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29 Dec

COMPANY LAW 2.1 MAJORITY RULE AND MINORITY PROTECTION

MAJORITY RULE AND MINORITY PROTECTION.

Section 299 CAMA provides that only the company can sue to remedy a wrong done to it[1] and only the company can ratify an irregular conduct[2]. This provision is a codification of the rule in Foss V Harbottle. Meaning that the proper claimant/plaintiff is the company[3].

We know that the company being a legal personality acts through organs (i.e. the members in general meeting and the board of directors). Therefore, the power to initiate legal proceedings on behalf of the company is vested in the board of Directors[4]Section 63 CAMA, Carlen V Drury.

The issue of minority protection would come up in a situation explained by Bello C.J.N in Omisade V Akande (observing Lord Denning MR in Wallersteiner V Moir) thus: “suppose the company is defrauded by insiders/ by directors who control/hold a majority of the shares-who can sue…? those directors are themselves the wrongdoers[5]… they will not authorize the proceedings to be taken against themselves if a general meeting is called, they will vote down any suggestion that the company should sue”. Minority protection is where the law allows the minority holders to enforce certain rights in certain instances which can be termed “exceptions to the rule in Foss V Harbottle[6]. This is because “the majority in control may constitute an unruly horse if not checked[7]” These instances have been codified in Section 300 CAMA.

When can the “minority” be entitled to sue?

Section 300: Provides that the court on the application of any member, may by injunction or declaration restrain the company FROM:

(a) “Entering into any transaction which is illegal or ultra vires”[8]: In Yalaju-Amaye V A.R.E.C, the court allowed a minority shareholder to sue on breach of articles of association.

(b) “Purporting to do by ordinary resolution any act which by its constitution or the Act requires to be done by special resolution”: the shareholder would be allowed to sue where the majority does not adopt the proper course-Cotter V National Union of Seamen.

(c) Doing “any act or omission affecting the applicant’s individual rights as a member”: Since the Memo and Article are binding contracts between the members and co and members inter-se. Therefore a breach of these contracts which affects the member personally is actionable. See Edokpolo and Co Ltd V Sem-Edo Wire Industries Ltd.

(d) “Committing fraud on either the company or the minority shareholders where the directors fail to take appropriate action to redress the wrong done”[9]: In Burland V Earle, fraud was defined as when the minority appropriate to themselves assets of the company[10]. In Estmanco (Kilner House) Ltd V Greater London Council, fraud was deemed to encompass both common law and equitable considerations. In Associated Registered Engineering Co Ltd V Yalaju-Amaye, the court held that any act which would amount to an infraction on fair dealing or abuse of confidence can entitle the minority to sue. In Cooks V Deeks, the directors of a company obtained a contract of the company in their own names. The court held that the benefit of the contract belonged to the company in equity.

(e) “Where a company meeting cannot be called in time to be of practical use in redressing a wrong done to the company or to minority shareholders”[11]; and

(f) “Where the directors are likely to derive a profit or benefit, or have profited or benefited from their negligence or from their breach of duty[12].

In the above listed instances, the law allows the minority to apply for a “declaration” or “injunction” only. No damages.

The Minority may sue by the following actions.

