The Derivative Actions and Unfair Prejudice Remedies - Coursework Example

Introduction A corporation has been considered as juristic person. The company’s finance would be coming from money that would be contributed by the shareholders and debenture holders. They would not be owners of the company and would not be equated to the company. This would mean that company on incorporation would be getting a personality distinct from its constituting members. It would be capable of holding property and would have the rights not unlike that of a natural person. The biggest landmark case has been that of Saloman Vs Saloman that has stated that once a company was incorporated, it would be a different entity and that none of the members would be liable for its debt. There has been artificial nature of the company, that would be taking actions by it and decisions for it would be taken by natural persons. A question would arise as to whether the decisions or acts has been taken or done that would be taken in away that they could be attributed to the company. The focus of the paper has been the shareholders as they could be insiders in a company, members- controllers and integral part of the corporation. Shareholders would be essentially persons who would increase a the capital of the company and they would be investing a small or big amount that would be a dividend proportional to the investment and they invest a small or a big amount for a dividend proportional to their investment. It is pertinent to understand what a share would means and the status a shareholder has in a corporation. A shareholder would not be an owner of the company but an interest holder would rights as mentioned in the Articles of Association or the relevant statute.1 In 1997, the Law Commission recommended that derivative actions at common law be replaced with statutory derivative actions with more modern, flexible and accessible criteria for determining whether a shareholder may bring a claim. (Law Commission Report, Shareholder Remedies, LC 246, 1997, para 6.15). The statutory derivative action was introduced by the Companies Act 2006; nevertheless, despite such codification the role of derivative actions is still overshadowed by the unfair prejudice remedies under s.994 of the Companies Act 2006. There has been shareholder disputes that has been said as majority shareholder allegations against minority shareholder. There has been accusations that majority has been preventing the minority from participating. There has been also accusations that majority has been taking in more money when compared with minority and there has been a law in the United Kingdom that had been against unfair prejudicial conduct and the court has been for remedial actions and there would be a buyout remedy that would be at the discretion of U.K court. The meaning of unfair prejudice could be said as 1."unfair prejudice" remedy, :The member would be seeking redress for action by the company and the reason would be that his interest as a member of the company would be injured. 2.derivative action, :The member would be seeking claim against the company; and 3.there would be an action so that the constitution of the company gets enforced. A derivative action would be commenced by one member of a company on behalf of all the other members and the reason for this would be that there would be to enforcing a cause of action to the company (Incases Ltd Jones v Jones and others [2002] EWCA Civ 961). The derivative action would be saying that the claimant would be requiring permission of the court to continue the claim and the court has discretion to order the company to indemnify the claimants against the cost and that has been incurred in the claim. The independent board would be making the standard of care that a prudent business man would exercise in his own affairs that had decided to bring the proceedings (Jaybird Group Ltd v Greenwood [1986] BCLC 319). The key case and summary of English law and procedure would be on bringing of derivative actions and this has been stated in Barrett v Docket and Others [1995] 1 BCLC 243 .That had set out the general principles that would determine the conduct of the company. Derivative actions could be described by simple terms as an individual shareholder would be taking action against the company wrong doings. A derivative action would be prevented from taking place by the majority of a company that would be ratifying the decision and the contested decision has been made. The court has been allowed to the action has been proceed, the claimant would be given an opportunity to an indemnity from the company for the costs that has been given. The courts has said that derivative actions could be considered as an action that has been under s.459 of the Companies Act .2 Examples of unfairly prejudicial conduct include: Exclusion from participation in the management of a quasi-partnership company. Ebrahimi v Westbourne Galleries Ltd [1973] The award to him or herself of excessive financial benefits by the majority shareholder/director. The directors had received the salaries but has not received the dividends. A director was removed and there was promise of dividends being paid in the future. The right and obligations has been held beyond the small company law. Re Elgindata Ltd [1991] The diversion of business to another company in which the majority shareholder/director holds an interest The plaintiff had obtained a patent that has been utilized through the company and the plaintiff had been having one third of the shares. There was complaint later that the majority shareholder had acted prejudicially. There has been mismanagement that could amount of prejudicial conduct of the company and there has been evidence of misuse of assets. It has been considered as a wrong to leave the plaintiff with the share holding and the order has been made for the purchase of the shares and that has