Minority shareholder protection

what private benefits of control can shareholders gain by exerting power and influence over a company?

- alter the terms of the constitution - change the understanding that minority shareholders have in their running of the company - excessive director remuneration - transactions with parties connected to the shareholder - further altering the control relationship by issuing more shares to the shareholder - forced sale of the minority shareholders' shares

what restrictions are there on a controlling shareholder in a general meeting?

- different views held by different shareholders (less so in widely-held companies with rational apathy) - minority shareholders also have a contract with the company (needs knowledge and awareness of this) - this risk is incorporated in the low value of the shares

How does the common law limit controlling shareholders?

1. can't ratify a director's duty when the shareholder had an interest in the dodgy transaction (e.g. was the director) 2. limits on amending the articles of association (beyond requiring certain number of votes) - also need to act bona fide in the interests of the company as a whole

Which types of power can controlling shareholders use to gain the private benefits of control?

Any (direct, indirect, de jure, de facto)

Why do controlling shareholders not owe a fiduciary duty of loyalty?

Because you need to have accepted a charge on behalf of another to have this (Bristol and West Building Society v Mothew [1996])

North-West Transportation Co Ltd v Beatty (1887)

Common law imposing limits on the ability of conflicted controlling shareholders to ratify a breach: Fairness considerations: ratifications can't be oppressive towards those who oppose it cf Regal -there wasn't impropriety or bad faith in this case. Not trying to oppress the minority but still illegal.

De jure vs de facto control (by shareholder)

De jure = more than 50% of shares De facto = less than 50%, but other shareholders are apathetic and don't vote

Ebrahimi v Westbourne Galleries Ltd [1973]

Just and equitable winding up (not assessed) Where companies are deemed to be quasi partnerships, the ability of shareholders to exercise power at the general meeting is not limited to compliance with the company's articles, the CA and the 'bona fide for the benefit of the company as a whole' requirement. Also limited by equitable constraints. Must abide by informal obligations and understandings between the shareholders/quasi partners on how the business will be run and managed.

Sidebottom v Kershaw, Leese & Co Ltd [1920]

Need a rational account of why the action benefits the company. A shareholder sought a declaration that an alteration to the company's articles was invalid, as it allowed the majority to compulsorily acquire the shares of persons engaged in competition with the company. Upholding the validity of the alteration, Lord Sterndale MR accepted that the phrase "company as a whole" meant the company itself, rather than its constituent shareholders. Thought it was definitely in the interests of the company as a whole to remove the interests of competing shareholders.

Is it just legal remedies that the unfair prejudice remedy remedies?

No, also equitable and legitimate expectations of the exercise of corporate power

O'Neill v Phillips [1999]

Normally can't just go by expectation though (for unfair prejudice remedy), need some sort of breach of agreement that the member signed up to. So can get unfair prejudice by a breach of the rules or using the rules in a way which is contrary to good faith.

what is the issue with the law regulating controlling shareholders?

Only really deals with controlling shareholders as far as they are exercising corporate power. Doesn't really help when they're just acting against the company's best interest in other capacities (e.g. persuading the board to enter non-arm's length transactions with them) They don't owe a fiduciary duty of loyalty to the company as directors do.

Allen v Gold Reefs of West Africa Ltd [1900]

Power to change articles must be for the benefit of the company (can be implied) Means that the power can't be used to directly discriminate between shareholders by an amendment to the constitution which explicitly provides one group with superior rights to the others. What is required to prove this? A rational justification, not what the courts consider to be fair and equitable.

s 174

Prejudiced shareholder remedy

Shuttleworth v Cox Bros and Co (Maidenhead) [1927]

Shareholders can decide what is in the best interests of the company, not the court. "the test is whether the alteration of the articles was in the opinion of the shareholders for the benefit of the company" Court only needs to decide: i. is the decision capable of being in the company's best interest? (rational link) ii. that the decision is not so unreasonable that no reasonable person could arrive at that conclusion Doesn't affect agreements amongst shareholders (e.g. changing the terms of the constitution so that a director had a life tenure)

In what other situations can a controlling shareholder have restrictions on them?

When they're acting as a shadow director (s 126(b)(i) 'a person with whose instructions a director of a company is accustomed to act'

does the unfair prejudice remedy in s 174 allow derivative actions? what are the problems with this?

Yes, under subs (2), but without the safeguards under s 165 -unless they automatically apply?

What other statutory innovations are there to remedy the power of controlling shareholders?

a) liquidating a company because it is 'just and equitable' to do so b) granting relief from 'oppressive, discriminatory or unfairly prejudicial conduct'

Cook v Deeks [1916] (not in case list)

directors holding a majority of votes clearly can't make gifts to themselves

What happens when a shareholder gains a larger percentage of shares?

incentive to exercise power over a company increases. de jure/de facto control direct/indirect control

difference between cases where courts imposed limits on the ability of conflicted controlling shareholders to ratify a breach (1st exception to 2nd rule in foss v harbottle) and regal?

no bad faith or impropriety in Regal -not trying to oppress the minority

Latimer Holdings Ltd v SEA Holdings NZ Ltd [2005]

s 174 (prejudiced shareholders can apply to court for relief) was considered in NZ CA to be well-established that it didn't apply to deadlocks (disagreements in management) 'without more'.

Indirect vs direct control (by shareholder)

Direct = controls any decision made by the board Indirect = influence over the board of directors

What is an unfair prejudiced shareholder remedy?

It is not enforcing a duty on behalf of a company, rather getting a personal remedy because a breach of director's duty affected shareholders' interest as members.