“COMPANIES STAND TO BE GOVERNED ACCORDING TO THE WISHES OF

THE MAJORITY, NO MATTER HOW ‘UNFAIR’ THE CONSEQUENCES MAY BE

TO THOSE WITH MINORITY INTERESTS.”

EXECUTIVE SUMMARY

 COMPANIES DEALT ACCORDING TO THE WISHES OF THE MAJORITY

Minority shareholder protection has always been a contentious issue in Company law. With the

possibility of majority shareholders abusing their position of power without considering the damage

they may possibly cause to the interests of minority shareholders, effective minority protection

remedies remain an important part of a good Corporate Governance System. The majority rule and

proper claimant principle allows the majority shareholders to administer the matters of the company.

Both of these principles were reasserted in the famous 19 th century case of English courts known as

Foss v Harbottle (1843). Critics have often pointed out that the ruling in Foss acts as a foe to the

individual rights of the minority shareholders as it endorses the idea that it is not usually open to

individual shareholders to start an action on behalf of the company. Truly, this set of circumstances

makes one to believe that the minority must be bound by whatever the majority decides then

howsoever ‘unfair’ the consequences are.

 REMEDIES AVAILABLE FOR THE MINORITY SHAREHOLDERS

Despite the control and over-riding power that rests in the hands of the majority shareholders, English

law was quick to depart from the stringency given in Foss v Harbottle (1843). English law made sure

that the already weak position of the minority shareholders was not further weakened, and the statute

complemented by common law emerged to preserve the rights of the minorities. The Common law

has allowed the minority shareholders to use the courts system in case the majority superseded its

powers by conducting an ultra vires or illegal act, initiating fraud on minority, or breaching an

individual’s rights. On the other hand, the statutory protection of minority rights is inclusive of
different recourses such as the derivative claims (encapsulated under s 260 of the Companies Act

2006) or the petition to either wind the company (s 122 of the Insolvency Act 1986) or to pursue for

court’s relief in case an ‘unfair’ or ‘prejudiced’ act against the minority (s. 944 of Companies Act).

The different protections offered to the minorities, however, do not circumvent the principles finalized

in Foss but instead seek to enforce the different recommendations of the Law Commissions which

suggested for the provision of an improved derivative procedure, possibly more flexible and

accessible to masses. Thus, the statutory procedure and common law gave more recourse to the

minority shareholders.

 ARE THE AVAILABLE REMEDIES TO MINORITIES SUFFICIENT?

With regards to the discussed remedies each of these minorities protection rights are envisaged to be

used in a particular scenario and remain an effective tool to defend against the authoritative tendency

of those in majority. Despite the availability of these rights, they are not very easy to access as there

are many boxes to be ticked before the minority shareholders can even initiate the case. With section

122 of the Insolvency Act 1986’s remedy being extremely difficult to achieve, the aggrieved parties

are mostly left with the derivative claims or s.944 of the 2006 Act which have their own complexities.

In order to put the matters into a perspective the UK’s system of protection is also compared to that of

US’s. Despite its stringency one can still conclude with the fact that UK does provide its minority

shareholders with requisite rights and securities. The system may have its discrepancies and

weaknesses but there is no way that the system allows the majority to treat its minority unfairly.
 1. INTRODUCTION

Companies and their constitutional structures are usually managed by the majority
shareholders. This power and discretion associated to the majority comes at the expense of
the rights of minority shareholders. Duty bound by the wishes of the majority, the minority
shareholders come under the sword of the general principle of majority rule, which however,
must not be mistaken for allowing the majority to imposing unfair decisions on others.
Therefore, in order to curb the ‘unfair’ consequences from affecting the rights of the minority
shareholders there are statutory and common law guarantees promised to them. The stringent
criterion1 that suppresses the voice of the minorities has its limited exceptions and the essay
will discuss most of them and try to evaluate the affectivity of the rights and securities
already given to the minority shareholders in company law.