been given as a discount that would reflect the minority status. Re Cumana Ltd [1986] The court of appeal had been held that there has been two shareholders who has been termed as L and B and they had entered into agreement and that had involved mutual trust and confidence and the majority shareholder actions has been held by excessive salary. The salary that has been happening in last 14 months has been found to be very large. Re London School of Electronics Ltd [1986] Ch 211 The majority shareholder conduct in taking students away from the company to the courses and there has been misappropriation of company assets and there has been cases of diverting business to another company. In exceptional circumstances, serious mismanagement Re Macro (Ipswich) Ltd [1994] Low payment of dividends may be unfairly prejudicial The petitioning shareholders has said that mismanagement of properties owned by the company. Re Sam Weller & Sons Ltd [1990] BCLC 80 Locus standi The general position is that a member of the company in question must bring the claim. The section also applies to a non-member to whom shares in the company have been transferred or transmitted, but a mere agreement to transfer is insufficient Re Quickdome Ltd [1988]. Ownership of a single share is enough to establish locus standi. 3 Re Garage Door Associates Ltd [1984]. The petitioner may have joined the company knowing about the conduct complained of. Bermuda Cabletelevision v Colica Trust Co. Ltd [1988]. Where persons claim they are being wrongfully excluded from membership an existing member cannot petition on their behalf in this respect as a member of a company has no interest (in the sense of s.994(1))in the recognition of voting rights of other persons claiming to be members. 4 Jaber v Science an Information Technology Ltd [1992]. Former members have no locus standi. Re A Company ex p Holden (1991) BCLC 597 The shareholders would be required to serve a notice on the company and there has been institute proceedings that has been happening month, and there has been grounds of the proposed derivative action, and if the company fails and the shareholder would commence a derivative action. There has been exception to the requirement for notice and that should be made when the applicant shows that urgent relief would be needed or the court dispenses with the requirement. The company commences an action, but fails diligently to prosecute it. The notion of ‘interest’: The notion of 'interest' has traditionally been limited to the interests of the member as a member of the company as illustrated by the case of Re J.E. Cade and Son Ltd [1992]. In this instance the petitioner tried to include a claim for possession of land in which he had the freehold title. It was held that that this interest did not fall within s.459(1)). The position appears to have been somewhat relaxed in O'Neill v Phillips [1999] 2 BCLC 1. Available Remedies The Court can make any order it wishes under S.996, 2006 Act, for example: a) The purchase of the petitioner's shares by the defendant. This is the most common remedy sought under s.994 and a reasonable offer to buy out the petitioner may defeat the claim of unfair prejudice Guidance on what constitutes a reasonable offer was given by Lord Hoffman in O'Neill v Phillips [1999]. This is aimed at helping parties to avoid costly litigation. b) The purchase of the petitioner's shares by a third party Re Little [1995] c) The sale of the majority shareholder's shares to the petitioner Re Brenfield Squash Racquets Club Ltd [1996] d) The amendment of the petition to seek winding up on just and equitable grounds Re Full Cup International Trading Ltd [1995]. Fraud on the Minority: There have been cases when the minority interest has been sacrificed and that would mean that there would be several actions that would be taken to uphold the value of the company. There would be common law derivative action to uphold the value of the minority share holder. The rule in Foss v Harbottle could be described in two steps There has been democratic principle in the sense that the majority decision would stand and the minority decision would not stand. There has been proper claimant principle that would state that there would be a breach of duty that has been owned by the company and the proper plaintiff has been the company itself and there has been reinforcing the concept that the company would be considered as a separate legal entity. The decision making power has been vested in majority of directors and that has been the main problem. There have been many instances when the unhappy minority shareholder has been forced to exit and that would mean that there have been instances on when the fraud on the minority has been taken forward and that would mean there would be no success guaranteed. The nature of the case has highlighted the fact that in the past there has been no success guaranteed. From since October 2007, minority shareholders have been allowed a new statutory derivative action. The two rules in Foss v Harbottle will continue to apply, although the absence of one or the other will no longer be a bar to commence proceedings. Before exploring the new statutory derivative action. The buyout has been at the discretion of the UK court. There has to be proof that wrong doers has been at control. The importance of shareholder rights through alternative actions is an important aspect of controlling the behavior and actions of the Board of Directors and an important part of corporate governance. The 2006 act has increased the derivative actions and that would include the alleged negligence, default, breach of duty,breach of trust, and claimant need not show that directors had benefitted from the act. Derivative actions would be unlikely to increase when the takeover bid would come. The concept of 'fraud on the minority' is not an exact one. 5 Estmanco (Kilner House) Ltd v Greater London