page 32 of 41 SHAREHOLDERS require considerable support to remove a director according to this clause, and the bar for removing a director is thus relatively low. Eclairs Group Ltd v. JKX Oil & Gas plc [2015] UKSC 71 - This case provides an example of the circumstances in which a court may intervene in a dispute between shareholders and directors over the removal of a director. Clarke, B. (2017):  "Section 168 of the Companies Act 2006 (CA 2006) sets out the general right of shareholders to remove a director by ordinary resolution."  "Although the requirements for passing a resolution to remove a director are relatively straightforward, there are certain circumstances in which a director may challenge the resolution's validity and seek an order from the court reinstating them as a director."  "In some cases, a director may also be entitled to compensation for loss of office if they are removed from their position prematurely." Goo, S. H., & Wong, S. Y. (2019):  "In the UK, the power of shareholders to remove a director is a fundamental right under company law and is governed by s.168 of the Companies Act 2006."  "Despite the broad scope of s.168, there are some limitations to the power of shareholders to remove directors. For example, the articles of association may provide for a higher threshold than the one set out in s.168, and there may be restrictions on the ability of certain classes of shareholders to participate in a vote to remove a director."  "The effectiveness of s.168 in empowering shareholders to remove directors ultimately depends on how it is implemented in practice and the extent to which courts are willing to intervene in disputes between shareholders and directors." Bahrami, S., & Sabeti, S. (2017):  "The right of shareholders to remove directors is an important feature of company law in many jurisdictions, including the UK."  "The ability of shareholders to remove directors is generally seen as a key mechanism for holding directors accountable for their actions, and for ensuring that the board of directors operates in the best interests of the company and its shareholders."  "However, there are some potential drawbacks to the power of shareholders to remove directors, such as the risk of abuse of power by dominant shareholders and the potential for disruption to the company's operations if key personnel are removed without an adequate replacement." 1. Clarke, B. (2017). Shareholder Rights to Remove Directors in the United Kingdom. Business Law Review, 38(6), 200-206. - This article provides an overview of s.168 and discusses its application in practice, as well as the circumstances in which it may be necessary to resort to court intervention. 2. Goo, S. H., & Wong, S. Y. (2019). Shareholder activism in Asia: A comparative study. Journal of Corporate Law Studies, 19(2), 387-417. - This article compares the laws and practices surrounding shareholder activism and the removal of directors in several Asian countries, including the UK, and provides insights into the effectiveness of s.168. 3. Bahrami, S., & Sabeti, S. (2017). Shareholders' Removal Right and the Board's Independence. Journal of Accounting and Management Information Systems, 16(2), 331-354. - This article discusses - Thus, it seems correct that s.168 ensures shareholders by a simple majority. Permanently remove a director; however, can Page 35 of 41 SHAREHOLDERS it be contracted out of? Begin by noting that s.168(1) says that the power of the shareholders to remove a director by ordinary resolution applies 'notwithstanding anything in any agreement between the company & the director'. It seems wrong to say that the shareholders' power to remove can be contracted out of. On the contrary, s.168 is a mandatory rule. However, note that some subtle & indirect ways of excluding the shareholders' right to remove a director have been ruled valid. Example: 'Weighted vote'. An agreement says in the articles that a director has extra or weighted votes when faced with removal has been held to be enforceable ( case Bushell v Faith); hence in reality, this looks very much like contracting out of s.168. With a regular resolution, shareholders can always dismiss a director, thanks to Section 168. Even though section 168(1) specifies that the ability of shareholders to remove a director applies "notwithstanding anything in any agreement between the company and the director," it is feasible to contract out this right in subtle and indirect ways. Using a weighted vote is one example of how the ability to fire a director might be indirectly restricted. In the case of Bushell v. Faith, it was determined that an agreement in the company's articles might grant a director additional or weighted votes while facing removal. The ability of shareholders to remove a director is effectively constrained by making it more challenging to get the required majority, even though this may not be a direct contracting out of s.168. - Now, turn to Compensation Issue, which was raised by the question, can remove directors get compensation? Well, as per s.168 does not create a right to compensation. However, suppose a