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‘The current laws in England and Wales relating to theprotection of minority shareholders’ interests are unfitfor purpose.’

Critically discuss the above statement.

Introduction

The protection of minority shareholders’ interests in

England and Wales are safeguarded by a small selection of

remedies for either their own personal losses, or losses

to the company (e.g. diverting company contracts to the

directors themselves).1 The former is the most common and

is available under s994 of the Companies Act (CA) 2006; a

petition for ‘unfairly prejudicial conduct’ (UPC), or by

a court order requesting the winding-up of the company

under Part IV of the Insolvency Act (IA) 1986. The latter

is protected by the derivative claim, codified and

refined by ss260-265 CA 2006. However, the shifting

boundaries of these remedies illustrate the courts’

dilemma in balancing the competing interests of minority

shareholders and the company’s right to manage itself

without court interference.2

1 Sykes, J. (2009) “Minority Shareholders and their Rights” Charles Russell Briefing Note, p.22 See Lord Davey’s judgment in Burland v Earle [1902] A.C. 83

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The significance of striking this balance is critical.

Minority shareholders in smaller companies, without the

current legal remedies could be ‘locked in’ to their

investment in the company by the exploitation of the

majority.3 This is especially true of minority

shareholders in smaller companies where there is no

market to sell their shares and so they must seek legal

action against wrongdoers for a remedy.4 Therefore, the

purpose of the remedies is to provide minorities redress

for their rights,5 but also to uphold the founding

principles of company law that safeguard this balance.

This essay will first discuss the development of the

derivative claim and the reasons the Law Commission (LC)

suggested such drastic reform, before arguing that the

claim has been made inaccessible and unattractive due to

high litigation costs and uncertainty on the criteria for

proceeding to trial. Secondly, that the petition for UPC

has been expanded beyond its intended jurisdiction and

3 Sealy, L. and S. Worthington, (2013) Sealy & Worthington’s Cases andMaterials in Company Law, (Oxford: Oxford University Press), p.6384 ibid5 Chief Justice Holt in Ashby v White [1703] 1 E.R. 417 cited in Joffe QC, V., D. Drake, G. Richardson, D. Lightman, and T. Collingwood, (2011) Minority Shareholders: Law, Practice, and Procedure (Fourth Edition) (Oxford University Press: Oxford, UK).

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now encroaches on the other remedies at the expense of

fundamental company law principles. This has unbalanced

the delicate equilibrium between protecting minority

shareholders and the need for companies to be able to

manage themselves without court interference. The

shortcomings of the English and Welsh system will be

contrasted with alternative jurisdictions in order to

elucidate similar problems with different methods of

enforcing minority shareholders’ rights and highlight

potential solutions. It should be noted that the WUO will

be discussed more briefly than the other remedies as it

is seen as a last resort, and has similar qualifications

to the petition for UPC. Squeeze-out remedies are outside

the remit of this essay because they are only applicable

regarding takeovers, not general breaches of minority

shareholder rights.

The development of the Derivative Claim

The common law surrounding minority shareholders’

rights derives from the rule in Foss v Harbottle.6 That is

when a wrong is committed against the company, only the6 (1843) 2 Hare 461

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company can bring an action i.e. the ‘proper plaintiff’

principle. Of course, strict adherence to this principle

would make for injustice whenever majority shareholders

were the ones wronging the company.7 Thus, the Court of

Appeal established an exception to the rule.8 This is when

the complaint concerns fraud by those ‘in control of the

company’.9 In these circumstances a member of a company

could bring a derivative claim on the company’s behalf.

Practically, however, proving a fraud on the company

was committed by those in control of it meant that the

trial was ‘complex and obscure’, requiring rigorous

investigations which were to the detriment of smaller

companies who would struggle with the high costs of

litigation.10 In Re Elgindata, the forty-three day hearing

cost eight times more than the original price of the

shares.11 Foss also made clear that the court would act in

accordance with the ‘internal management’ principle i.e.

7 Lord Davey in Burland v Earle cited in Boyle, 2002, pp.25-268 Edwards v Halliwell [1950] 2 All ER 1064 cited in Steinfeld QC, A., M. Mann QC, R. Ritchie, E. Weaver, H. Galley, S. Adair, N.McLarnon and A. Cloherty, (2007) Blackstone’s Guide To The Companies Act 2006 (Oxford: University Press), p.1049 ibid.10 Law Commission cited in Dignam, A. (2011), Hicks & Goo’s Cases & Materials on Company Law (Oxford: University Press), p.467 11 [1991] BCLC 959

