Majority shareholders own more than half of outstanding shares in the company whilst minority shareholders own less than 50% of the share capital. Majority shareholders are usually also the directors of the company. They in effect control the operations of the company and their actions may be to their benefit.
The law therefore, in light of this possibility provides various legal remedies available to the minority shareholder. In this case Ergan, Arif and Moshe the minority shareholders are unhappy with Pedro and Morgan.However, they might not be able to bring any action against Pedro and Morgan because the doctrine of separate legal personality enables the company to sue and be sued by a member or a third party. Moreover, the wishes of the majority as expressed through votes at properly conducted meetings should always reign over the wishes of the minority.
In Foss v harbottle case, action was brought by two shareholders against the alleged fraudulent and illegal transactions by the company’s directors and to make up for the resultant loss to the company.It was held that since the loss was to the company, only the company could bring an action and not the minority shareholders. The rule established in this case was that where the company suffers harm, only the company itself is the true and proper claimant. This principle was further supported by the ruling in Bamford v Bamford [1970] Ch.
. Consequently, Ergan, Arif, and Moshe as shareholders might not sue for wrongs done to the company.Similarly, in Burland v Earle (1902) Lord Davey restated the basic rule that the Court will not interfere with the internal management of companies acting within their powers, and in fact has no jurisdiction to do so. There are however exceptions to this rule that Ergan, Arif and Moshe could rely on. Pedro and Morgan have awarded themselves a pay increase even though the company has making marginal profit. This could amount to unfairly prejudicial conduct.
In Re Cumana Ltd, the company’s share capital was held by two people.The major shareholder engaged in a number of financial transactions and got the company to pay him excessively over a 14 month period. The court found this to be excessive and prejudicial to the minority shareholders interests. By awarding themselves a pay increase, Pedro and Morgan are likewise only improving their positions and not those of the minority shareholders.
In addition, Pedro and Morgan as directors owe their duties to the company’s shareholders as a body and under duty to act bona fide to the interest of the company as seen in Smith v Fawcet case.Directors also owe the company a standard duty of care and skill. However, even though the company affairs have been mismanaged, Egran, Arif and Moshe may not be able to sue as director duties are is owed to the company and not to any individual shareholder as seen in Perceival v Wright (1902). However, they may be able to sue as Pedro as a director is proposing to enter in a transaction that is not to the interest of the company. Section 172 requires directors to promote the success of the company and benefit of the shareholders. This principle was held in the case of Daniels v Daniels .
Morgan and Pedro cold also be appropriating company property by selling them at undervalue. InCook v Deeks [1916] 1 AC 554 directors in a construction company Pacific Railways diverted work to a new construction company associated with some of the board members. The minority shareholder succeeded in bringing a claim against the directors as the company had lost a business opportunity.Likewise Ergan, Arif and Moshe may bring a claim that the company is loosing revenue because the directors are selling property at undervalue.
Ergan, Arif and Moshe could also can bring a derivative action under s. 60-264 Companies Act 2006 or in pursuance of a court order under s 996 (2). They are all concerned that Pedro and Morgan are not running the affairs of the company properly. Derivative actions are claims brought by individual shareholders acting on behalf of the company against the directors of the company.
A derivative claim under this chapter may be brought only in respect of a cause of action arising from an actual or proposed act by a director of the company. Faults include Negligence, breach of duty or breach of trust by a director.In Daniels v Daniels, minority shareholders brought an action against Mr & Mrs Daniel alleging that they had fraudulently sold land at a fraction of its value. It was held that the plaintiff had a standing to sue. As such, Ergan, Arif and Moshe could sue if they believed that Pedro and Morgan had acted untoward. In case they decided to sue, they must obtain permission from the court to continue their claim under (s.
261(1) CA 2006) They must make out a prima facie case in order to obtain permission. Furthermore, the court must consider the factors listed in s. 63(3) CA 2006, for example, whether the shareholder is acting in good faith, when deciding whether to grant permission. They however should note that permission to continue with a derivative action under s 261 may be refused as happened in the Mission Capital v Sinclair & another (2008) EWHC 1339. They could also bring a claim under Section 994 (1) CA 2006 for unfair prejudice. This section aims to provide relief where a minority shareholder is oppressed.
In Scottish CWS v Meyer [1959] AC 324, House of Lords, shareholders successfully complained that the company business was diverted to another company.They could also argue that just as in Cumuna case Pedro and Morgan have used their powers to intentionally benefit themselves at the expense of the company and as such the suffered unfair prejudice. All three minority shareholders may get remedy under s 996 CA2006. The court if satisfied that a petition in this part is well founded may give relief as it finds fit. The court order may regulate the affairs of the company or order the company to refrain from conducting affairs as they have been.
It may also authorise civil proceedings to be brought in the name and on behalf of the company.
