Company Law shareholders - Case Study Example

Remedies available to Samantha are bringing action section 994 (old459) of the Companies Act meant for Minority Shareholders' petitions against the directors' misrule etc. and also a derivative action. From time immemorial, minority shareholder has been discouraged to take action against the directors on the grounds of company being run on majority concept and on the basis of action if any should be taken only by the Company on the directors and not the shareholder in individual capacity. In Foss v Harbottle1, it was observed by the court that minority should rather take necessary action through the internal forum of company meetings.

Wigram VC stated that in view of the majority rule, any unlawful conduct of the directors was capable of being ratified by the majority and that it was not possible for the court to intervene. The only exception to the rule as observed by Jenkins LJ in Edwards v Halliwell(1950)2, could be that the minority shareholder should show that the directors accused of fraud were actually in control of the company rather than merely maintaining that majority could not lawfully ratify the wrong acts of the directors.

3 In Ebrahimi v Westbourne Galleries Ltd4, the minority shareholder Ebrahimi sued on the basis oppression of minority and winding up on just and equitable grounds. The second one was accepted by the court holding that individual's rights should be respected and the rights were not necessarily submerged by the artificial corporate entity context. The minority shareholder Samantha is of the opinion that the purchase of the property of Pastry Products for 450,000 by Filo Ltd is prejudicial to its interests and now she has learnt that both the directors are together holding 44%(each 22%) of shares of that company and the proceeds of the sale of the property have been used for payment of that company's dividends.

Regulation 81(a) of Table A of Articles Filo Ltd has adopted, governs removal of directors along with other regulations from 81(b) to (e). Regulation 81(a) says "the office of a director shall be vacated if-(a) he ceases to be a director by virtue of any provision of the Act or he becomes prohibited by law from being a director"5 Besides, a director enjoys immunity as per regulation 118 which indemnifies every director against liability incurred by way of defence to any civil or criminal proceedings in case of judgment or reliefs in his favour.

On the other hand a person conducting shareholder litigation has to meet costs from his own sources in case of the derivative claim being rejected by the court. As per the new Act's section 172 which came into force from October 1, 2007, directors must "promote the success of the company for the benefit of the members as a whole"6 as against the earlier parallel provision that they should act "in the best interests" of the company. Government has clarified that "to promote the success" means "long-term increase in value" though this is subject to being confronted by a competing definition from potential litigants.

Under Section 175 of the new Act, director has duty to avoid conflict of interests. There should not be a situation involving exploitation of any property, information, or opportunity whether or not they are advantageous to the company. The acquisitioning of the property by Filo Limited from Pastry Products in which both of the directors hold 44% of shares falls under this section. Further it has been stated that