director has a service contract, and the removal means that the company is breaking the terms of the Director's service contract by terminating her position prematurely. Then she has a contractual right to compensation. Crucially, s.168(5) preserves this right even though shareholders also have the right to remove the Director, so if many directors do have service contracts, their right to claim compensation may well mean it is very & perhaps too expensive for the company to remove them. A director ousted by shareholders does not have a right to remuneration under Section 168. However, the Director can be entitled to compensation if their termination violates the terms of their service contract by prematurely ending their employment. This might happen if they have a service contract. Page 36 of 41 SHAREHOLDERS It's significant to note that Section 168(5) protects the Director's entitlement to pay even in the event of their removal by Shareholders. This implies that if many directors are under service contracts, it can be costly for the firm to fire them due to their entitlement to compensation. In other instances, it can even make removing a director excessively expensive, making it harder for shareholders to exercise their right to do so. - Note that company law does do something to stop directors from awarding themselves very long contracts, which might be prohibitively expensive to terminate early s.188- any contract over two years must be approved by shareholders ( although according to Atlas Wright), such approval could be informal. - Also, mention that removing a director who is also a shareholder could, at least in a quasi-partnership, trigger a claim by that Director or shareholder for relief under s.994 (unfair prejudice). If most of these claims are successful, the majority who removed the directors or shareholders could be forced to buy their shares from her, further increasing the removal cost. Section 188 of the Companies Act of 2006 mandates that any service contract longer than two years must be authorised by shareholders. This requirement was implemented to prevent directors from giving themselves extremely long contracts that could be too expensive to terminate early. It's essential to remember that such consent might be informal, according to Atlas Wright. Additionally, under section 994 of the Companies Act 2006, a director who is also a shareholder who considers that their dismissal was unfairly detrimental may be entitled to file a claim for relief. If successful, the majority that ousted the Director or shareholder could be required to purchase those individuals' shares at fair market value, raising the removal price. This is especially true in quasi-partnerships when there is a closer resemblance between the shareholders and directors and where there is a more cooperative management style. Here are a few articles with relevant extracts that discuss the use of section 994 in the context of director removal: 1. "A Guide to Unfair Prejudice Claims" by Anthony Misquitta and Rachel Graham, published in The Company Lawyer (2021): "Section 994 of the Companies Act 2006 provides shareholders with the right to bring an action for relief in cases where the affairs of a company are being or have been conducted in a manner that is unfairly prejudicial to their interests. Unfair prejudice claims can arise in various situations, including where a director has been removed from office." 1. "When Shareholders Fall Out: Unfair Prejudice Claims" by Emma Jordan, published in Law Society Gazette (2019): "Section 994 of the Companies Act 2006 allows a shareholder who considers that they have been Page 37 of 41 SHAREHOLDERS - Talk about the personal action under s.170(1) CA 2006 ; Coleman v Myers ; Allen v Hyatt ; Platt v Platt ; Peskin v Anderson; Sharp v Blank ; rules on reflective loss for eg. Prudential Assurance ; Johnson v Gore Wood . - Begin by noting that shareholders cannot normally sue directors in a personal action this is for two reasons first is that although directors do owe duties they owe them to the company not to shareholders PERSONALLY ( see now s.170(1)) . Secondly if directors breach their duties they harm the company & typically any loss suffered by shareholders is only a consequence or a reflection of the loss suffered by the company . And shareholders cannot sue for such reflective loss ( Prudential ; Johnson v Gore Wood ) . - So if Arthur is to sue to directors personally here he must overcome both these problems first he must establish that some duty owed to him personally as a shareholder has been breached . Note that although directors do owe their duties under CA 2006 to the company alone , the law has recognised that in some situations and in some types of company, directors may also owe separate duties directly to shareholders. - Note the different bases on which such parallel duties to shareholders might arise and the case law developing these such as Allen v Hyatt, Platt v Platt, Peskin & the recent case of Sharp v Blank . Secondly Arthur must show that the loss he has suffered is not merely reflective loss . It seems likely that