Summary
Summary Minority Shareholder Protection I & 2
- Module
- LAWS10083
- Institution
- The University Of Edinburgh (ED)
LAWS10083 Minority Shareholder Protection I & 2
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Minority Shareholder Protection I & 2Minority Protection I
Derivative Proceedings
Just and Equitable Winding up
Minority Protection
-Majority rule unless something happens that is wrong.
3 Main types of minority protection and they are all statute. Parliament has deemed that
the courts can interfere with companies in these instances. It is an exception to the usual
rule of majority rule.
The instances we are dealing with is that something has happened so the decision that was
taken via the majority should not stand. But this instance should be more than being simply
upset.
Statute sets out the three ways in which minority protection can occur. They each involve
wrongdoing on the part of the company(i.e through the director). As this is on the basis of
what is unfair/unjust and inequitable, the legislation/caselaw has specified what falls under
these adjectives.
Minority protection involves a situation where the management is being looked at.
Someone who is not a majority is complaining about the way the company is run. The
individual's influence is limited. This could take place for instance in a family run company.
Someone who has like 20% of the shares/voting rights, since they cannot even block a
special resolution.
Would it be possible to vote with your feet? i.e Sell your shares? This is very possible in a
plc. In a private company, not so easy. Here shares are not so readily tradeable. You have to
approach people, and try and sell the unattractive situation you are in. This is quite difficult.
Another issue is the rights of pre-emption. When you are dealing with private companies,
this can effect such issues such as selling shares. If you have to offer your shares to existing
,shareholders, they may 'muck you about'. They may offer, they may not, they may not offer
a reasonable price. It is a very difficult situation.
So you can approach the management to indicate your disdain for the situation, you can sell
your shares and third thing you can do is bring legal proceedings, which the following
lectures are regarding.
The situations which are involved are quasi-partnerships.
Derivative Claims/Proceedings
The company law steering group stated that this method ought to be statutory based.
What is the difference between an unfair prejudice order?
They want to continue the company. In an unfair prejudice order, the most common remedy
is a buyout, i.e the person wants to leave the company. Despite this, there can be seen to be
somewhat of an overlap between them.
What was there beforehand?
Derivative actions were seen as a procedural device, while in scotland it was more than just
procedural.
The original case was Foss v Harbottle
-This case preceded Salomon's case.
- Here the case held that where a wrong is done to the company, the proper pursuer is the
company. It was a recognition of separate legal personality.
Who instigates proceedings on behalf of the company? - Directors.
However, what happens if the wrong done to the company was done by the director?
Actions like negligence/secret profits? This leads to the company's profitability decreasing,
leading to the dividends decreasing and ultimately leading to diminishing capital growth. It
affects the value of shares.
, On this basis, the law fashioned exceptions to this rule. When there is a 'fraud on the
minority'. Where the directors are doing stuff for their own benefit. Here fraud is
determined to have a very broad meaning. It is not deceit but wrong doing.
The next question is whether or not this could apply to skill, care and diligence. The courts
then fashioned something where if negligence benefit the majority, it was allowed.
After this the Company Law Steering Group got involved, and put it into statute.
There is now a derivative action; where you have a right to sue by being a shareholder for
instance, but on behalf of the company.
The reading indicates that the previous regime was extremely unsatisfactory, given the
amount of things you needed to show.
Why bring an action?
The company may recover money, which may allow you to benefit. Additionally, with small
private companies there is a strong personal element involved.
Another reason is because they are potentially awarded if they sort it out. They think about
the costs of bringing an action
Section 265
Looking at the Scottish provisions;
Who can bring the action?
-A member of the company - (1)/(2)
Who benefits?
- The company, since the proceedings are even brought forward on its behalf. Though the
shareholder may benefit indirectly(share price increases), in principle the benefit is put
forward onto the company.
What conduct gives rise to derivative proceedings?
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