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commercial decisions about the internal management of the

company will not be interfered with.12 This judicial trend

had been evident for many years.13

The LC was aware of the need to reach this balance and

made it clear in their consultation paper. Although

minority shareholders’ may need protection from abuse,

the LC was of the opinion that companies should not be

unnecessarily interfered with by vexatious claimants, so

there should be ‘tight judicial control at all stages’ to

make the derivative claim ‘exceptional’. 14 The Company

Law Review Steering Group (CLRSG) agreed and incorporated

these points into their review for the Department of

Trade and Industry.15

In light of these recommendations, ss260-265 CA 2006

introduced a statutory derivative claim aimed to be ‘more

modern, flexible and accessible’,16 which replaced the

12 Tang, J. (2012) “Shareholder Remedies: Demise of the derivative claim?”, UCL Journal of Law and Jurisprudence, 1(2), pp.179-18013 See Lord Elden’s judgment in Carlen v Drury (1812) 35 E.R. 6114 Law Commission cited in Reisberg, A., (2008) “Derivative Claims under the Companies Act 2006: Much Ado About Nothing?” Electronic copy available at: http://ssrn.com/abstract=1092629, p.615 Reisberg, 2008, pp.6-716 Law Commission, ‘Shareholder Remedies’ (Law Com No 246, 1997)

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common law in the area. This new claim slightly widened

the scope of the remedy (to include negligence for

instance),17 whilst respecting the fundamental company law

principles that the rule in Foss protects – a company’s

legal personality and majority rule.18

Under s261 CA 2006, the new procedure introduced a

two-stage preliminary hearing before the substantive

trial. Its purpose is to protect companies from

unmeritorious claimants who wish to harass the company,19

but also to determine whether there are sufficient

grounds for the case to go to trial. In addition to the

‘irregularity’ principle safeguard (that denies claims

based on technicalities),20 the imposition of a prima facie

stage for the derivative claim has kept the floodgates to

litigation firmly closed,21 which may be the reason why it

17 Steinfeld et al., 2007, pp.105-10618 Hannigan, B. (2009) “Drawing boundaries between derivative claims and unfairly prejudicial petitions” Journal of Business Law, 6, p.60819 Hannigan, 2009, p.60820 Browne v La Trinidad (1887) 37 Ch D 1 (CA)21 Milman, D. (2012) “Protection of minority shareholders in the post-Companies Act 2006 era” Company Law Newsletter, 323, pp.1-2

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took three years for the first English derivative claim

to proceed to a full trial.22

Not only does this respect the balance required

between the protection of minority shareholders and non-

intervention by the courts, but it also ensures that

unmeritorious claims are kept to a minimum as the claim

must be refused under s263(2)(a) CA 2006 if no director

(with their s172 ‘duty to promote the success of the

company’ in mind) would bring a claim. If some would and

others would not, discretionary factors under s263(3)(b)

are to be used,23 including the disruption to the

business, the prospects of a successful claim, and

negatively affecting the company’s reputation.24 On the

flipside, the Canadian system makes these factors

compulsory for judges to consider.25 This approach ensures

a fair and objective guideline that applies to all cases,

creating much greater certainty than the English system.

At common law it was determined that a derivative

claim would be defeated if there was ‘a real opportunity’

22 Kiani v Cooper [2010] B.C.C. 46323 Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch)24 Tang, 2012, p.18925 Reisberg, 2008, p.7

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that the wrong would be ratified,26 but s239 CA 2006 now

ensures that a wrongdoing director, and members connected

to him, may not take part in a vote to ratify the wrong.

The court should also consider if the claimant would be

barred from bringing an action due to the company

ratifying the wrong.27

This raises issues of excessive intervention and

clearly meddles with the internal management of the

company. It stands to reason that a minority shareholder

may be unable to bring a claim due to a lack of voting

power – this is just the reality of majority rule.

S263(2)(b) CA 2006 respects this principle by barring

acts that are ratified by the company.28 But for the court

to go beyond the company’s articles of association into a

Wednesbury-style test for unreasonableness, seeks to

expand the scope of the remedy.29 It becomes a matter for

judicial discretion under s263(3) as to whether a

director, with the s172 duty in mind, would be for or

against the claim.30 This, in conjunction with the lack of26 MacDougall v Gardiner (1875) 1 Ch. D. 1327 Franbar Holdings Ltd v Patel and Ors [2008] EWHC 1534 (Ch)28 Hannigan, 2009, pp.609-61029 Milman, 2012, p.230 ibid

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a ‘fixed standard of proof’ in CA 2006 for deciding which

claims will go to trial, means that there is still much

uncertainty surrounding this remedy, which puts

petitioners off,31 as some potential defendants may be

successful where other fail.32 The Canadian system appears

to address these concerns.

