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In a world of capitalism and widespread corporate affairs and entities, there will always exist the utilitarian principle

of the majority good for a majority amount of people. This is where the principle of the “majority rule” stands – where shareholders who majorly collectively vote for an agenda during a general meeting will have the upper hand in most of the affairs run by the company. The minority shareholders however, will be expected to conform to the flow and be bound by the decisions agreed upon by the majority. Thus, they shall only thrust themselves into the limelight of decisions when they petition to the court against the unjust acts or omissions made by the directors and/or majority shareholders.

In status quo, there exist three routes where minority shareholders can rely on in order to contest the decisions of directors and majority shareholders: the derivative claim, the unfair prejudice petition, and finally, by enforcing personal entitlements “under the articles of association.” This paper will analyse the first two remedies that are available for aggrieved minority shareholders.

the strengths and weaknesses of each respective remedy will be accessed and compared in order to determine the ultimate saviour of minority shareholders’ rights in a “solvent company” . Finally. Thankfully though. malicious minority shareholders.This paper will not only analyse both the common law and statutory remedies mentioned above separately. One will also evaluate the rule in Foss v Harbottle (which shall herein be addressed as Foss) and the general attitude of the courts in safeguarding the rule against unjustified. the duties and capacities of shareholders are illustrated in section 33(1) of the Companies Act 2006 (CA 2006). This section upholds the power of the majority vote where any decision decided upon by the majority shall bind all shareholders within the company. there are checks and balances when it comes to equal footings of power – dissented shareholders may vote "against the resolution in question" or . Companies Act 2006 and the Duties of Shareholders Generally. but also the procedures and requirements that particular petitioners have to comply with when petitioning to the court as well as the limitations to these remedies.

once the final tally of votes is recorded and conceded to. and ." However.. This is where the exceptions to the Foss rule come into play. As a result. this may highly likely deter smaller shareholders from voting to begin with as they feel like their dissent will hold no water to the decisions of the majority.. all shareholders are at its mercy regardless of inconsistent attitudes. This will be mutually exclusive to the position of majority shareholders as they consequentially will have "virtually unlimited decision making power" without any hindrance from opposing minority shareholders during general meetings. The Rule in Foss v Harbottle The rule in Foss was developed in order to protect the standing of the company as a whole against fragmented shareholders and it acts as an order in determining locus standi (capacity to sue in court). Status quo has declared the company as the only entity with legal standing to sue when a wrong has been committed against it.they can "alter the articles or. as much as a number of shareholders may disapprove of the decisions made in the general meeting.[refuse] to re-elect the directors of whose powers they disapprove.

" That means that all collective decisions are final. in which the courts have steered clear of interfering with the “internal management” of companies.meaning that "the question is at an end. the majority will supersede regardless in any way in a collective meeting so there is no constant need for the courts to intervene. as well as the opinion that the directors themselves are in a far better position to determine how the company should run. The attitude of the courts has long been "non-interventionist" . . there is a presumption by the courts that the companies are “acting within their powers” until proven otherwise... The courts also believe that for any decision. Their justifications are primarily to uphold the rights of the majority shareholders’ and the choices they make in general meetings. This is known as the internal management rule. if a mere majority of the members of the company. Moreover. The proof for otherwise will be elaborated in the requirements of derivative claims below. then cadit quaestio" .is in favour of what has been done.once an ultimate decision has been reached by the majority no individual shareholder should be allowed to express his or her dissatisfaction "for the simple reason that.

Derivative Claims Derivative claims are legal actions brought by a minority shareholder on behalf of a company for a cause and consequence of the company’s interests. Although other shareholders’ actions exist under the CA 2006. Derivative claims are most greatly known as the top exception to the Foss rule. It is expounded in Section 260 CA 2006 to mean that all actions pursued by the minority shareholder must be tied and largely rooted by the company’s best interests and nothing else. but it is derivative actions that . that this ability provided to minority shareholders does not substantially substitute the rule in Foss. One must note. however. but it namely acts as a last resort or final alternative route to shareholders who have felt that “the majority are abusing their powers. and are depriving the minority of their rights” in a company. namely personal actions and representative actions (group litigation). largely because it manages to overreach the barriers placed by the majority rule in allowing minority shareholders to claim.

but simply a loss faced by the company.have a higher call towards minority shareholders.” Reflective loss on the other hand. under a contract or a tort – and it results in a “personal loss. This is because of the discretionary attitude of the courts as mentioned above. Such loss is not reciprocal onto the shareholder. This is where the only loss encountered by the shareholder is exhibited by the diminution of finances by the company itself. It is said that a shareholder “cannot…recover damages merely because the company in which he is interested has suffered damage. On the other hand. Such claims will usually be allowed by the courts where the minority will be “entitled to come before the court to maintain their rights. and not on behalf of the company. Personal actions are generally not affected by the Foss rule since it would be an action by a particular shareholder regarding the question of his or her rights. will not be entitled to claim under personal actions. .” A shareholder cannot claim where he has not been compelled to endure a personal loss near and dear to him. if a shareholder can prove that the defendant had indeed breached a duty that correlated to his rights personally – for example.

