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Essay/Exam Answer_Shareholder Protection
A thorough and comprehensive answer that discusses the remedies available to minority shareholders.
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Shareholder ProtectionThe company as a legal entity can sue to enforce its legal rights and can be sued for breach of its legal
duties; John Shaw & Sons (Salford) v Shaw [1935] Breckland Group Holdings Ltd v London & Suffolk
Properties [1989]. Pursuant to section 17 of the Companies Act 2006 (“CA 2006”), the company’s
articles form an integral part of its constitution along with any resolutions and agreements to which
Chapter 3 of the CA 2006 may be applicable or those resolutions or agreements which must be
notified to the registrar. Prior to the enactment of the CA 2006, section 14 of the CA 1985 failed to
address the legal effect of the articles in respect of creating an agreement between a company’s
members’ inter se, and the extent to which such a statutory agreement can be enforced against the
company. Section 33 of the CA 2006, now takes into account the ‘doctrine of separate legal
personality’; Salomon v Salomon [1897] and recognises the statutory contract between a company and
its shareholders. (Drury [1986] CLJ 219)
If a company is limited by its shares, it has separate legal identity from that of its shareholders; s 20
CA 2006, Lee v Lee's Air Farming Ltd [1960]; Macaura v Northern Assurance Co Ltd [1925]. Likewise,
if a company has complied with the relevant registration requirements under Part 2 of the CA 2006, it
shall be afforded the applicable statutory protections through t incorporation. Baxter [1983] CLJ 96
noted that the courts shall not interfere in matters pertaining to the company’s internal management;
Edwards v Halliwell [1950], Bamford v Bamford [1970], Carlen v Dury [1812]. The rule in Foss v
Harbottle [1843] translates the doctrine of separate legal personality and the principle of majority rule
into a rule of procedure governing locus standi. Per Jenkins LJ in Edwards v Halliwell [1950] the
proper claimant in an action in respect of a wrongdoing against a company is, prima facie, the
company itself; Stein v Blake (No 2) [1998] and where there is an alleged wrong in a transaction
which might be made binding on the company and all of its members by a simple majority of the
members, no individual members of the company is allowed to maintain an action in respect of that
matter’; Burland v Earle [1920] (Lord Davey); MacDougall v Gardiner [1975] Mozley v Aston [1847]
Johnson v Gore Wood & Co [2002]. A shareholder may bring a claim on behalf of the other
shareholders (‘representative action’) under Part 11 CA 2006. Alternaatively, shareholder may also
bring a claim against any wrongdoing against him/her (‘personal action’). Whereas, a derivative action
enables a shareholder to enforce the rights of the company on behalf of the company (‘derivative
action’). This action is only applicable where the cause of action falls within the exceptions under Foss
v Harbottle. A personal right is a right accruing from the shareholder’s statutory contract via the
company’s constitution or within a shareholders’ agreement; Wood v Odessa Waterworks Co [1889],
Bond v Barrow Haematite Steel Co [1902], Lee v Sheard [1956]; Walker v Stones [2001]
Mitchell [2004] LQR 457 commented that in Johnson v Gore Wood & Co [2002] Lord Millet and Lord
Goff stressed that the policy reasons underlying the bar on personal claims for reflective loss are
pivoted upon the need to protect creditors. The bars on such claims extends beyond allegations of
diminutions in share value to include claims for loss of dividend of diminution in share value; Day v
Cook [2003], Barings v Cooper & Lyrband (No 1) [2002] (Evans-Lombe J), George Fisher v Multi-
Construction [1995] Morgan J in Sukhoruchkin v Van Bekestein [2013], Ellis v Property Leeds (UK)
[2002] Gardner v Parker [2004], Prudential Assurance Co v Newman Industries (No 2) [1982] The
claimant’s loss merely reflected the loss that sustained by the company; Rushmer v Meryvn Smith
[2009], Rawnsley v Weatherall Green & Smith [2009], Gaetano Ltd v Obertor [2009], Garment
Technology Inc v Lectra Systems Ltd [1997]. Nevertheless, the prohibition can be circumvented if the
shareholder brings a claim qua beneficiary of a trust of shares of which the wrongdoer is a trustee;
Shaker v Al-Bedrawi [2003], Giles v Rhind [2003], Johnson v Gore Wood & Co [2002] Atlasview v
Brightview [2004], Malhotra v Malhotra [2014]. Where a representative action is bought, the
shareholder is entitled to sue on behalf of himself and the other members who have the same right
which has been abused or infringed; CPR 19.6. CPR 19.6(1) provideded that more than one person
has the same interest in the claim, the claim may begun by or against one or more of the persons who
has the same interest as representatives of any other person who have that interest. CPR 19.6(4)
dictates that unless the court otherwise directs, any judgment or order given is binding on all persons
represented in the claim; Quin & Axtens v Salmon [1909]. The derivative action is a “procedural device
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