From the common law exceptions (fraud on minority, ultra vires act, irregularity etc) to
statutory protections as given under Insolvency Act 1986 (hereinafter mentioned as IA 1986)
and Companies Act 2006 (hereinafter mentioned as CA 2006), the efforts made by the
legislators to protect the minorities must be appreciated. Despite the highs and lows of these
protections and the non-interventionist policy of the courts, one can easily detect a trend of
protection and how minority shareholders in the UK are not simply stranded without any
solution when it comes to that.

2. COMPANIES DEALT AS PER THE WISHES OF THE MAJORITY

Minority shareholders often have to face the ‘foe of ancient origin’2in the face of the 19th

century case of the English courts famously known as Foss v Harbottle (1843)3. Having re-

1
Foss v Harbottle[1843] 67 ER 189

2
Lee Shih, 'Minority Shareholders’ Remedies: How to Slay The Dragon' The Malaysian Reserve (2017)

<https://themalaysianreserve.com/2017/04/03/minority-shareholders-remedies-how-to-slay-the-dragon/>

accessed 25 March 2020.

3
Ibid at 1
asserted the majority rule and locus standi4 of companies i.e., the capacity to initiate legal

proceedings rested with the Company only, the two headed dragon of Foss acted as a bar

against the minorities and their rights. Both of these heads are discussed below:

2A) The general principle of Majority rule

The democratic principle of majority rule 5 places considerable power in the hands of

those who constitute at least 51% of the company i.e., the group formulating the

major share of a company. This majority rule allows the major shareholders to enjoy

the discretion of making the decisions for the company and the minority group is

thereby obligated to accept the decisions imposed on them.

This lawful power given to the majority groups is often said to act as an oppressive

force against the minority shareholders. Despite the relentless criticism associated to

this general principle, no initiative has ever been taken to replace it. Jenkins LJ in

Edwards v Halliwell (1950)6 explained that the majority principle allows the decision

made by the majority to be binding on all and no individual action may be maintained

against it “for the simple reason that, if a mere majority of the members of the

company….is in favour of what has been done, then cadit quaestio”.7

Therefore, even though the majority rule endorses the fact that the majority trumps the

minority group, it in no way suggests that the majority will overshadow the minority

group with unfair decisions only. Any decision that may result in the unfair

4
John Lowry and Alan Dignam, Company Law (7th edn, Oxford University Press 2012), at 188

5
Leonard S Sealy and Sarah Worthington, Sealy and Worthington's Cases And Materials In Company Law (10th

edn, Oxford Univ Press 2013), at 638

7
Ibid, at para 1066
 consequences has a tendency to impact the company as well, so in most of the cases

the majority makes the call that is in favour of all.

2B) The proper claimant principle and the internal management principle

The other head discussed under Foss is the proper claimant principle. As per this

general principle, “company is a legal person, with its own corporate identity,

separate and distinct from the directors or shareholders…. If it is defrauded by a

wrongdoer, the company itself is the one person to sue for the damage”.8 In other

words, in case a minority shareholder alleges to be aggrieved he or she may not be

entirely eligible to bring an individual case against the other shareholders as per the

principle.

In the same light, the courts usually avoid interfering within the internal management

issues of the company as they deem that companies are “best left to the judgement of

their directors who are assumed to be more commercially aware than

judges”.9Believing that the courts lack the jurisdiction to interfere with the

“management of every Playhouse and Brewhouse in the Kingdom,” 10they clearly

expressed their non-interventionist agenda by leaving it on the company itself to seek

for redress in case it is required.

Although the above discussed principles portray an unfavourable picture for the minority

shareholders, however, these principles must not be taken as the source of creating the

already weak position of the minority. Despite the fact that considerable powers rests in the

hands of the majority shareholders, the minorities are not left empty handed. Rather there are

8
Wallersteiner v Moir (No 2) [1975] QB 373, at 390

9
Carlen v Drury (1812) 35 ER 61

10
Ibid
different remedies available for them and different exceptions to the Foss’s two headed

dragon that will be discussed below.

