Remedies Available to Minority Shareholders Members

In every legal system there are certain rights and liabilities of a legal person. One of the basic purpose of law is to protect these rights and provide remedies when these rights are infringed. When the right of a person is being infringed by another and thus not compensated with an adequate remedy, such right is “a hollow one, stripped of all practical force and devoid of all content”. [1]

A company has been known as a separate legal personality from its other members since the Victorian era. Like any other person whose rights are recognised by law; a company is also capable of doing business, holding properties, making contracts, making profits and loses etc. Therefore, if some wrong is going to happen with the company, legal proceedings can be brought at its name. It can sue and be sued. It is not necessary for a company to initiate proceedings against every wrong done to the company. [2] It can decide not to initiate the claim at all, when there is a possibility that it might affect the reputation of the company or the issue can be settled out of court amicably in the best interest of the company. [3]

Due to artificial character of a company, the need of natural person to perform its function is vital. In Ferguson v Wilson, [4] Cairns LJ said, “The company itself cannot act in its own person … it can act through directors”. The company’s affairs are normally looked after by its organs which in normal course would be the board of directors [5] or the shareholders in general meeting. [6] The “Majority Rule” would apply where the decision regarding the commencement of legal proceedings is made in shareholders’ general meeting. It was held in Re Kong Thai Sawmill (Miri) Sdn Bhd [7] that, the decision of the majority must be honoured by the minority members. [8] This principle was adopted at common law before Companies Act 2006 that substantial powers had been granted to those who were controlling more than half of the votes in board or shareholders meetings. Apparently, this principle seemed logical, but practically different problems arose at common law when these powers were abused by either the directors or the majority shareholders/members; who themselves had caused harm to a company. [9] They were unwilling to initiate any proceedings against themselves. [10]

In early times, the courts inclination towards the internal matter of a company was not affirmative as the courts were not allowing the shareholders to bring the claim against the principles of majority rule. [11] The courts’ were reluctant to entertain those claims which were against the principle of Majority Rule backed by other factors like business efficacy, apprehension of multiplicity of claims, and floodgates. [12] The Majority Rule and other related doctrines were found in the primary case of “Foss v. Harbottle”. [13] Thought the majority rule apparently looked logical and necessary for the good corporate governance but at the same time it was creating major obstacle in the way of minority shareholders, in order to get the redress against the wrongs done to the company by those who were actually controlling it. [14]

This issue has been identified long time ago and the remedy was provided at common law to the minority shareholders in the form derivative claims which are exception to the majority rule. Among these derivative claims the most important one is when fraud is committed on the minority due to the wrongdoers’ control. Before the Companies Act 2006, however, it was frequently argued that the derivative actions face significant procedural and substantive difficulties of establishing wrongdoer control in case of fraud on minority and hence do not provide adequate protection to minority shareholders, [15] by leaving them to rely upon the alternative remedy available under section 459 of Companies Act 1985 (CA 1985), which is now found under section 994 of CA 2006. Section 994 usually operates as an exit way from the company. In addition to that the limited circumstances under which the minorities can bring action against any wrong have proved to be more costly and lengthy procedure. The law governing derivative actions before CA 2006, has been declared as “complex and obscure” [16] by the Law Commission.

This study is an effort to explore the remedies available to minority shareholders/members under the current system in order to cure any harm caused to a company. It is proposed to start by discussing the rule in “Foss v. Harbottle” which requires analysing other doctrines and judicial policies that provide the basis for the rule. It is then proposed to open thorough discussion of the principle of proper claimant followed by the theory of ratification. The common law derivative actions (exceptions to the rule) will subsequently be discussed by pointing out the problems and difficulties for potential litigants. While such discussion carries on, more emphasis will be given to a new statutory remedy of derivative claims, which is incorporated into CA 2006 after the recommendations of Law Commission. The Rule and its exception of “fraud on minority” in case of “wrongdoer control” has been abolished and a concept of judicial discretion to grant permission for derivative actions has been legislatively adopted by setting out certain guiding criterion for courts. Since, the wider accessibility of derivative claim was the foremost purpose of these new reforms, it is crucial to analyse whether the statutory derivative claims provide a better way forward for a minority shareholder to bring a claim against corporate wrongs as compared to the derivative actions provided in the common law.