  1. Personal Action (Section 301(1) CAMA): where the right infringed is personal to the plaintiff shareholder. E.g. breach of the shareholder’s personal right or a contract between him and the company/wrongdoers-Omololu-Mulele V Ijale Properties Ltd and Others, Johnson V Grove Wood and Co.
  2. Representative Action (Section 301(2)): by a shareholder on behalf of (and with the consent of[13]) other aggrieved shareholders who also have an interest in the litigation. This prevents multiplicity of actions[14].
  3. Derivative Action (Section 303): This is brought by an applicant[15] on behalf of the company. I.e. to defend/enforce the company’s right-Omisade V Akande. The company should be joined as a party to the suit[16] so that it can be privy to the judgment resulting thereon[17]. 1. The plaintiff must show that the majority directors are the wrongdoers and if he (the plaintiff) does not sue, nobody else would sue. 2. The plaintiff must apply for the leave of the court (by originating summons[18]) which is at the court’s discretion to grant if it is satisfied[19]. 3. The plaintiff must be acting in good faith and for the benefit of the company. 4. He should come to equity with clean hands (meaning that he should not have participated in or benefited from the wrong complained of. Furthermore, that his claim should not be vitiated by his inequitable conduct). 5. He may be required to undertake to pay the cost of action if the suit turns out to be frivolous/unwarranted. 6. The case of AGIP Nigeria V AGIP Petroli International BV mandates that the applicant serves the wrongdoers with notice. Section 304 empowers the court to make deserving orders. It may authorize the applicant to control the conduct of the action in question, give directions.
  4. Winding up on Just and equitable Grounds (Section 408 CAMA): Section 408(e) CAMA provides that a company may be wound up by the court if it is of the opinion that it is just and equitable to do so. In certain instances, a shareholder may find it more appealing to have the court wound up the company. This has been done where the whole substratum/object[20] of the company failed[21], where the company became incapable of fulfilling its objects or its objects became impossible or illegal[22] or where it is formed for illegal purposes[23], where it is a sham, where the minority are unduly oppressed such that there is no confidence in the management[24], where there is a complete deadlock[25], where the co is small and (based on the facts and events) it would have been wound up if it was a partnership[26]. In Ebrahimi V Westbourne Galleries Ltd, a three-man private company was formed. Two out of the three removed one in accordance with the articles. It was held that it is just and equitable that the company be wound up because the mutual confidence has been breached as the third person reasonably expected to participate in the management of the company’s affairs. In Loch V John Blackwood Ltd, it was alleged that the statutory conditions as to general meetings were not observed, the balance sheet and account report had not been submitted, the wrongdoers were in the majority, and that without winding up it would be impossible to realize the true value of the shares. Winding up was decreed.
  5. The “Unfairly Prejudicial” Remedy (Section 310, 311 CAMA): this is a laudable remedy introduced by the Section 75 of the English Companies Act 1980 now re-enacted in Sections 310 and 311 of our CAMA. In Rigntower Holdings Plc, Gibson J noted that the test here is “unfair prejudice” not necessarily unlawfulness or illegality. The Jenkins Committee noted that “unfair prejudice” means the violation of fair play. In Williams V Williams, the court held that the oppressive conduct should be shown to be continuous. Under this remedy, the applicant is saying that the affairs of the company are being conducted in a manner that is unfairly oppressive and prejudicial to the interest of member(s) and also affecting him in his capacity as a shareholder of the company[27]. Upon receiving this complaint, the court may grant any of the remedies stated in Section 312(2)[28] In Re Saul D, Harrison and Sons Plc, the court noted that we should examine the conduct vis a vis the provisions of the articles. While in O’Neil V Phillips, the court held that fairness was to be determined by reference to general equitable principles. In this case, O’Neil (a manual worker) was promoted by Mr Philips rapidly to site supervisor and director then managing director and later he started receiving 50 percent of the profit. However when the company began to run down, Mr Philips did not gbadun/like O’Neil again and declared that he is no longer director and no longer received 50 percent profit. Mr O’Neil petitioned for winding up. Held that simple breakdown of trust between members should not suffice to wind up the company. In Re Ghyll Beck Driving Range Ltd, a father and son with 2 others incorporated a company with equal shares. The father fought with the petitioner and the relationship between the parties was strained. The affairs of the business was managed without consulting the petitioner. It was held that the petitioner was unfairly excluded but that did not suffice for a winding up. The court ordered the majority pay the petitioner off by purchasing his shares. In essence, this remedy is important where winding up would be extreme… the court can then use its discretion to award alternate remedies. This remedy is pretty simple as the claimants task is to prove unfairness. Furthermore, the application may be brought by persons other than members[29] as it can include -personal representatives or those vested with interest of the member, -present and former officers/members, -creditors of the company, the CAC, and any other person whom the court deems proper. Professor Abugu believes that by this provision, a floodgate has been opened[30].

Note however Section 408(E) CAMA allows for a company to be wound up on just and equitable grounds. This means that a stubborn client may insist onteh Ebrahimi situation. It is suggested that the Section be repealed.

In conclusion, Professor Abugu is of the opinion that the majority rule has now been abdicated for rule of law and justice and the rules on locus standi have been liberalized. Therefore, a minority shareholder is not totally voiceless in the face of injustice.

 

[1] See also Lord Jenkins in Edwards V Halliwell, B.P.R. Ltd V Awayewaserere, noted same.