3. REMEDIES AVAILABLE FOR THE MINORITY SHAREHOLDERS

The rights of the minority shareholders and the famous majority rule principle appear as two

striking ends with no common point of reconciliation. On one hand, letting the matter slide in

favour of the majority shareholders tends to oppress the minority, while on the other hand,

allowing the same to go in favour of the minority may impede the ongoing business or

hamper the financial growth of the company. Therefore, the need of reaching an optimum

balance11 has been the top priority of the law makers.

The fact that the need of balancing the rights of the majority and the minority is felt like a

necessity now is a proof in itself that companies cannot be simply directed by the unfair

majority decisions. Foster J insisted on adopting the practices that may further assist in

keeping a check against the unfair acts of the majority that may be used to dilute the already

weak position of the minorities in the case of Clemens v Clemens Bros Ltd (1976), 12where he

based his findings on ‘equitable considerations’13 and commented clearly that “the majority

shareholder was not entitled to exercise her vote in any way she pleases”.14

There have been several attempts made to ensure that the rights of the minority shareholders

are preserved along with the integrity of companies remaining intact. For this common law

and statutory law have tried to lay foundations of a system where no one is left without a

11
Ibid n4

12
[1976] 2 All E.R. 268

13
Ibid n4, at p 170

14
Ibid n12
remedy. The securities promised to the minority shareholders will be discussed in detail

below:

3A. Derivate claims: Safeguarding minority rights under ‘statutory law and the

shadow of common law’15

Companies are like legal persons that possess distinct identities. In case of any violation of

their rights it is on them to approach the courts. However, this fundamental understanding

leaves the minority shareholders without a remedy or a possible solution in case they are

aggrieved by the decision of the majority shareholders who control the company. In such an

instance, an individual may be able to drive a claim and sue the majority shareholders. This

remedy of derivative claims is explained in the statute and is also supplemented by case law.

The idea of giving relief to a group within the company originates from the idea that the

majority should have used its power in order to benefit “the class as a whole, and not merely

individual members only”16and in a case where the majority does not take into account the

interests of minority then a solution becomes necessary.

3A.I) Exceptions to Foss v Harbottle (1843)

Jenkins LJ in the case Edwards v Halliwell (1950) commented in detail on the

reservations to the stringent rules given in Foss v Harbottle (1843). He mentioned the

reservations to the Foss ruling under four categories. Creating special instances where

the minority shareholders could acquire the legal standing and take the matter to

courts for conflict resolution, a new avenue of law was discovered. The four

exceptions have been enlisted and briefly explained as follows:

15
Ibid n4, at p. 194

16
BritishAmerica Nickel Corpn v MJ O’Brien Ltd (1927) AC 369
 i) In an instance where the act of the majority members is ultra vires or illegal

In Prudential Assurance Co. Ltd,17a pre CA 2006 case, the courts clearly explained

how the ultra vires acts of the majorities will be barred from ratification. There is a

plethora of case law that suggests the same. However, the CA puts a condition on this

point of law18 and the post 2006 position for the ultra vires acts is a little different. As

per the latest law, if an act is pursued under a legal obligation, then howsoever ultra

vires the act is, it cannot be used as a basis for initiating a case by the minority

shareholders.

The pre CA position which gave outright protection to minorities from ultra vires acts

is now restricted to a certain extent. One may argue the weak position of minorities

pursuant to Sec. 40(4); however, it is to be noted that if minority shareholders are

given unfettered liberty of suing the majority shareholders then “there would be a

real risk of multiplicity of suits and vexatious litigation”.19

ii) Matters when the majority drifts away from some special procedure;

In cases where the majority attempts at drifting away from a particular stipulation

such as the Articles of Association etc. then the minority earns the locus standi to fix

the wrong. In such a case, minorities may attain an order of injunction or specific

performance from the courts that may assist in preserving their rights or proper

procedure as was done in Halliwell (1950).20

17
Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204

18
Companies Act 2006, S. 40(4)

19
Ibid n4, p 187

20
[1950] 2 All ER 1064
 iii) An individual member’s rights are infringed;

In case of having his or her personal rights infringed, a minority shareholder is given

the capacity to sue the majority shareholders. However, this right is not an absolute

right as the person basing their case on this exception will have to satisfy the courts

that a ‘right’ was infringed and the matter at hand was not simply a matter of internal

irregularity.

