Business Law and Practice notes - BPP Law School - High Distinction Level notes!
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There are statutory remedies available to disgruntled minority shareholders
Often costly
Uncertainty as to sucess & remedy that will be granted by the court
Due to this + other reasons, shareholders enter into shareholder agreements - which aim to
minimise the effect of the principle of majority rule by setting out how the company
is to be run as between the shareholders and how the shareholders will vote on
certain matters.
--
Rights and remedies available to minority shareholders-
“Membership rights” – enforcement - s.33
Derivative actions:
o exceptions to the rule in Foss v. Harbottle
o under s.260
Unfair prejudice actions - s.994
Just and equitable winding up - s.122 IA ‘86
Other benefits under CA 2006
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Members rights – s33 -
Articles act as a contract between the members and the company
S33- “The provisions of a company’s constitution bind the company and its members to the
same extent as if there were covenants on the part of the company and of each member to
observe those provisions.”
Hence, a member may sue under this provision if its member ship rights are infringed
Membership rights that have been enforced under s.33 -
The right to a dividend once it has been lawfully declared;
The right to share in surplus capital on a winding up;
The right to vote at meetings; and
The right to receive notice of GMs and AGMs.
Membership rights which are NOT enforceable under s33-
The right to be appointed as the company’s solicitor was not a membership right.
It is important that rights which are not membership rights are set out in a separate
contract (such as a shareholders’ agreement) and not in the articles of association.
, It should also be noted that a company’s articles are deemed to be a complete
contract and the court will not imply any terms into them whether to create
business efficacy or otherwise (Bratton Seymour Service Co. v Oxborough)
-
Derivative's actions -
Where the shareholder’s right of action is derived from the company’s right of
action, which the company has not exercised.
Since 1 October 2007, the only procedure for bringing a derivative action is under
s.260 CA 2006. Examples of the common law principles established before then as
they may still be followed by the court and you may hear them referred to in
practice.
+ Foss v Harbottle will continue to be relevant where shareholders seek to
enforce a right which is vested in themselves rather than the company, since
this line of authority will not be affected by the introduction of s.260 CA 2006
(Foss v Harbottle)-
in situations where a wrong has been done to a company, the company is the
proper claimant
Accordingly, the court will not interfere in the internal management of a
company acting within its powers. The effect of this rule is that, in general,
under the common law a minority shareholder is not allowed to sue for a wrong
committed against a company of which he is a member, even if the company
is refusing to take action.
Exceptions to (Foss v Harbottle) rule-
Minority shareholders can bring an action as follows:
Where the majority exercise their votes in such a way as to defraud minority
shareholders
Where directors who are in control of a company have been guilty of a breach of
fiduciary duty, provided that breach of such duty is not ratifiable by the majority
Where the company (usually as a result of a decision of the board) is proposing to act
ultra vires or illegally
Where the company has purported to pass an ordinary resolution in circumstances
where a special resolution, or some other special procedure is required
Where the company proposes to act on the authority of a resolution which is defective
because inadequate notice was given
Derivative claims under s260-
It provides an express right to bring a derivative claim in certain circumstances.
It is a statutory exception to the rule in Foss v Harbottle.
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