Discuss the remedies available to a minority shareholder.

Khurram Raja in Majority shareholders' control of minority shareholders' use and abuse
of power: a judicial treatment’ noted the increasing claims of "oppression" and "unfairness"
by minority shareholders vis-à-vis company directors and majority shareholders for
irregularities committed in the course of a company’s affairs, or wrongs done to the
company. Majority shareholders may pass any resolution which benefits themselves or
deprives the minority. Therefore, the minority should be given protections or remedies such
as section 994 of Companies Act 2006 (CA 2006), s.996 CA 2006, formerly the case of Foss v
Harbottle and s.122(1)(g) of Insolvency Act 1986.
The basic principle of major control and restriction of actions by minorities was
established in Foss v Harbottle in two propositions: a) the proper claimant in an action in
respect of a wrong to a company is prima facie the company; and b) where the alleged
wrong may be made binding on the company by a simple majority of the members, no
individual member is allowed to maintain an action in respect of it.
The exception to the Foss v Harbottle rule is developed in Edwards v Halliwell. To bring a
derivative claim- where a shareholder brings a claim in respect of a wrong to the company-
the minority had to establish prima facie that: (a) the company was the victim of a ‘fraud’,
defined as an abuse of power as director or shareholder (Estmanco (Kilner House) Ltd v
GLC); and (b) the wrongdoers were in control of the company and preventing it from
bringing an action itself. The claim was equitable and discretionary. If the claimant is
successful, an action would be brought by the company on behalf of minority shareholders.
Mahmoud Almadani in ‘Derivative actions: does the Companies Act 2006 offer a way
forward?’ noted that the term ‘fraud’ covered most breaches of duty but did not cover
‘mere negligence’ (Pavlides v Jensen) unless the alleged negligent action resulted in profit to
a director, Daniels v Daniels. Mahmoud further noted that the common law confers on
shareholders only a scant corporate right to internal company documents. In such a
scenario, shareholders will have no access to internal information which might be necessary
in order to prove the wrongdoing of the people in control through dominance of
shareholding and management position (Prudential Assurance Co Ltd v Newman Industries
Ltd (No.2)).
This heavy onus of establishing fraud and control acts as a disincentive for a genuine
claim to be brought in the interest of the company. The statutory derivative claim is thus
incorporated into Companies Act 2006, s.260(1) for members to seek relief on behalf of the
company, abolishing “fraud on minority” in case of “wrongdoer control”. A derivative claim
may be brought in respect of a cause of action arising from an actual or proposed act or
omission involving negligence, default, breach of duty, or breach of trust by a director
(s.260(3)). Members bringing a derivative claim must apply to the court for permission to
continue it (s.261(1)), and if the application and evidence filed do not disclose a prima facie
case for permission, the court must dismiss the application(s.261(2)).
Permission must be refused at this stage if either a person under the duty to promote
the success of the company would not continue it (s.263(2)(a)) or if the act or omission in
question has been ratified or authorised (s.263(2)(b) & (c)).
If the claim is not rejected under s.263(2), the court considers whether to give
permission, taking into account in particular: whether the member is acting in good faith in
seeking to continue the claim; importance that a person acting in accordance with
s.172(duty to promote success of company) would attach to continuing the claim; whether
authorization or ratification is likely; whether the company has decided not to pursue the
claim; and whether the act or omission gives rise to a personal cause of action for the
member (s.263(3)).
In relation to s.263(3)(b), Andrew Keay and Joan Loughrey in ‘Something old,
something new, something borrowed: an analysis of the new derivative action under the
Companies Act 2006’ noted that whether or not the best interests of the company are
fulfilled by permitting a derivative action is an objective test. They further argued that
argued that this assessment should involve a cost and benefit analysis. Hence, in Mission
Capital Plc v Sinclair and Franbar Holdings Ltd v Patel, the court found that from the view of
a hypothetical director acting for the benefit of the company, the claim has low importance.
It seems the court also adopted a relatively restrictive approach in the hypothetical director
test as the considerations.
William J regarded in the Franbar case as of relevant were fairly wide: these include
such as the prospects of success of the claim, the ability of the company to make a recovery
on any award of damages, the disruption which would be caused to the development of the
company's business, the costs of the proceedings and any damage to the company's
reputation and business if the proceedings were to fail.
The above two cases were applied in Iesini v Westrip Holdings Ltd, where Lewison J.
expressed a similar view and identified more factors It can be submitted that the court took
into account many considerations that makes the continuance of claim harder under s.260.
The next remedy would be unfair prejudice remedy. It originated as a remedy against
oppression in Section 210 Companies Act 1948 which is only protecting minority from
oppressive conduct. Therefore, Jenkins Committee in 1962 proposed to extend it so to
include impropriates which fall short of actual illegality. This was adopted in section 459
Companies Act 1985 and replace ‘oppressive manner’ with ‘unfairly prejudicial conducts’.
This section then reiterated in the current law, section 994 CA 2006. This has shown the
willingness of Parliament to prepare more sufficient relief for minority shareholders.