are much more precarious. then said shareholder may be authorised to bring a personal action. one must first establish the requirements set out by the courts.6 of the Civil Procedure Rules (CPR). Rule 19. but the requirements are specific in which under rule 19. Although it brings the benefit of reducing the amount of identical suits against the company.6(4)(a) CPR also states that whatever resulting judgement will be “binding on all persons represented in the claim. The most important aspect is the fact that the wrongdoing as specified by the minority shareholder is being controlled by the defendant directors and it is those who are in control that are thwarting the company . and said shareholder manages to establish all other requirements demanded by the courts.” Requirements of Derivative Claims In order for a minority shareholder to bring forward a derivative claim. Representative actions (or group litigations) on the other hand. a class right has been violated and there must be more than one individual who has an interest in a claim.separate and distinct from that suffered by the company”.

The first requirement is that the act(s) forwarded by the company was “illegal or [was] wholly ultra vires the company. This is important in that it is the corporation that would highly likely bear the costs of the derivative action in question and thus.” This was where the directors propelled decisions that surpassed and exceeded beyond the boundary of their duties. it becomes nearly impossible for the .from launching an action. Generally. there must be some collective consensus amongst the aggrieved. In the event this occurs. there are a number of exceptions to the rule in Foss before a minority shareholder can pursue a derivative action. so that the company can both receive compensation for the wrong done onto it as well as be bound by any resulting decision made by the courts. but will also be included as the defendant with the actual perpetrators. It is here that the company will no longer be the ultimate claimant. Another important element to note is that there must be a “majority of the minority [that] wish the action to proceed” otherwise the derivative action will fail.

Firstly.” If a particular decision of the company requires a “special resolution” but there is no approval by the “special majority. The third requirement is on the notion that an individual member’s direct rights have been violated. . The second obstacle is the distinguishment by the courts on whether the wrong was only inside irregularities – “which can be waived by a majority vote” – or that it is a “constitutional right” or constitutional infringement in which the claimant would be allowed the cause for claiming. there must be a distinction between outsider and insider rights in which only the latter is enforceable. Two obstacles must be overcome before this requirement can be satisfied. The second requirement is where the subject in question “requires the sanction of a special majority” or there exists non-adherence of a “special procedure.” then the individual minority shareholder will have enough basis to sue via a derivative claim.remaining shareholders to “ratify the transaction” or rectify any “informality or irregularity” found in the decisions of the company.

Surprisingly. in a manner which benefits themselves at the expense of the company.” Apart from that. there is the minor exception where a shareholder can sue when the interests of justice demands it.The fourth requirement is the execution of fraud against minority shareholders. . the definition for ‘fraud’ has been rather wide in which the courts have even allowed a claim albeit the presence of an actual fraud where the directors have misused their powers “intentionally or unintentionally.” The requirement for fraud would also be met if particular shareholders attempt to “use their voting power to stultify any proceedings being taken against them.” or as “when the majority are endeavouring directly or indirectly to appropriate to themselves […]” which means the seizing of benefits which would otherwise belong to the company or other shareholders.” It is only then that “the claims of justice would be found superior” to all the barriers initially placed by the technicalities of the derivative actions. This is the ultimate last resort for minority shareholders when no other viable and visible remedy exists “except that of a suit by individual corporators. Fraud can be defined as “an abuse or misuse of power. fraudulently or negligently.

This is primarily to protect the .Limitations of Derivative Claims As much as the courts and the rules of justice intend to uphold the rights of minority shareholders in a company. there must exist some limitations to derivative claims as to safeguard not only the company as a whole but also innocent shareholders who have not been tainted by the actions and decisions of the wrongdoers. as well as “shadow directors” (third parties who assist the directors or former directors) who may or may not be equally guilty.” It is also said that all derivative actions must be sought “bona fide on behalf of the company” and there cannot exist any reasonable doubt of the member being enticed by external interests or possessing any ulterior motives. the courts took into account shareholders who “were independent of the wrongdoers” and the fact that they refused for actions to be commenced “for disinterested reasons. In Smith v Croft (No 2). the individual member seeing for derivative action would not be able to be successful without the support of “the majority inside the minority.” For this reason.

