Rights of minority shareholders and remedies available
Majority rule and company to take action
Two factors affect the ability of minority shareholders to enforce the rights of a company in respect of harm the company has suffered:
· The principle of majority rule acknowledges that a company is governed by the will of the majority of the shareholders. The court will not allow minority shareholders to start litigation in respect of an issue to which the majority shareholders can subsequently grant their approval.
· Where a company has suffered harm, the company is the only party capable of beginning proceedings to seek redress for that harm. Action by the company may be through the directors acting under a general power of management or at the request of the company in general meeting through powers conferred by the Articles of Association or constitution. If the actions of the directors constitute a wrong to the company, the company should take the action against them. It is not available to a single shareholder to complain of a breach of the Articles.
Remedies available to individual and minority shareholders
To prevent injustice, the court may allow an individual shareholder to seek the court’s assistance in the enforcement of directors’ and other officers’ duties. In addition, statutory remedies also afford individual and minority shareholders protection against misconduct by those running the company and against being dominated by the majority.
In the new Companies Act, remedies are provided under Management of Company and for the purpose of interpretation, “complainant” means:
a) A member of a company, or a person who is entitled to be registered as a member of a company;
b) A former member of a company if the application relates to the circumstances in which the member ceased to be a member.
c) Any director of a company; or
d) The Registrar, in the case of a company investigated at the direction of Minister.
In the new Companies Act, any member or debenture holder of a company who is oppressed may apply to the court for an order. The shareholder must prove that the wrongdoers in the company are in control of the company and there is fraud on the minority. If oppression is established, the court may make such order as it thinks fit to remedy the matters complained of without prejudice.
The order may-
a) Direct or prohibit any act or cancel or vary any transaction or resolution;
b) Regulate the conduct of the affairs of the company in the future;
c) Provide for the purchase of the shares or debentures of the company by other members or debenture holders of the company or by the company itself;
d) In the case of a purchase of shares by the company, provide for a reduction accordingly of capital of the company; or
e) Provide that the company be wound up.
The court may refuse to apply the rule where only the company can sue in respect of wrongs done to it and where an individual shareholder cannot bring an action in the courts to complain of an irregularity in the conduct of the company’s affairs, if the rule is exploited by a majority to the obvious prejudice of the minority shareholders.
For practical purposes, circumstances in which the rule will not prevent an objection by minority shareholders to an act of the majority, are as follows:
· The activity objected to is ultra vires or illegal.
· The activity undertaken must be sanctioned by a special resolution.
· The activity is an infringement of personal rights of shareholders.
· The activity amounts to a fraud on the minority shareholders.
· The activity is oppressive to minority shareholders.