Even with this protection, wrongdoer control is not

completely removed. Vinelott J in the court of first

instance for Prudential Assurance Co Ltd v Newman Industries

recognised that in larger companies, wrongdoers may be

able to decipher the outcome of a resolution by ‘proxy

votes’.33 S262(2) CA 2006 allows a member of a company to

take over the derivative claim if the company has

proceeded in a way that would be deemed an ‘abuse of the

process of the court’, or the company ‘failed to

prosecute the claim diligently’.34 Although the wrongdoer

may have influence in making other members abstain from

voting, giving them de facto control – something the courts

31 Tang, 2012, pp.209-21032 ibid, p.209; Per Newey J in Kleanthous v Paphitis [2011] EWHC 2287 (Ch)33 [1981] Ch 25734 ss262(2)(a)-(b) Companies Act 2006

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are unable to deal with without encroaching on the

internal management principle further.

An alternative approach that might make some headway

in this area is the European approach, which instead of

deciding whether a member can bring a claim on behalf of

the company based on a prima facie permission hearing,

claimants only have to pass a certain threshold of shares

in the company (in Germany this is one per cent but in

Austria it is as high as ten).35 This method illustrates a

sufficient interest in the company in either having

enough shares to meet the threshold themselves or joining

with other minority shareholders to bring a claim.

However, the weakness of this method is that the courts

may interpret it widely (as in Germany) which has opened

up the legal system to a flood of unmeritorious claimants

seeking to interfere in the company’s operations.36

A significant limitation to the derivative claim is

costs. Predominantly, there is no automatic right that

the company indemnifies the claimant if the claim

35 Gelter, M. (2012) “Why do shareholder derivative suits remain rare in continental Europe?” Brooklyn Journal of International Law, 37(3), p.85936 Vutt, M. (2010) “Systematics of Shareholder Remedies—Originsand Developments” Juridica International XVII, p.195

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proceeds to trial, 37 despite Lord Denning’s reasoning

that as the claimant is acting for the company, the

company should pay.38 Applicants still open themselves up

to the possibility of substantial costs if the court does

not use its discretionary power in the applicant’s

interest and may be subjected to paying the defendants

litigation costs if the claim fails.39 In Kiani, Proudman J

ordered a partial indemnity, arguing that the defendant

should bear some of ‘the risk of litigation’.40 By failing

to reform this discretionary guideline into a statutory

right, it will be in very rare circumstances that a

minority shareholder will be better off litigating,

rather than just selling their shares.41 Thus, finances

continue to be ‘a formidable barrier’ to the derivative

claim,42 meaning that in practice, solicitors often advise

clients against seeking this remedy.43

37 Civil Procedure Rules 19.9E; Tang, 2012, p.20238 Wallersteiner v Moir (No. 2) [1975] QB 37339 Tang, 2012, p.20240 Kiani v Cooper [2010] B.C.C. 463 cited in Tang, 2012, p.20341 Reisberg, 2008, p.5242 Milman, 2012, p.2; Tang, 2012, pp.209-21043 Bermans LLP, “Minority shareholder – rights & remedies”. Available at: http://www.bermans.co.uk/publications.php?5.articles.view.227 Last accessed [03/04/2014]

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This is tied closely with the principle of ‘no

reflective loss’,44 which was reaffirmed by the House of

Lords in 2002, meaning that personal losses to minority

shareholders’ shares that are reflective of the losses

suffered by the company, are irrecoverable.45 This was

seen as the ‘death knell’ of the derivative action for

public companies as such losses could be recovered in a

personal action.46 As the courts will also be much less

likely to permit a claim if there is alternative remedy,

47 this principle illustrates the reluctance of the court

to interfere in matters of internal management, where it

must be conceded that majority rule is the only plausible

way to run a company.48

Unfairly Prejudicial Conduct

44 Prudential Assurance Co Ltd v Newman Industries (No. 2) [1982] 1 All E.R. 35445 Johnson v Gore, Wood & Co [2002] 2 AC 1 HL; Gardner v Parker [2004] 2B.C.L.C. 55446 Boyle, 2002, p.24; Gray, A. M. (2012) "The statutory derivative claim: an outmoded superfluousness?" Company Lawyer, 33(10), p.29647 Cooke v Cooke [1997] 2 BCLC 28 Ch D48 Sealy and Worthington 2013, p.637; See North-West Transportation Co Ltd v Beatty (1887) 12 App. Cas. 589

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The most attractive remedy available to minority

shareholders is a petition under s994 CA 2006 for UPC.