Section 994 stipulates that members may petition the court on grounds that the affairs
of the company has been conducted in a manner unfairly prejudicial to the interest of
members generally or of some part of its members (including at least himself) or any actual
or proposed act or omission of the company (including an act or omission on his behalf) is or
would be prejudicial. The provision includes present, past, and future. In Lloyds V Caseythe
court allowed the petitioner to include acts that occurred before he became a member of
the company.
For unfair prejudice remedy to lie, the act complained of must be in the company’s
affairs and the petitioner must show that his interest qua member has been unfairly
prejudiced, as opposed to other interests (Re John Reid & Son (Strucsteel) Ltd). The qua
member requirement is extended to non-member of company but to whom shares in the
company have been transferred or transmitted as they apply to a member of company
under s.994(2). Also, s.995(1) permit the secretary of state to petition. As established in
Gamlestaden Fastigheter AB v Baltic Partners, ‘interest of members’ is not restricted to
interests held in their capacity as members, as long as there is a sufficient connection with
membership.
Interest of a member can be ascertained by reference to breach of the terms of
association. However it goes beyond this and includes legitimate expectations in quasi-
partnership company. In Ebrahimi V Westbourne Galleries, Lord Wiberforce held that “There
are individuals with rights, expectations and obligations inter se which are not necessarily
submerged in the company structure legal rights”.
In O’Neil, O’s primary complaint was that C had failed to award him additional shares as
had been expected and discussed. Lord Hoffmann’s analysis of unfairness showed that this
was not unfair as the ‘promise’ to give O more shares had not been legally binding.
Furthermore, although the company was a quasi-partnership, so that excluding O from
management would have been unfair, the court found that O had not been forced out; he
had chosen to leave rather than take on the role offered.
Clearly, the formulation of ‘unfairness’ in O’Neil mirrored the analysis of Hoffman LJ in
Re Saul D Harrison & Sons plc. The significance of O’Neil lies more in the explicit rejection of
the concept of ‘legitimate expectations’, a notion introduced in Re Saul case, but recognized
as ‘probably a mistake’ in O’Neil. Lord Hoffman explained ‘legitimate expectations’ was a
‘label’ for the equitable restraint and ‘should not be able to lead a live of its own’. It was this
focus on legitimate expectations that had led the Court of Appeal to find in favour of O, and
generally loosen the boundaries of unfair prejudice.
The O’Neil analysis has shown that for the majority of companies, where the
relationship is purely commercial, unfairness will lie only in a breach of the terms of
association- the articles, company law, or binding shareholder agreements.
If it was satisfied that there is a 994 petition, court may, by virtue of section 996(1) CA
2006, grant any relief it thinks fit to the petitioner. Mummery J in Re a Company (No. 00314
of 1989) ex p Estate Acquisition and Development Ltd opined that courts should grant
appropriate remedy so as to continue the life of company, rather than bring a company
down. This means, although court has discretion to decide what relief to be granted to the
petitioner, just and equitable winding up which governed under section 122(1)(g) Insolvency
Act 1986 should not be deployed unnecessary. This often occurs as the result of removal of a
director of a quasi-partnership company because the exclusion was a breach of the
understanding that the directors would run the company together as per Ebrahimi V
Westbourne Galleries.
CA 2006 provides several remedies for petitioner and one of which is injunction,
governed under section 996(1)(b) CA 2006 which capable to refrain an upc from reoccurring.
For instance, in Whyte Petitioner, injunction was granted to prevent majority shareholders
from removing the petitioner from his directorship. Apart from that, in most cases,
especially when the parties’ relationship had broken down, court would prefer to make a
purchase order which enshrined in section 996(1)(e) CA 2006. This order is granted so that
the petitioner could exit the company by selling his share at a fair value.
However, issue arises as to how to determine fair value as raised by Re Southern Couties
Fresh Food. Law Commission Report (No. 246): Shareholder Remedies suggested that the
shares should be valued on a pro rata basis which means proportionate with the value of
share owned over all issued share capital. Cases like Re Bird Precision Bellows and
CVC/Opportunity Equity Partners v Almeida have applied this view provided that the
petitioners have legitimate expectation of participating in management.
Viewing other jurisdiction, Ladd Hirsch and Jason Fulton in their article A Pound of
Cure: Remedies for Majority Shareholders Without an Exit Strategy expressed the view
that when the issue of fair value could not be settled, court could consider the method in
California Corporations Code, section 2000(c) which is to appoint three disinterest
appraisers to appraise the fair value of the shares. Then, make a decree based on their
finding to bind both disputing parties. As such, this makes the remedy more readily available
to claimants.

In conclusion, the common law principle of Foss v Harbottle is, too restrictive. Although
s.260 aims to provide a flexible remedy, it makes the minority shareholder hard to apply for
leave when the requirement is too restrictive. S.994 of CA 2006 continues to be praised for
its adaptability (Arden LJ in Re Tobain) and its ‘wide and flexible’ nature (Re Coroin Ltd).
Also, s.996 CA 2006 is more available for the claimants when the issue of valuation is
resolved. 994 petition is always been said as costly and cumbersome. This can be seen in Re
Elgindata Ltd where its cost of litigation is much higher than the value of assets being
argued. Hence, alternative dispute resolution should be encouraged and s.122(1)(g) is only
last resort option. One can safely conclude that Companies Act 2006 brought positive
changes and the application depends on judges’ discretion when justice demands.