The relief one can attain under this exception is debatable since there are two difficult

conditions that one needs to satisfy before the case even takes a tangible form before

the courts.

iv) Or a case where the minority shareholders have been defrauded and the

‘wrongdoers’ are in authority

Clearly, this is the only true exception to the rule in Foss where the ‘fraud on

minority’ allowed them to approach the courts and seek for redress. However, the

defrauded minority had to satisfy the courts as to who was the ‘wrongdoer’ was

and how they controlled the Company. The cases where the wrongdoer is an

“insider” are relatively difficult for the minority shareholder to initiate and Lord

Denning commented on the situation in the following words: “In one way or

another some means must be found for the company to sue.. Otherwise the law

would fail in its purpose. Injustice would be done without redress”.21

There was no strong derivative claim procedure till 2006. It was only after CA 2006 that a

comprehensive system of bringing derivative claims was brought to the picture. However, the

common law exceptions still remain in force. The derivative claims and its standing on

providing relief to minority shareholders as given in the statute will be discussed now.

21
Ibid at 8, at 390
3A. II) Derivative Claims under Part 11 of Companies Act 2006

Derivative claims are one of the remedies available to the minority shareholders who have

been possibly abused by the majority rule, the principle whereby the decisions of the majority

bind the minority. The background to this remedy can be found in the context of separate

legal personality i.e., the companies possessing the locus standi to sue or be sued and the

non-interventionist inclination of the courts who constantly avoid from intermingling with the

internal matters of any company. This set of arrangement usually puts the minority

shareholders in a very weak position.

S.260(1) of the CA 2006 governs the statutory recourse of derivative claims for the aggrieved

minority shareholders. In order to better understand the effectiveness of s 260’s operation, it

will now be elaborated upon in steps. Firstly, to initiate a claim under s 260, one needs to

obtain the court’s permission. A theoretical evaluation of the process may seem simple and

easy to process, however, in practice obtaining permission is much harder. In a case where

the majority wilfully authorizes or ratifies an act constituting breach of duty then permission

may be relatively easier to seek, given in the circumstances expounded in Sections 263 and

268 of the CA 2006. On the other hand, permission to initiate a case against majority may be

withheld by the courts, especially where the conduct of the majority was in pursuance of

promoting the company’s interests then even if that came at the expense of the rights of the

others. Moreover, alternative remedies such as the s. 994 of the CA are usually considered as

a bar for continuing derivative action by the Courts as was held in Franbar Holdings22 case.

Secondly, the petitioner’s motive for bringing the claim is examined especially from the

viewpoint of the Directors in order to ascertain that there is no mala fide intention behind the

lodged case. For this the courts view the case from the position of a director and assess if they

22
Franbar Holdings vs Patel [2009]1 BCLC I.
were acting under their legal obligations to the company as in s.172 and if they would have

considered about bringing the issue to the courts as well. If the answer to this is found in

affirmative, then a derivative claim can be successfully initiated. The same factors were

thoroughly considered in Iesini and others v Westrip holdings ltd (2009) 23as well and the

continuance of the derivative claims was debated upon. What follows from this discussion is

that although derivative claims provide an exception for the minorities in contrast to the

majority favouring rule in Foss the fact that permission from the court has to be sought makes

it a discretionary remedy.

However, the importance of this statutory procedure cannot be underscored either due to the

complexities within the remedy for a minority shareholder in establishing his or her locus

standi to sue and the costs of litigation involved in doing so. Clearly, the law lawmakers have

tried their best to achieve a balance between the majority’s liberty and minority’s rights by

giving a remedy to the weak but at the same time assuring that the sword given to them is

only used as a shield.