“trouble and expense for the company. In order to determine unfairness.” Unfair Prejudice Rule The unfair prejudice rule – which was previously laid down under Section 459 of the Companies Act 1985 but is now replaced with Section 994 CA 2006 – aimed to protect minority shareholders’ rights where the issue arose “from unfairly prejudicial conduct of the company’s affairs. The Articles of Association can also be utilised as an important benchmark in determining .” the unfair prejudice rule on the other hand is partially contradictory in that it is to remedy “wrongs done to the shareholder” – although in rare instances.” Where derivative claims are actions sought by a member on behalf of the company for “wrongs done to the company. it can include wrongs done onto both parties. the courts resort to an objective approach in which it observes the conduct and demeanour between the company and its members.company from any frustrated shareholders who may be “acting through malice or misjudgement” and end up consuming a hefty amount of time.

The claimant shareholder may even obtain a “costs order” so that it will be the corporation and not the petitioner who will finance the action. Critics exclaim that the methods utilised by the courts in filtering out unnecessary claims is . The result from Clark v Cutland has sparked numerous criticisms in allowing the remedy of unfair prejudice to expand so wide as to award minority shareholders an incredible leeway to petition for both personal and company-related claims. there will now be an unavoidable combination of “personal and corporate issues” of both individual and corporate claims.whether the actions of the company conform to how it should treat its members especially if it relates to any specific “shareholder agreements that may be present.” The significant case of Clark v Cutland exemplifies the usage of the unfair prejudice rule where the capacity of the rule has been extended by Arden LJ to include an individual shareholder to acquire a considerable remedy for the company over the injustice committed onto it as well as “possibly…obtaining a remedy for themselves personally.” As a result of such judgement.

individual members still opt for derivative claims – albeit the presence of a newly fortified Section 994 CA 2006. This statement does appear to be true based on the extended grounds for derivative actions as well as the insufficient accessibility of the unfair prejudice rule. All in all. An advantage of derivative claims is the expansion to incorporate “mere negligence and breach of regulatory duties” when seeking an action under Section 260 CA 2006. .“inadequate” and that the “collective position” of the remaining shareholders in a company should be taken into account. the case of Hecquet v McCarthy managed to draw the line on minority shareholders gaining unreasonable remedies apart from the sake of the companies they serve. Thankfully. it is agreed upon that minority shareholders should not be given “an indefeasible right to obtain substantive corporate relief” under the unfair prejudice rule. Comparison and Criticisms The statement for this paper claims that despite the fact that the unfair prejudice rule is more feasible in protecting minority shareholders’ rights.

However. . Furthermore. The initiation of any petition on behalf of a company will inevitably cause a “substantial diversion of management time and resources” and despite all the hurdles intended to reduce unnecessary claims. For derivative actions. but it is still a considerable relief from the existing “procedural hurdles” that surrounds the action.Although it will still be up to the ultimate discretion of the courts to allow such claims to pass. there exist numerous criticisms for both remedies respectively. it will only be evident after the company has endured the long and complex procedures. no such compensation costs exist under the unfair prejudice rule. The main criticism of derivative claims is its complicity and the unpredictable scrutiny of the courts in respect to each individual claim. the court may declare the corporation to compensate the charges reasonably sustained by the petitioner when bringing an action. Another difference between the common law and statutory law rule is that public companies can rely on derivative actions but not the unfair prejudice rule.

one can finally make a conclusion on the credibility of the statement. will not be able to substantially gather the proof needed for the courts. Moreover. minority shareholders still rely on . the largest criticism is the lack of accessibility for petitioners to obtain the proof of prejudice.As for the unfair prejudice rule. Minority shareholders have to bear the “limited access…to the ‘inside’ corporate information necessary to underpin a shareholders’ action” and thus. With the extension of grounds for petitioning derivative claims to include negligence.” Conclusion Based on the extensive deduction of derivative claims and the unfair prejudice rule. Lastly. Exclusion of minority shareholders in “small companies” is also an issue faced by unfair prejudice petitioners. the “long length of proceedings” as well as their high resulting fees is also a flaw. as well as the comparative studies of their strengths and weaknesses. there is a risk of a minority shareholder attaining “a corporate remedy in response to a corporate wrong without going through the leave and notice requirements which are in place in a derivative action scenario. as a result of the decision in Clark v Cutland.

It is reasonable to speculate that both remedies will encumber a company of its valuable time and money however.the common law remedy regardless of the flexible nature of the statutory alternative. . It is for this reason that the statement should stand. it is practical to conclude that an individual minority shareholder would rather opt for derivative claims as compared to the statutory remedy because of its nature as being the last resort for aggrieved shareholders. a derivative claim is what remains as the prevailing action for minority shareholders who feel that they have been misled or deceived. Where proof is incredibly difficult to attain due to the stronghold of those in charge of the company.