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Company la2

COMPANY LAW

ASSIGNMENT 1

CONTENTS

Page 3 Terms of Reference

Page 4 Summary

Page 5-9 Main Body

Page 8 References, bibliography

Terms of Reference

This paper is base on the concept of ‘Minority Shareholder Protection’. Minority shareholder protection is one of the most complicated areas of company law. During the course of this paper I will attempt to:

• Identify minority shareholder’s right.

• Analyses the legal protections of minority shareholder.

• Identify the legal protection of minority shareholders.

• Look at cases where the concept has been used and the decisions.

• decide whether the concept achieves its purpose.

Summary

Decisions of directors or shareholders are normally taken on the basis of majority vote. If shareholder happen o find himself/herself in the minority, there is not normally anything that he/she can do about it. However, the law provides protection for the minority shareholders, although that is very difficult and very expensive to enforce minority rights. Shareholder disputes can be enormously expensive to resolve because lawyers have to review the whole history of company before advising and because both sides can become entrenched in their views. The dispute also takes up an inordinate amount of management time, which is particularly detrimental to smaller, owner managed companies.

Main Body

Minority Shareholder Protection

Shareholders believe that their interests are being prejudiced by the way affairs of the company are being managed by the company’s directors. Shareholders have right to petition the court to seek relief. The court has wide possible discretion in the matter. The most usual remedy however, is to order the purchase of the minority shares by the majority on a proportion of the value of all shares, without reduction because it is minority holding.

Almost all petitions relate to companies within 10 or fewer members and one of the commonest allegations as a ground of ‘unfair prejudice’ is exclusion from management. Other examples of unfair prejudicial conduct as the following:

• Removal as a director.

• Payment of inadequate dividends.

• Making a discriminatory rights issue of shares.

• Diverting business opportunities away from the company.

• taking excessive remuneration/management fees out of the company.

• Allotting shares improperly/in breach of pre-emption rights/deleting pre-emption rights from articles.

Minority has some protection under general law and Company law and other acts. Examples of minority protection are:

1)    Under general law, the doctrine that the majority of the members must not commit a fraud on the minority but must act true for the benefit of the company as a whole.

2)    The other exception to the rule is in Foss v. Harbottle, in that case an individual member may bring a copied action.

3)    The various sections intended to protect a minority of shareholders. Some apply on a general basis; thus under sections 122 and 124 of the insolvency Act 1986 a member can petition the court to wind up the company on the ground that it is just and equitable that the company be wound up. Further, under section 459 of the companies Act a member can petition the court for other relief where the company’s affairs are being conducted in an unfairly prejudicial manner to some or all of the members, including himself. Other minority sections enable a number of shareholders to challenge the majority on specific issues.

In two recent cases, the courts have looked to the articles of association as to whether a company's affairs are being conducted in a manner which is unfairly prejudicial to the interests of some of its members under s459 Companies Act 1985.

In the first case, O'Neill and another v Phillips and others the House of Lords held that unfairness to a member of a company falling within s459 Companies Act 1985 generally required breach of the terms on which such shareholder had agreed the company's affairs should be conducted.

Briefly, the case involved an asbestos stripping company, which was wholly owned by Mr Phillips. Mr O'Neill, an employee of the company, so impressed Mr Phillips with his loyalty that Mr Phillips was moved, in an informal discussion, to express the hope that one day Mr O'Neill would run the company. On this basis Mr Phillips promptly allowed Mr O'Neill to draw 50% of the company's profits. Mr Phillips retired, leaving Mr O'Neill as sole director. As recession struck Mr Phillips resumed management of the company and withdrew Mr O'Neill's rights to 50% of the profits. Mr O'Neill alleged unfair prejudice.

Lord Hoffman in the House of Lords stated that the concept of fairness must be applied judicially and its content had to be based upon rational principles. The content would depend on the context and background. The background to s459 had two features:

  • The manner in which the affairs of the company might be conducted was closely regulated by rules to which the shareholder had agreed. It was held that unfairness could not be alleged unless there was a breach of the terms on which it had been agreed that the company's affairs should be conducted (that is, in most cases, a breach of the articles of association). In this case there had been no such breach.
  • Company law had developed from the law of partnership, treated by equity as a contract of good faith. A breach of the rules or using the rules in a manner that equity would regard as contrary to good faith would probably constitute unfairness. It was held here that simply a breakdown of trust between the members would not be sufficient.

Accordingly Mr O'Neill's petition was dismissed.

In the second case, Morris and others v Hateley and another, the Court of Appeal held that majority shareholders were not entitled to bring the s459 petition to force a minority shareholder to give up his investment.

This case involved a petition under s459 by 75% majority shareholders in a company to attempt to require a 25% minority shareholder to transfer his shares.

The court's starting point was to consider :

  • the commercial arrangement between the parties, whether in the articles of association or an additional agreement such as a shareholders agreement; and
  • the use of, or failure to use, powers in relation to the conduct of the company's affairs provided by its constitution.

The Court of Appeal had to consider whether a majority shareholder could seek relief under s459, a section generally regarded as for the protection of the minorities. There was a disinclination by the Court to act where the petitioner was able to control the relevant conduct by his own powers. However it was not ruled out by the Court that a majority could succeed in a s459 action.

It was held that there was nothing in the articles of association requiring the minority shareholder to sell his shares if the majority shareholders did not want him to continue as a shareholder. Additionally, there were no relevant powers in the company's constitution which would enable the majority shareholders to require a sale or transfer of the minority shareholders' rights. The Court of Appeal held that as majority shareholders they had the power to procure the passing of any resolution of the company and could bring an end to any prejudicial state of affairs in the company. Accordingly the petition failed.

Comment
In establishing whether an act is unfair for the purposes of s459 the court's primary consideration is whether there has been a breach of the company's constitution. Additionally, the court will apply equitable principles of fairness on a case-by-case basis. In the meantime the best way to avoid the kind of problems outlined above, is to make sure that any issue that can be are addressed in advance preferably in the company’s articles of association or a shareholders agreement. Every private limited company should have a periodic check on its arrangements for the transfer of shares to ensure they properly reflect what the shareholders want.

References

Morris and others v Hateley and another (The Times 10 march 1999)

O’Neill and another v Phillips and others (The Times 21 May 1999)

Foss v Harbottle 1843. ‘Company law’ Stephen Griffin pg. 326

Bibliography

‘Mayson, French & ryan on Company Law’ 1995-96 Edition by Stephen W.Mayson LLB, LLM, FRSA, Derek French BSc and Christopher L. Ryan LLB, LLM. Chapter 14 page 350-399, Blackstone Press Limited

‘Smith & Keenan’s Company Law For Students’ Tenth Edition by Denis Keenan. Chapter 14 page258-275, PITMAN PUBLISHING

‘Company Law’ Second Edition by Jacqueline Wilkinson. Chapter 11 page 261-293, Old Bailey Press Limited

‘Company Law fundamental Principles’ Third Edition by Stephen Griffin LLB, M.Phil. chapter 23 page 339-365, Pearson Education



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