Prior to the CA 2006, this remedy was in s210 of the CA

1948 and required ‘oppressive’ behaviour – a term

narrowly interpreted by the courts in order to subdue

vexatious claimants. However, the term proved too

conservative and the Company Law Committee recommended

that a reformed version be much wider in order to allow

more claims to proceed.49 Under s994, a claim is available

where ‘the company's affairs are being or have been

conducted in a manner that is unfairly prejudicial’

(s994(1)(a)) or ‘an actual or proposed act or omission of

the company…would be so prejudicial’ (s994(1)(b) CA

2006). Consequently, the term ‘unfairly prejudicial’ is

the most open to interpretation in the section, and the

courts have spent a lot of time discussing it in case

law. As s994 CA 2006 is a reestablishment of s459 CA

1985, it is still relevant to discuss cases prior to the

2006 act.

49 cited Dignam, A. & J. Lowry (2012) Company Law (Oxford: University Publishers), p.226

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Initially the courts remained reluctant to open up the

interpretation of the term and made clear that ‘trivial

or technical breaches of contractual agreements governing

the shareholders’ relationship or of directors’ fiduciary

duties; would not be successful.50 This is evidenced by

the term ‘prejudice’ which at first was defined to a

commercial context only, which severely restricted

potential claimants (Re Unisoft Group Ltd (No. 3)).51 This

restriction was strengthened by Neill LJ’s judgment in Re

Saul D Harrison & Sons, which emphasised that a successful

petition must be both prejudicial and unfair. A good

example where one was found without the other is Nicholas v

Soundcraft Electronics Ltd. A parent company was unable to pay

its debts to its subsidiary company due to being in

financial trouble, the result of which was prejudicial

treatment of the subsidiaries members’ interests.

However, the Court of Appeal maintained that although it

was prejudicial, it was not unfair to withhold payment of

debt when trying to keep the company solvent, as this was

‘a reasonable commercial judgment’ on the part of the50 Re BSB Holdings LTD (No. 2) [1996] 1 BCLC 155 cited in Joffe et al., 2011, p.26151 [1994] B.C.C. 766

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parent company. It would have been wholly unfair to

chastise the parent company for making tough commercial

decisions in the benefit of the company and thus the

qualification that the act complained of must be both

prejudice and unfair appears to have balanced the

competing interests of minority shareholders and the

courts reluctance to intervene.

The only House of Lords authority to have considered

the meaning of ‘unfairly prejudicial’ is O’Neill v Phillips.52

Hoffman LJ reinterpreted his own concept of ‘legitimate

expectation’ from Re Saul D Harrison & Sons, to ensure that the

courts did not further expand it but instead ensure it is

applied rationally,53 suggesting that Hoffman himself had

difficulty finding the right balance between protection

and non-intervention. Nevertheless, Hoffman LJ

interpreted unfairness to include the ‘legitimate

expectation’ of minority shareholders in the way the

company is run and its affairs conducted.54 In this sense,

the concept is ‘elastic’ and allows judges to mould the

concept of UPC to the context of the case in front of52 [1999] B.C.C. 60053 [1994] B.C.C. 47554 ibid

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them.55 It has also allowed the courts to see beyond the

fundamental legal rights a member has, to those that are

subject to equitable expectations associated with the

type of membership.56 Thus what is unfair between family

members who run a business may not be for ‘sophisticated

investors who are capable of making formal arrangements

to protect their own interests’.57

This expansion of the remedy’s scope has created

discrepancies in what constitutes ‘unfair’ depending on

the type of business. Whether it is a large public

company, a quasi-partnership or a small family business,

the meaning of unfair is dependant upon the circumstances

of the company.

The case of Re Coroin Ltd58 states the importance of this

distinction in recent case law.59 Here there were four

major shareholders, one of whom (B), wished to take

control of the company by buying shares from another

55 Re Macro (Ipswich) Ltd [1994] 2 BCLC 354, 404 cited in Tang, 2012,p.20756 Re Coroin Ltd [2012] EWHC 2343 (Ch) cited in Milman, 2012, p.357 ibid58 [2013] EWCA Civ 78159 Griffin, S. (2013) “The significance of determining the nature of a company in the context of an unfairly prejudicial conduct petition” Company Law Newsletter, 341, p.2

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shareholder (P). When the parties could not agree on

terms, B purchased another twenty-five per cent of shares

in the company through the acquisition of a subsidiary

company from the third shareholder (S). B then acquired

the fourth shareholder’s (R) thirty-five per cent share

by transfer of a charge on the loan that R used to

purchase their shares in the first place. Thus, B

successfully gained control of the company.

Both of these moves by B bypassed the pre-emption

clause that forbade the transfer of shares except under

very narrow circumstances that were included in the

company’s articles. As these acquisitions were strictly

speaking, within the articles, P had no reasonable

grounds to argue UPC against their interest. However,

Griffin contends that if the company had been a quasi-

partnership, the legal rights conveyed in the company’s

articles would have been subject to equitable

considerations on the ‘transfer of shares provisions’, P

probably would have been successful.60

The significance of this is that the scope for the UPC

petition is expanding. Now judges are able to look at60 ibid.