it is .Arthur’s shares are worth less because the company itself has been harmed by this poor transaction. a) As a general rule, shareholders cannot bring a personal action against directors for a drop in the value of their shares. This is because directors owe their duties to the company, not to individual shareholders. However, under section 170(1) of the Companies Act 2006, a shareholder can bring a personal action against a director if the director has breached a duty owed to the shareholder personally. To establish such a breach, Arthur would need to show that the directors owed him a separate and distinct duty of care as a shareholder, which they breached by negligently approving the acquisition of Readyloans. This may be possible in some circumstances, such as where the company is a close company, and the directors have a personal relationship with the shareholders, as was the case in Allen v Hyatt. However, even if Arthur can establish a breach of duty, he must also show that the loss he has suffered is not merely reflective loss. Reflective loss refers to loss suffered by a shareholder that is merely a reflection of the loss suffered by the company, and for which the company can sue. The rule against reflective loss is designed to prevent double recovery and maintain the principle that only the company, not individual shareholders, can recover losses caused by a breach of duty owed to the company. In Arthur's case, it seems likely that his loss is reflective loss, as the drop in the value of his shares is a consequence of the harm caused to the company by the directors' negligence. Therefore, Arthur would likely not be successful in bringing a personal action against the directors. b) Whether a shareholder can get permission to continue a derivative claim - Permission to continue derivative claim Part 11 Companies Act 2006 Page 40 of 41 SHAREHOLDERS - The need to gain the court’s permission to continue the claim under s.261 - Explain briefly what a derivative claim is and how permission to continue such a claim must be sought in s.261 - The criteria for granting permission under s.263(2) & (3) - Focus on criteria that the court must apply under s.263 in deciding whether to grant such permission - Note that the permission must be refused if the transaction has been authorized in advance by the shareholders s.263(3).This seems to be the case here hence it seems quite likely that the court will have to refuse Arthur permission to continue . - Note the validity of the authorisation does not depend on whether the directors voted in favour of it ( contrast ratifications) . However , since the authorisation was procured only by the director’s incompetent advice that might lead a court to disregard it . - Briefly also note some other criteria that would be relevant in deciding whether to grant permission assuming that the authorisation was held not to be effective and would consider some of the guiding case laws such as Lesini v Westrip Holdings Ltd (2009), Franbar Holdimgs v Patel (2008) , Kleanthous v Paphitis (2011), Mission Capital Plc v Sinclair ; Wishart v Castle croft Securities Ltd (2010). b) Derivative claim and the likelihood of Arthur getting permission to continue such a claim: A derivative claim is a claim brought by a shareholder on behalf of the company against a director or other third party for breach of duty owed to the company. The claim is brought when the company itself is unable or unwilling to bring the claim. Under section 261 of the Companies Act 2006, a shareholder must seek the court’s permission to continue a derivative claim. The court will only grant permission if the shareholder satisfies certain criteria set out in section 263(2) and (3) of the Act. One of the key criteria for granting permission is that the shareholder must show that they have a prima facie case, i.e., a reasonable chance of success in the claim. The court will also consider whether the shareholder is acting in good faith and whether the claim is in the best interests of the company. Additionally, the court will look at whether the shareholder has exhausted all other avenues to pursue the claim and whether the company has ratified the relevant transaction in advance. In this case, it appears that the transaction was authorized in advance by the shareholders, despite Arthur and other shareholders opposing it. As such, under section 263(3) of the Act, the court must refuse permission to continue the derivative claim. However, it is worth noting that the validity of the authorisation may be called into question if it was procured by the directors’ incompetent advice. If the court finds that the authorisation was not effective, it would then consider the other criteria for granting permission under section 263. Overall, it seems unlikely that Arthur would be granted permission to continue the derivative claim given the prior authorization of the transaction by the shareholders. However, the specific circumstances of the case, including the validity of the authorization and the other criteria set out in section 263, may impact the court’s decision. Page 41 of 41