Shareholder Litigation & Minority Protection

Foss v Harbottle [1843]

prima facie rule that shareholders are unable to litigate against directors, through application of two principles:

i] “proper plaintiff” rule —> company is the only “person” with standing to sue when wrongs have been done to it

ii] “majority rule” principle —> court will not interfere into decisions made by a majority of shareholders

Percival v Wright [1907]

director’s duties are to the compan

Edwards v Haliwell [1951]

Four “exceptions” to the rule in Foss v Harbottle, where shareholder can litigate against the company:

i] ultra vires + illegal acts (Hutton v West Cork Railway Co. [1883]

ii] when company constitution requires a special majority and ordinary majority is used

iii] articles of association give shareholders enforceable rights (Wood v Odessa Waterworks Co. [1889]

iv] fraud on a minority

fraud on a minority is the only “true exception”

s.260(1) + (3)

derivative claim is vested in company, seeks relief for company, and arises in response to negligence/breach of duty/breach of trust of a director

s.261

statutory derivative claim requires two-stage permission test (1st stage is prima facie, 2nd stage is merit based)

apply mandatory bars and factors of s.263

Iesini v Westrip Holdings Ltd. [2011]

prima facie case means showing company has a good cause of action and relevant director act exists

second stage is not meant to be a mini-trial, but will require merits-based review

Franbar Holdings Limited v Patel [2008]

apply mandatory bar of hypothetical director as “no director would ever”

Franbar Holdings Limited v Patel [2008] + Mission Capital v Sinclair [2008]

gave significant consideration to alternative remedy of unjust prejudice petition

court is sometimes unlikely to force disclosure

parties often combine 1st and 2nd stage of the proceedings

Kiani v Cooper [2010]

emphasized that presence of alternative remedies is not a bar to granting a derivative claim

recognized informational issues with collecting evidence and granted disclosure

Andrew Keay, Assessing and Rethinking the Statutory Scheme for Derivative Actions Under the Companies Act [2006]:

relief goes directly to company, so only shareholder benefit is a change in share value —> ineffective incentive to offset high costs

free-rider problem reduces incentive to launch a claim

remove ratification bar like Australia

Wallersteiner v Moir (No. 2) [1975]

court could force company to grant indemnity to claimant for costs, later restricted by “independent organ” test by Walton J in Smith v Croft (No. 1)

D. Gibbs, Has the Statutory Derivative Claim Fulfilled its Objectives? A Prima Facie case and the Mandatory Bar [2011]

merits-based review of claim is problematic given informational asymmetry experienced by shareholder

Prudential Assurance Co. Ltd. v Newman Industries Ltd. (No. 2) [1982]

“fraud on the minority” requires fraud and wrongdoer control of the company (wrongdoer control = whenever calling a general meeting is “futile”)

necessary for a shareholder to establish a “prima facie” case

shareholders are unable to personally recover for what is merely “reflective” of company’s loss

rejected 5th “interests of justice” exception for rule of Foss v Harbottle

Johnson v Gore Wood & Co (No.2) [2002] + Gardner v Parker [2004] + Sevileja v Marex Financial Co. [2020]

Millet originally suggested that reflective loss rule was a general principle against “double recovery” —> applied against shareholder-creditor in Gardner v Parker [2004]

Sevileja v Marex Financial Co. [2020] restricted rule to original application in Prudential

Estmanco (Kilner House) Ltd. v Greater London Council [1982]

requirement of fraud is fulfilled by “unconscionability”

Pavlides v Jensen [1956]

mere negligence would not constitute fraud for the purposes of a derivative claim

Daniels v Daniels [1978]

negligence with benefit could ground a derivative claim as fraud

Smith v Croft (No. 2) [1988]

necessary to show that “majority of independent minority” would support a derivative claim to establish a prima facie case

Nurcombe v Nurcombe [1985]

requirement of “clean hands” if shareholder wants to make a derivative claim

“procedural device for enabling court to do justice to a company”

Barrett v Duckett [1955]

presence of alternative remedies bars a common law derivative claim

Stimpson v Southern Landlords Association [2009] + ClientEarth v Shell Plc. [2023]

statutory derivative claim cannot be made with personal motives

s.122(1)(g) IA 1986

courts can wind up a company on just & equitable grounds

Ebrahimi v Westbourne Galleries Ltd. [1973]

Just & equitable winding-up is available when relationship in quasi-partnership breaks down —> quasi-partnership is:

i] an association formed on the basis of a personal relationship involving mutual confidence

ii] an agreement or understanding that all or some of the shareholders will participate in the conduct of the business

iii] restriction on the transfer of shares

requires claimant to have “clean hands”

s.125 IA 1986

just & equitable winding up not available if other remedies exist

Riley, Contracting out of Company Law; Section 459 of the Companies Act and the Role of the Courts [1992]

expansion of unfair prejudice petition from “oppressive” conduct to “unfairly prejudicial” necessary due to failure of “contractarian” model of shareholding in certain circumstances

s.994

member of a company can apply for unfair prejudice petition if company conduct is:

i] unfairly prejudicial

ii] affecting interests of members

Gross v Rackind [2004]

unfair prejudice petition could cover any matter capable of coming before a board of directors

Bridgen v Bridgen [2022]

no “clean hands” requirement for unfair prejudice petition

Re RA Noble and Sons (Clothing) Ltd. [1983]

test of unfairness was “reasonable bystander test”

Re Saul D Harrison & Sons Plc. [1995]

conduct must be “prejudicial and unfairly so”

conduct is unfair when:

i] powers are used for unlawful purposes or infringe articles

ii] “legitimate expectation” existed as to their use that is broken

O’Neill v Phillips [1999]

test of “legitimate expectations” should not live a life of its own

conduct is unfair if:

i] breach of terms upon which affairs of the company would be conducted (constitutional)

ii] equitable considerations that would make it unfair to run company on strictly legal basis —> relevant equitable considerations are the same as a just & equitable winding up (Ebrahimi v Westbourne Galleries [1973])

fair offer to purchase shares makes unfair prejudice petition unvailable

Waldron v Waldron [2019]

“equitable considerations” that create unfairness are the same as just & equitable winding up —> Ebrahimi v Westbourne Galleries [1973] is not a strict definition of quasi-partnership

Re Bird Precision Bellows [1985]

remedy for unfair prejudice petition is usually a share purchase order done at a fair valuation with no discount for minority shareholding

Re Sunrise Radio Ltd. [2009]

discount was offered on bought-out shares since company was modelled on capital growth, not dividends

Hawkes v Cuddy [2009]

unfair prejudice petition asserted as distinct from just and equitable winding up

Bhullar v Bhullar [2003] + Clark v Cutland [2003] + Nztegkoutanis v Kimionis & Coinomi [2023]

possible that breach of duty could be litigated as an unfair prejudice petition

S. Watkins, The Common Law Derivative Action: An Outmoded Relic [1999]

common law derivative action was inconsistent with idea of solving wrongs without redress:

• “fraud” excludes mere negligence but allows negligence with benefit

• equitable doctrine of “clean hands” denies relief based on petitioner’s mental state

• no “interests of justice exception” —> minority shareholder in Greenhalgh v Arderne Cinema Ltd. [1946] denied relief

Dan Prentice, The Theory of the Firm; Minority Shareholder Oppression; Sections 459-461 of the Companies Act 1985 [1988]

firms reduce transaction costs but introduce risk of majority opportunism —> exacerbated in quasi-partnerships

creates gap that courts will intervene to full through application of unfair prejudice petition

addresses the “incomplete contracts” minority shareholders hold, given their lack of governance mechanisms