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contextual factors when deciding whether the expectations

of a minority shareholder should be protected if the

business was expected to run as a quasi-partnership. For

minority shareholders in public or larger private

companies, they are confined to only clear evidence of

breaches of codified legal rights61 - a distinction that

was not included in the act.

This judicial feeling, that the whole remedy is open

to very wide interpretations, is due to the provision for

potential remedies under s996. These include regulating

future conduct of the company (s996(2)(a)), having the

company perform the duty neglected or cease the UPC

(s996(2)(b)(i) and (ii), and most commonly, ordering the

majority shareholders to buy out the minority’s shares in

the company (s996(2)(e)).62 In valuing the shares, Hoffman

contemplated that a discount may be applied to reflect

the lack of control in the minority of shares. This

restrictive measure gives judges the discretion to

rebalance the rights of the company and petitioners with

company law principles. Although, it should be noted that

61 Re Astec (BSR) Plc [1999] B.C.C. 5962 Hannigan cited in Gray, 2012, p.297

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discounts cannot be guaranteed in every case and very

much depends on the facts of the case.63

But the greatest protection for minority shareholders

is in the courts wide ranging powers to grant any remedy

‘as it thinks fit’,64 which allows the court to create a

‘bespoke’ remedy for the circumstances of each case,65

such as ordering the majority to sell their shares to the

minority shareholders.66 This has been to the benefit of

petitioners as even those seeking corporate relief (when

the remedy is supposedly for personal remedies, only

meaning such a claim should be struck out for abuse of

process), are manipulated by judges in order to promote

what they see as the most just outcome. The implication

of this approach has been that the boundaries of the

available remedies and on what grounds they can be

implemented have become unclear. 67

The WUO

63 Sykes, 2009, p.364 s.996 Companies Act 200665 Per Briggs J, in Sikorski v Sikorski [2012] EWHC 1613 (Ch) cited in Milman, 2012, p.366 Re Brenfield Squash Racquets Club Ltd [1996] 2 BCLC 184 cited in Dignam, 2011, p.44867 Gray, 2012, p.295

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The final remedy available to minority shareholders is

winding-up the company,68 which effectively ‘ends’ the

company and distributes its remaining assets to the

members.69 It requires that the claimant has clean hands

and can evidence an ‘adequate surplus [of assets] for

distribution to the members after a winding-up’.70 As it

is unlikely that minority shareholders will be able to

accrue the three quarter majority in favour of the

resolution required for ‘voluntary’ winding-up,71 they can

seek a court order to wind-up the company on the grounds

that it is ‘just and equitable’ to do so.72 This is seen

as an option of last resort.73

What is ‘just and equitable’ is wide ranging and

includes breaching ‘rights, expectations and

obligations’.74 It will be considered unreasonable, if

another remedy is available and not pursued.75 On these

68 Part IV Insolvency Act 198669 Dignam & Lowry, 2012, p.21770 Sykes, 2009 p.271 s.84(1)(b) IA 198672 s122(1)(g) Insolvency Act 198673 Gray, 2012, p.295; Griffin, S. (2010) “Alternative shareholder remedies following corporate mismanagement – whichremedy to pursue?” Company Law Newsletter, 281, p.374 Per Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd [1972] 2 W.L.R. 128975 Re Woven Rugs Ltd [2008] B.C.C. 903

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grounds, the WUO will be unlikely to be granted although

it is discretionary under s125(2) IA 1986.76 In contrast,

s996 tells the court to give ‘such order as it thinks

fit’ and can even order the company to be wound up if it

is deemed the most equitable remedy.77

Both the petition for UPC (s994 CA 2006) and the WUO

(s122(1)(g) IA 1986) make clear that a claimant must

prove that their interest in the company was subject to

‘inequitable conduct of a type destroying a previous

relationship of mutual trust and confidence’. Similarly,

case law precedent like O’Neill makes clear that the ‘just

and equitable’ requirement is very similar to the

requirement for ‘unfair prejudice’ under s994 CA 2006.78

As a result of the Court of Appeal’s decision in Hawkes v

Cuddy,79 conduct that is deemed enough to warrant winding-

up the company ‘will almost always amount to unfair

prejudice for the purpose of s994’.80 This, among the

other factors discussed concerning the overlap of

76 Griffin, 2010, p.377 Re RA Noble & Sons (Clothing Ltd) [1983] B.C.L.C. 27378 O’Neill v Phillips [1999] B.C.C. 600, per Lord Hoffman79 [2009] EWCA Civ 29180 Griffin, (2010), p.3

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remedies and the problems they invoke make s994 petitions

the most common for minority shareholders.