Council [1982] 1 All ER 437 Megarry V-C noted that: " It does not seem to have yet become very clear exactly what the word 'fraud' means in this context; but I think it is plainly wider than fraud at common law.." Burland v Earle [1902] AC 83 A straightforward example is “... where a majority are endeavouring directly or indirectly to appropriate to themselves money, property or advantages which belong to the company” Palvides v Jensen [1956] Held that a loss caused to a company through the negligence of its directors who had derived no personal gain through the transaction did not constitute a fraud on the minority. Daniels v Daniels [1978] Ch 406 Held that a derivative claim arose where a substantial profit was made upon the resale of company land sold to a director. Therefore, it should be noted that fraud in this context is not confined to literal or common law fraud. It may include: Misappropriation of corporate property – (Note the wide scope of this concept); Mala fide abuse of power – (Refer to directors duties); Discrimination against a section of the membership; Errors of judgment from which the directors have benefited. Wrongdoer Control: In addition, the shareholder must demonstrate that there was sufficient control exercised by the alleged wrongdoers to enable them to prevent the company from bringing a claim. This is explained as follows: As an exception to the 'proper claimant principle' the court permits a claim to be brought on behalf of a company by one of its members. The member is said to be deriving a right of action from the company, hence the term derivative claim. The reason that the shareholder is permitted to undertake this action is because the company is incapable of pursuing the claim due to the influence and control of the wrongdoers. For instance if the wrongdoers control the Board of Directors, then: Article 70 Table A; The General Meeting delegates powers to the Board of Directors; The Board then makes the day-to-day decisions for the company; This includes whether or not the company should bring a claim against the wrongdoers. However, how does a shareholder demonstrate this? In other words, what is the process by which the shareholder establishes locus standi – the right to bring a derivative action on behalf of the company against these alleged wrongdoers in a particular case? Prudential Assurance Company Ltd v Newman Industries Ltd (No.2) [1982] Ch 204 If a minority brings a derivative claim on behalf of the company then the defendants may apply for the claim to be struck out on the grounds that the minority does not have locus standi to sue. Where this happens, then a full trial of the substantive issues must be avoided. Look at the facts of this case. Smith v Croft (No 2) [1987] 3 All ER 909 The court can investigate the conduct of the voting and count heads to see what the other shareholders, independent of the plaintiffs and the wrongdoers, think should be done. The organ capable of reviewing the matter will usually be the General Meeting.6 Where the majority of independent shareholders would vote against legal proceedings, then no claim in the company’s name should lie. Other matters: A derivative action for fraud in the minority is an equitable remedy. Thus, the plaintiff must come with clean hands. Towers v African Tug Co [1904] The courts will not allow a derivative action to be brought if the courts are of the opinion that there is an alternative remedy available which is more appropriate in the circumstances. Barrett v Duckett [1995] Where a company has gone into liquidation, a derivative action cannot be allowed. Fargo v Ltd v Godfrey [1986] A minority shareholder who brings a derivative claim may be entitled to an indemnity for costs from the company. Wallersteiner v Moir (no.2) (1975) Basis for such actions is that the wrong cannot be ratified by a majority. Statement from Edwards V Halliwell [1950] 2 All E.R. 1064 at pp. 1066-69 as restated in Prudential v Newman and cited in the Law Commission’s Consultation Paper No. 142 on Shareholder Remedies p.287 “(1) The proper plaintiff in an action in respect of a wrong alleged to be done to a corporation is, prima facie, the corporation.8 (2) Where the alleged wrong is a transaction which might be made binding on the corporation and on all its members by a simple majority of the members, no individual member of the corporation is allowed to maintain an action in respect of that matter because, if the majority confirms the transaction cadit quaestio [the question is at an end]; or, if the majority challenges the transaction, there is no valid reason why the company should not sue9 (3) There is no room for the operation of the rule if the alleged wrong is ultra vires the corporation, because the majority of members cannot confirm the transaction.10 (4) There is also no room for the operation of the rule if the transaction complained of could be validly done or sanctioned only by a special resolution or the like, because a simple majority cannot confirm a transaction which requires the concurrence of a greater majority11 (5) There is an exception to the rule where what has been done amounts to fraud and the wrongdoers are themselves in control of the company.”12 References “Company Law”,Majority and Minority protection,viewed and retrieved from law.exeter.ac.uk/staff/drury/documents/majorit08.doc http://www.latrobe.edu.au/legalservices/downloads/duties_of_directors.p df THE PRINCIPAL FIDUCIARY DUTIES OF BOARDS OF DIRECTORS: Presentation at Third Asian Roundtable on Corporate Governance, Bernard S. Black, Singapore, 4 April 2001, http://www.oecd.org/dataoecd/50/53/1872746.pdf EXPLICIT AND IMPLICIT SYSTEM OF CORPORATE CONTROL - A CONVERGENCE THEORY OF SHAREHOLDER RIGHTS , Dirk a. Zetzsche , http://papers.ssrn.com/sol3/papers.cfm?abstract_id=600722 Section 35, The English Companies’ Act, 1985; Brenda Hannigan, THE REFORM OF ULTRA VIRES RULE, 1987 JBL 173 Read More