3B. Safeguarding minority rights under statutory law

3B.I) Winding up on ‘just and equitable’ grounds24

The IA 1986 gives the courts the discretion to wind up a company bringing it to a deadlock in

case it believes it to be the ‘just and equitable’ solution to the issue at hand. Winding up of a

company is a serious step; therefore, the courts require strong grounds before even

considering the claim of the petitioner. It goes without saying that this security is not readily

available to the minority shareholders and its tangibility may even be doubted at times. This

brings to question whether IA 1986’s remedy is adequate enough or not? The answer lies in

23
[2009] EWHC 2526 (Ch)

24
Insolvency Act 1986, Sec. 122(1)(g)
simple speculation only. Despite it being true that the security under sec. 122(1) (g) is usually

the last resort available to the minority shareholders and in case of any other remedy, judges

tend to dismiss the case,25 the draconian nature26 of this remedy must and does make it

difficult to plead.

Also, it is very unlikely that a person, who himself is a part of the company, would ever want

its deadlock until and unless circumstances as unique as those in Ebrahimi v Westbourne

Galleries Ltd (1973)27arise. Different grounds such as fraud, substratum having failed,

justifiable loss of confidence and others have been discussed in Ebrahimi28 for the sec. 122(1)

(g) petition to be made. For the success of such a petition, petitioner has to satisfy the courts

about there being no other remedy. In case there is an alternate remedy, the petition is

dismissed29 and if the petitioner at any stage indicates any other inclination as the Petitioner

implied his willingness for selling his shares in Re a Company (No 002567 of 1982) (1983)30,

then such an alternate remedy is allotted.

3B.II) Unfair prejudice under CA 200631

Section 994 of CA 2006 has created a relatively easier recourse for the aggrieved minority

shareholders who can lodge a petition against the unfair and prejudicial acts of the majority

and seek remedy for it. ‘‘Under s 994 the court has a very wide discretion as to the relief it

25
Ibid, Sec. 125(2)

26
Ibid n 4, p 217

27
Ebrahimi v Westbourne Galleries Ltd [1973] AC 360

28
Ibid

29
Sharafi& Anor v Woven Rugs Ltd & Ors [2010] EWHC 230

30
Re a Company (No 002567 of 1982) (1983) ChD 1984

31
Companies Act 2006, at s. 994
may grant’’32 to those who approach the courts. The section is applicable on general

companies or even quasi-partnerships.

However, the courts did not always have such discretion. The decision of the legislators to

give courts a little freedom on the matter and discretion to rule as to what they think is fit for

the aggrieved party can be traced back to the Cohen Report33which deliberated on the tied

hands of the minority shareholders. It goes without saying that legislators have tried to ease

down the tensions for the shareholders who have complains of exclusion from management,

breach of fiduciary duty or at times remuneration division issues with the directors. In short,

the Cohen Report formulated the path of sec. 210 of the Companies Act 1948. This section

was translated as the ‘oppression’ remedy but due to its narrow interpretation of the word

oppression as being “burdensome, harsh and wrongful”,34 the need of bringing some

flexibility to the system was felt and thereby Jenkins Committee35 extended the avenue for

which a Petitioner could reach out to courts which subsequently laid down the foundation of s

994 CA 2006. This only re-asserts the fact that the remedy for unfair and prejudicial acts of

those in authority has always been a priority of the law makers and s 996 CA remedies is the

result of it.