How to tackle overlapping remedies?

Quite clearly from the evidence shown there is an

overlap between the remedies that comes from wide

judicial interpretations of the statute. The case of

Gamlestaden Fastigheter AB v Baltic Partners Ltd for example, made

clear that the Privy Council had no problem with the idea

that a petition for UPC could be used for a corporate

claim.81 This view was later supported by the Court of

Appeal in Re Tobian Properties,82 while in Clark v Cutland, the

Court merged a petition for UPC and a derivative claim to

provide corporate relief using s996 CA 2006.83 This wide

interpretation of s994 by the courts has become

commonplace for private companies.84

On the one hand, this flexibility goes much further to

minority shareholders in circumstances where they are

unable to bring a derivative claim due to the rule in81 Gamlestaden Fastigheter AB v Baltic Partners Ltd [2007] UKPC 2682 [2012] EWCA Civ 998; [2013] B.C.C. 9883 [2003] EWCA Civ 810 cited in Tang, 2012, p.20684 Re Allied Business & Financial Consultants [2009] EWCA Civ 751 cited Griffin, 2010, p.2

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Foss, but corporate relief would be the most appropriate

remedy. According to Hoffman LJ, this way to bypass Foss

‘was one of the purposes of’ the act and should be used

where appropriate. On the other hand, the effect of these

cases is the erosion of the founding principles that

ss260-265 and s994 were built upon.85 The derivative claim

is for corporate claims, on behalf of the company,

whereas the s994 petition and WUO are personal remedies.

Without a rigid distinction, the ‘proper plaintiff’

principle becomes redundant, ergo, undermining precedent

that seeks to ensure minority shareholders are not

favoured above their companies. 86

Gray and Hannigan both argue that the petition for

UPC’s scope has ballooned out of proportion into the

jurisdiction of the other remedies and out of line with

Parliamentary intentions, regarding the member bringing a

personal or corporate claim. Such claims negatively affect

the reputation of companies and may result in no benefit

whatsoever. If corporate relief was sought under s260,

the fact that no other members would endorse the action,

85 Hannigan, 2009, pp.607-60986 Hannigan, 2009, p.607

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as it would not promote the company’s success (s172 CA

2006), would mean it would be denied at the permission

stage (s263(2)(a) CA 2006).

Hannigan firmly asserts that the way to tackle these

issues is to reaffirm the boundaries of the UPC petition

by scrutinising initial pleas more rigorously in the

first stages of the petition, as to determine if the

action pursued is the most applicable.87 The author goes

on to argue that petitioners that seek corporate relief

under a s994 petition in order to bypass the rules laid

down in Foss and Prudential should have their cases struck

out.88 Tang agrees, suggesting that this can be

accomplished by providing definitive guidelines for the

two-stage procedure for derivative claims.89 Here, the

stricter Canadian system that ensures that a certain set

of factors are considered in all cases would provide

greater certainty for claimants on the merits of their

own case and may encourage more successful claims. If

these measures were adopted, and the indemnification of a

derivative claimant made a statutory right for the87 2012, p.62588 ibid.89 2012, pp.209-210

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reasons aforementioned, then these remedies would be much

better suited to protecting minority shareholders’

interests, whilst respecting the rules in Foss and

Prudential; safeguards against vexatious claimants that do

not bar legitimate claimants from seeking redress.

Conclusion

In summary, this paper has identified that of the

three available remedies to minority shareholders, each

of them has expanded its scope in recent case law

creating an overlap of jurisdiction. The derivative claim

is still costly and unlikely to proceed due to very

strict prima facie permission hearings, which would benefit

from strict guidelines as seen in Canada. These factors

ensure few petitioners seek this remedy, and even fewer

succeed. The UPC petition has become the remedy to seek,

as from this starting point the courts have given

corporate relief and WUOs where it thinks fit. Although

this is pragmatic and beneficial to minority

shareholders, it is at the expense of the Foss principles.

Finally, WUOs have been much more seldom, but the

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judiciary has sought to qualify them on the same grounds

as UPC petitions, making their tests interchangeable,

though not their scope for redress.

Despite the statutory safeguards in place to stop

unmeritorious claimants and ensure the most equitable

outcomes, the strength of these arguments against the

remedies being fit for purpose is overwhelming. This

pragmatic approach of the courts in some instances has

created a set of misapplied remedies that have generated

uncertainty and discrepancies between them. Additionally,

they now encroach on the founding principles of company

law established in Foss. In order to fix this, the

boundaries of the remedies must be reestablished by the

courts inline with Parliamentary intentions to rebalance

the reluctance of the courts and minority shareholders’

interests.