[2] As in MacDougall V Gardiner, the court held that if the thing (irregular act) complained of can be ratified by the company, there is no use litigating about it. In this case, the chairman adjourned a meeting of the company without allowing a vote to be taken on the issue of adjournment. Two shareholders sued. The court held that ultimately a meeting would still have to be called wherein the majority would still have its way and ratify the irregular adjournment. Furthermore, in Burland V Earl, the court expressed its unwillingness to “interfere with internal management of companies acting within their powers…”

[3] On this, see also Mozley V Alston. Professor Abugu has noted that this rule prevents multiplicity of Legal Proceedings.

[4] However, the members in general meeting can alter the article to make them the proper representatives. They can also refuse to re-elect a director that habitually refuses to initiate proceedings for and on behalf of the company-John Shaw and Sons (Salford) Ltd V Shaw.

[5] See Smith V Croft (No.2) where the same situation was explained.

[6] Although Professor Abugu and Professor Olawoyin prefer to call the exceptions “instances where the rule in Foss V Harbottle would not apply” rather than calling them exceptions.

[7] Professor Abugu, Principles of Corporate Law in Nigeria.

[8] Same point was noted by Jenkins LJ in Edwards V Halliwell. Simpsons V Westminster Palace Hotel Co Ltd too.

[9] See Daniels V Daniels: Frank and Ors V Abdu: Prudential Assurance Co Ltd V Newman Industries (No.2).

[10] See also Menier V Hooper’s Telegraph Works.

[11] Hodgson V National and Local Government Officials Association.

[12] Daniels V Daniels, Alexander V Automatic Telephone Co,

[13] Melifonwu V Egbuj.

[14] Otuguor Ogamioba and Ors V Oghene and Ors. Professor Gower noted same.

[15] Section 309 defines the “applicant” used in Section 303 includes a current/former registered holder or beneficial owner, director/officer of the co, the CAC or any other person who in the discretion of the court is a proper person to make an application under Section 303.

[16] The company or its directors must be served notice to this effect so as to prepare and appear to defend the case.

[17] Third parties from whom the money of the company is to be recovered can also be joined

[18] AGIP V Petroli International BV and Ors, Rule 2 of the Companies Proceedings Rules 1992.

[19] Hodgson V N.A.L.G.O.

[20] Re International Securities Corp

[21] Re German Dates Coffee Co. in this case the company was incorporated to exploit a patent process. It could not obtain the patent for which it was formed to exploit. It was held that the substratum of the co has failed so it should be wound up.

[22] Re Suburban Hotel Co.

[23] Re Thomas Edward Brucemead and Sons.

[24] Loch V John Blackwood Ltd, Re Davies and Collect Ltd, Re Lundie Brother Ltd.

[25] Re Farmat Produce and Shipping Line Ltd, Idugboe V Oil Field Supply Ltd.

[26] For example, in a partnership, each partner owe one another a duty of utmost good faith. Therefore if one of the partners is unjustly excluded from the participation in the business it would amount to a breach of partnership obligations. Re Yenide Tobacco Co Ltd (approved in Lock V John Blackwood). Farmart Produce and Shipping Line Ltd V Establishment De Commerce General. Fasakin V Fasakin, UBN Ltd V Tropic Foods Ltd.

[27] Williams and Another V Williams.

[28] Section 312(2)Without prejudice to the generality of subsection (1) of this section, the court may make one or

more of the following orders that is, an order—

(a) that the company be wound up; (b) for regulating the conduct of the affairs of the company in future; (c) for the purchase of the shares of any member by other members of the company; (d) for the purchase of the shares of any member by the company and for the reduction accordingly of the company’s capital; (e ) directing the company to institute, prosecute, defend or discontinue specific proceedings, or authorising a member or the company to institute, prosecute, defend or discontinue specific proceedings in the name or on behalf of the company; (f ) varying or setting aside a transaction or contract to which the company is a party and compensating the company or any other party to the transaction or contract; (g) directing an investigation to be made by the Commission; (h) appointing a receiver or a receiver and manager of property of the company; (i) restraining a person from engaging in specific conduct or from doing a specific act or thing;(j) requiring a person to do a specific act or thing

[29] Scottish Co-operative Wholesale Society Ltd V Meyer.

[30] See however Re Legal Costs Negotiators Ltd, the court rejected the petition on the basis that since the applicants were majority shareholders they could prevent the minority from being unfair to them.

Isochukwu

Quite eccentric really

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