The effectiveness of s 994-996 remedies is a point of moot point. With time, courts have

shown more inclination of ensuring that an aggrieved party that approaches court is served

with some sort of relief. For this the courts have interpreted acts as random as not paying

debts to be the ‘company affairs’36 for initiating the claim and puts the onus of satisfying the
32
Kiani v Cooper [2010] EWHC 577, at 39

33
Report of The Committee on Company 226 Statutory shareholder remedies Law Amendment (Cmnd 6659,

1945)
34
SCWS Ltd v Meyer [1958] 3 All ER 66, per Lord Simmond

35
Report of the Company Law Committee (Cmnd 1749 (1962)

36
Nicholas v Soundcraft Electronics Ltd [1993] BCLC 360
courts that the conduct in issue is “both prejudicial to the relevant interests and also

unfairly”37 on the petitioners. It is to be noted that the s 994 does not give the petitioner any

kind of unilateral right that may allow him or her to withdraw their assets from the company.

Instead, this section has only tried to preserve the sanctity of the concept ‘fairness’. It is true

that the petitioner has to satisfy many conditions before his claim gets accepted, but this

remedy and its adequateness cannot be doubted either as there is a plethora of case law to

suggest so.

4. ARE THE AVAILABLE REMEDIES TO MINORITIES SUFFICIENT?

After a thorough analysis of the available remedies and protections, it might be observed that

they are not overreaching but there merely exists adequate room for improvement. This is

why Joseph C H Lee38 in his thesis remarks that there remains room to relax the stringent

requirements of bringing a derivative action or that more instances of fraud in minority

should be realized by courts. Perhaps the reason why minority shareholder has only been

given adequate protection is that it will open flood gates of litigation, but these fears have not

been realized as observed in Mission Capital plc v Sinclair & Anor (2008).39

5. BRIEF COMPARISON WITH FOREIGN JURISDICTION RULES

37
Re a company (No 005685 of 1988), ex parte Schwarcz (No 2) [1989] BCLC 427 448, per Pearson Gibson J

38
Joesph C H Lee, “Minority Shareholder Protection in Takeovers: Private Actions” [2005] Institute of

advanced legal studies, Univeristy of London

39
[2008] EWHC 1339
To be able to put things into perspective and to better evaluate whether the securities

provided to minority shareholders in UK are enough or not one can do a brief comparison

with another jurisdiction, such as the US.

The position of law in UK that a ‘loser pays’ 40 i.e., in case a petition loses the plaintiff will

have to pay damages to the defendant is one of the major reasons that there are so less

derivative claims in UK as compared to the US. The fact that winning a case is always

uncertain and tends to take long durations and in case where the loser has to pay for his loss,

makes the idea of lodging a petition a big decision to begin with. Whereas in the USA the

contingency fee rules are applicable which acts as a great incentive for the lawyers and the

plaintiffs, who in case of winning the case are allotted with generous funds.

Another important point to note here is how the UK’s position is influenced by the market

force, whereas that of US is influenced by state governments. 41 Critics suggest that it is due to

the political aspect of US’s structure that its framework is able to deliver practically. The

inter-lobbying, party politics and democratic nature of the structure help the system to remain

up to date. Whereas in the UK, reforming these laws is not as easy and the legislators have to

tackle many hurdles before they can propose any tangible amendments.

6. CONCLUSION

Having discussed the remedies of minority protection and their merits and demerits if a

holistic view of the extent of the minority protection is taken then the rights given to minority
40
James Kirkbride, Steve Letza and Clive Smallman, 'Minority Shareholders and Corporate Governance' (2009)

51 International Journal of Law and Management, at 209

51 International Journal of Law and Management, at 212-213

especially when the majority shareholders want to bring a dramatic change in the company.

Even though the derivative procedure remains a weak recourse, often circumvented by other

common law and statutory remedies like illegality and fraud exceptions or the unfair

prejudice remedy in s 996 of the CA 2006, it still plays an important part in assuring that the

helpless shareholder does not give up on the system. Truly, all the remedies in the statute

complemented by case law re-assert the fact that the actions of the majority tend to have

repercussions and not all of their ‘unfair’ decisions can be imposed on the minorities.

In my view, the pendulum cannot be allowed to swing too far in any direction especially in

favour of minority so that they do not transform into an internal impediment within the

system that may consequently hamper the growth of the company. Rather the pendulum

should be kept in a balance and that is exactly what the system has been trying to achieve.