I, 1048490, declare that this piece of work contains 4000 words, excludingthis declaration.

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Bibliography

Bermans LLP, “Minority shareholder – rights & remedies”.Available at: http://www.bermans.co.uk/publications.php?5.articles.view.227 Last accessed [03/04/2014]

Boyle, A. J. (2002) Minority Shareholders’ Remedies (CambridgeUniversity Press: Cambridge, UK)

Dignam, A. (2011) Hicks & Goo’s Cases & Materials on Company Law(Oxford: Oxford University Press)

Dignam, A. & J. Lowry (2012) Company Law (Oxford:University Publishers)

Gelter, M. (2012) “Why do shareholder derivative suitsremain rare in continental Europe?” Brooklyn Journal ofInternational Law, 37(3), pp.844-892

Gray, A. M. (2012) “The statutory derivative claim: anoutmoded superfluousness?” Company Lawyer, 33(10), pp.295-302

Griffin, S. (2010) “Alternative shareholder remediesfollowing corporate mismanagement – which remedy topursue?” Company Law Newsletter, 281, pp.1-4

Griffin, S. (2013) “The significance of determining thenature of a company in the context of an unfairlyprejudicial conduct petition” Company Law Newsletter, 341,pp.1-4

Hannigan, B. (2009) “Drawing boundaries betweenderivative claims and unfairly prejudicial petitions”Journal of Business Law, 6, pp.606-626

Joffe QC, V., D. Drake, G. Richardson, D. Lightman, andT. Collingwood, (2011) Minority Shareholders: Law, Practice, andProcedure (Fourth Edition) (Oxford University Press:Oxford, UK)

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Law Commission, ‘Shareholder Remedies’ (Law Com No 246,1997)

Milman, D. (2012) “Protection of minority shareholders inthe post-Companies Act 2006 era” Company Law Newsletter, 323,pp.1-5

Reisberg A., (2008) “Derivative Claims under theCompanies Act 2006: Much Ado About Nothing?” Electroniccopy available at: http://ssrn.com/abstract=1092629,pp.1-53

Sealy, L. and S. Worthington, (2013) Sealy & Worthington’sCases and Materials in Company Law, (Oxford: Oxford UniversityPress)

Steinfeld QC, A., M. Mann QC, R. Ritchie, E. Weaver, H.Galley, S. Adair, N. McLarnon and A. Cloherty, (2007)Blackstone’s Guide To The Companies Act 2006 (Oxford: UniversityPress)

Sykes, J. (2009) “Minority Shareholders and their Rights”Charles Russell Briefing Note, pp.1-3

Tang, J. (2012) “Shareholder Remedies: Demise of thederivative claim?” UCL Journal of Law and Jurisprudence, 1(2),pp.178-210

Vutt, M. (2010) “Systematics of Shareholder Remedies—Origins and Developments” Juridica International XVII pp.188-198

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Cases

Ashby v White [1703] 1 E.R. 417

Browne v La Trinidad (1887) 37 Ch D 1 (CA)

Burland v Earle [1902] AC 83

Carlen v Drury (1812) 35 E.R. 61

Clarke v Cutland [2003] EWCA Civ 810

Cooke v Cooke [1997] 2 BCLC 28 Ch D

Ebrahimi v Westbourne Galleries Ltd [1972] 2 W.L.R. 1289

Edwards v Halliwell [1950] 2 All E.R. 1064

Foss v Harbottle (1843) 2 Hare 461

Franbar Holdings Ltd v Patel and Ors [2008] EWHC 1534 (Ch)

Gamlestaden Fastigheter AB v Baltic Partners Ltd [2007] UKPC 26

Gardner v Parker [2004] 2 B.C.L.C. 554

Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch)

Johnson v Gore, Wood & Co [2002] 2 A.C. 1 HL

Kiani v Cooper [2010] B.C.C. 463

Kleanthous v Paphitis [2011] EWHC 2287 (Ch)

MacDougall v Gardiner (1875) 1 Ch. D. 13

Nicholas v Soundcraft Electronics Ltd [1993] BCLC 360

North-West Transportation Co Ltd v Beatty (1887) 12 App. Cas. 589

O’Neill v Phillips [1999] B.C.C. 600

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Prudential Assurance Co Ltd v Newman Industries [1981] Ch 257

