Mark, Nancy and Peter were friends who were partners in a business selling books
ID: 1150778 • Letter: M
Question
Mark, Nancy and Peter were friends who were partners in a business selling books. They set up Progress Pty Ltd (Progress), with each of them holding 1000 shares each. They are also directors of Progress. There is an understanding between them that they will all participate in management and share equally in the profits of the business. They choose not to pay dividends and instead take profits as directors’ fees
Mark and Nancy argued with Peter, over Peter’s constant complaints about their lack of diligence and combined their membership votes to remove Peter as director. Peter received no dividends and income after his removal as a director.
Discuss the statutory remedies available for Peter as a minority for oppression and unfair prejudice.
Directors are required to act in the best interest of the company. This includes acting in the best interest of members overall but not in the interest of creditors, employees or any other stake holders.
Discuss this statement critically with relevant case law.
Explanation / Answer
The concept of majority rule states that, ‘within the company structure, a minority shareholder will have effective title of control over the way in which the company operates’. This has been recognized from a long time because the control of company affair by majority might lead to the oppression of the minority class.
The common form of act which constitute unfair prejudice include:-
1. the failure by directors to register valid share transfer.
2. exclusion from management affairs when there is a legitimate expectation of participation.
3. diverting business, granting loans to another company in the interest of majority shareholders or directors.
4. awarding by the majority shareholders themselves an excessive financial benefits.
5. abuse of power and breach of the provisions in the articles of association.
6. Failure to hold annual general meetings and submit accounts before the members and depriving a member of his right of knowing the state of affairs of the company.
Section 459(1) of the companies Act gives a cause of action to file a suit in a competent court of law on the ground that the companies affairs are being or have been conducted in such a way that it is unfairly prejudice the interest of its shareholders generally or individually. There is no need that the act of prejudice have occurred but if merely proposed. The law presumes for the equitable consideration of all the shareholders. For an act to be prejudice, it is not necessary to show that the majority acted in bad faith or acted deliberately to treat the minority shareholders unfairly. It is simply needed to show that the consequence of the conduct amounts to the unfair prejudice to interest of the minority shareholder.
In O’Neill Vs. Phillips(1999) 2 BCLC 1 it is observed that a shareholder will not be entitled to complaint against unfairness of conduct where there has been no breach of terms of conduct on which the shareholders agreed with the company. Thus the court has to check whether the conduct complained is a breach of company’s Articles of Association and the power that shareholders entrusted with the board of directors.
The court does not entertain any petition where legitimate expectations outside of the contents in the company’s public documents namely memorandum of association, articles of association, prospectus and listing agreements.
The conduct of unfair prejudice include exclusion from management when there is an expectation of participation, repeated failures to office, lay accounts before the members, conduct in the general affairs of the company which diminishes value of shareholders, a majority shareholder diverting business to another company or awarding themselves excessive financial benefits.
If the court satisfies that the complaint of unfair prejudice has occurred, as per section 461(2) the court pass possible orders for appropriate relief. These reliefs include:-
a. make order to regulate the conduct of the company’s affair in future.
b. make orders to the company to refrain from doing or continuing such conduct.
c. authorise the complainant for civil proceedings in the name and on behalf of the company
d. issue order for the purchase of minority shares by the majority. This order is passed on the ground of divorce of relationship between the minority shareholders and the company and the relation is unlikely to recover.
e. Requiring the company to do an act which complained as omitted to do.
f. Requiring the payment of compensation to the aggrieved person due to the commitment of act or omission of the act.
g. Requiring the dissolution or winding up of the company.
Peter case
A minority shareholder is one who does not exert control over the affairs of the company. But a majority shareholder is always exerting an absolute control over the affairs of the company, its management and its board of directors. Here peter became a minority shareholder as other members combined their shares with a malifide intention to remove Peter from the company
Mark, Nancy and Peter are directors of the company. The company directors are person who are entrusted with responsibility to manage a company. Most of the affairs and business of a company are managed by the directors. The directors are in a fiduciary relationship with the company. They are prohibited from ding an act prejudicial to the company. In Hospital Products Ltd. Vs. United state surgical corporation, it is observed that the directors cannot and should not use his position to receive personal gains.
Section 132(1) of the Companies Act 1965 states that a direct must act in bona fide when exercising his powers for a proper purpose and he must act in the best interest of the company.
In Re W & M Rohit Ltd. Rohit a company director entered into a contract with another company to provide pension for his wife after his death. The court held that the contract is not binding on the company and the Rohit did not act in the best interest of the company.
In Howard Smith Ltd. Vs. Ampol Petroleum it was stated that the directors who use their power to issue shares for the purpose of destroying majority or creating a new majority which is not previously had breached their fiduciary duty to act in the interest of the company.
The act of Mark and Nancy amounts to the breach of fiduciary duty towards the company. They combined their membership votes to remove Peter.
As Mark and Nancy combined their shares peter became a minority share holder and the act of Mark and Nancy is not binding on the company as their act amounts to the breach of fiduciary relation with the company.
The director’s power to act in the best interest of the company is vested with the Articles of Association. But situation may arise which pose a question that whether the directors are acted in good faith and in the best interest of the company or not.
In such situations the courts have to look in to the Articles of Association to see the powers of the directors and the members. If the powers on a special matter are not specifically mentioned the courts have to refer article 73 table A of the Companies Act. Here the courts distinguish between the powers conferred on the directors by the Articles of association and the special approval of shareholders needed for the conduct of the directors.
In the removal of Peter case the if the power is not conferred on other board of directors by the Articles of association Peter can be removed by a special resolution passed by the General meeting of the company. Here neither such power is mentioned nor is special resolution passed. Hence the removal of Peter is invalid.