Prudential Assurance Co Ltd v Newman Industries (No. 2) [1982] 1 AllE.R. 354

Re Allied Business & Financial Consultants [2009] EWCA Civ 751

Re Astec (BSR) Plc [1999] B.C.C. 59

Re Brenfield Squash Racquets Club Ltd [1996] 2 BCLC 184

Re BSB Holdings LTD (No. 2) [1996] 1 BCLC 155

Re Coroin Ltd [2012] EWCA Civ 781

Re Elgindata Ltd [1991] BCLC 959

Re J Cade & Son Ltd [1992] BCLC 213

Re Macro (Ipswich) Ltd [1994] 2 BCLC 354

Re RA Noble & Sons (Clothing Ltd) [1983] B.C.L.C. 273

Re Saul D Harrison & Sons plc [1994] B.C.C. 475

Re Tobian Properties Ltd [2012] EWCA Civ 998

Re Unisoft (No. 3) [1994] B.C.C. 766

Re Woven Rugs Ltd [2008] B.C.C. 903

Sikorski v Sikorski [2012] EWHC 1613 (Ch)

Wallersteiner v Moir (No. 2) [1975] Q.B. 373

Legislation

Companies Act 2006

Companies Act 1985

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Insolvency Act 1986

Civil Procedure Rules 1998

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Research Trail

I first deconstructed the question to ask, what is the‘purpose’? To answer this I decided to read broadly on the remediesavailable to minority shareholders and their historicaldevelopment. This, I hoped, would offer indications as tojudicial trends towards helping or hindering petitioners.

For an introduction, I did a BPP Library search of theCompany Law section: Dignam

o Chapter 13: Majority Rule and Protection ofMinorities Law Commission

Dignam & Lowryo Chapter 10: Derivative Claimso Chapter 11: Statutory Shareholder Remedies

Sealy & Worthington o Chapter 13: Remedies for Maladministration of

the Company

BPP Library search for Minority Shareholder Remedies: Joffe et al. Boyle

o Chapter 1: The rule in Foss v Harbottleo Chapter 2: Shareholder actions by exceptionso Chapter 3: A new derivative actiono Chapter 4: The statutory minority remedies

After reading these introductory texts, it becameapparent that:1. The courts have always been reluctant to interfere in

the internal management of companies (e.g. Foss andBurland). Thus, the purpose of remedies is to provideprotection for minority shareholders (Ashby) withoutintervention in a company’s internal management.

2. The Law Commission made recommendations on the law inthe area (Dignam & Lowry/Sealy & Worthington/Joffe etal). Some, not all, were incorporated into CA 2006.

3. Winding-up is legislated separately by IA 1986.

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So, I performed a BPP Library search for ‘Companies Act2006’: Steinfeld QC, et al.

And, Westlaw Legislation search ‘Companies Act 2006’ /‘Insolvency Act 1986’: Companies Act 2006

o s33: Company’s constitutional obligationso s260-265: Statutory derivative claimo ss994-996: ‘Unfairly prejudicial’ conduct

Insolvency Act 1986o s84: Voluntary winding-up ordero s125(2): ‘Just and equitable’ grounds for

winding-up order

To understand how these statutory provisions wereapplied, I decided that it was best to search forjournals that would criticise the remedies using caselaw.

Thus, I performed a Westlaw journal search of ‘Minorityshareholder remedies’ refined by ‘UK’: Milman Griffin (2010)Both provided good insight into cases on how the remedieshave been moulded, (judicial discretion of the prima faciehearing and the overlap between remedies).

Westlaw journal search ‘derivative claim’: Tang Hannigan Gray ReisbergThese criticisms explained how the remedies (especiallys994) have been interpreted too widely, weakeningderivative claim and not fit for purpose.

I then asked, are there better alternative remedies inother jurisdictions and how are they interpreted?

Google search ‘Minority Shareholders’ Remedies Europe’: Gelter Vutt

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Case search Westlaw for all key cases cited and thensearched the judgments for keywords.e.g. ‘Indemnity’ in Wallersteiner led to my discussion ofcosts for which I searched www.legislation.gov.uk for‘Civil Procedure Rules 1988’.

The book by Joffe et al., highlighted the importance of thetype of company when establishing legitimateexpectations. This might be good evidence to show thecourts being more interventionist in recent case law.

So I performed a Westlaw journal search ‘quasi-partnership’ and ‘legitimate expectation’: Griffin (2013)This led to discussions of Re Coroin, and supported myargument.

To see the perception of the remedies in practice –Google search for ‘Minority Shareholders and theirRights’ and selected briefing notes from commercialfirms: Charles Russell (Sykes) Bermans LLP

My final argument was formed:Although CA 2006 addressed many issues with the commonlaw remedies, recent cases have expanded the scope of theremedies insofar as they now overlap. This has, in turn,sought to widen the scope for minority shareholderprotection at the expense of the internal management andproper plaintiff principles.

I, 1048490, declare this research trail is 600 words, excluding the title and thisdeclaration.

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