#10846 - Shareholders’ Remedies - Business Associations 1

[8.05] Protecting the few from the company

• Redmond notes the many potential areas of disagreement between members (remuneration of directors, constitutional structure etc.) and the scope of the exploitation of minority interests that can result – especially in small proprietary companies and companies whose shares are illiquid where there are no opportunities for market exit

• Minority shareholders can also exploited by means such as:

  • Withholding dividends with profits distributed to the majority as salaries, bonuses etc.

  • Exclusion from management participation

  • Diversion of corporate assets to interests associated with the majority

  • Disproportionate allotments

  • Withholding information concerning company affairs or the making of fundamental changes that effect their interests etc.

• There are a number of constraints, such as equitable constraints, on the voting power of the majority in general meeting. Two fundamental principles contend with each other in this area

  • The identification of the corporate will with a decision of the majority

  • Doctrines which together prevent majorities in GM from acting oppressively towards minorities or using powers for an improper purpose even though they act within the scope of their powers

• The difficulty, however, lies in formulating a general standard for identifying the factors or conceptions that prompt judges to invoke the formulary – it requires the drawing of a distinction between a legitimate exercise of majority power, even though it can cause dissension and disappointment amongst the minority, and the use of powers that is over-reaching and unfair.

  • Differing conceptions of justice and fairness, the claims of the majoritarian principles and the diversity and complexity of competing interests are reflected by the clear and unambiguous standards

[8.10] Shareholder litigation

• Giving shareholders legal standing is another way to protect their interest. Such standing exists in terms of a personal right to bring a cause of action, and a corporate right

  • The latter presents difficulties since it displaces the rule that gives directors the powers to litigate for the company. However a potential reason for running contrary to this is where the alleged wrongdoers are the directors/senior managers. If such a safeguard were not present their duties would be merely aspirational. There are others (fraud on the minority)

[8.15] The general principle

• The second of the two competing principles above was traditionally expressed in Allen v Gold Reefs of West Africa - “The power of the three fourths majority to alter the company articles must like all other powers, be exercised subject to those general principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities. It must be exercised not only in the manner required by law, but also bona fide for the benefit of the company as a whole, and it must not be exceeded”

• This was not the same as the director’s duty to act in good faith since it does not carry a fiduciary obligation

• But in Gambotto v WCP the HCA rejected this test as inappropriate and adopted the language of ‘oppression and improper purpose’ to define the vitiating overreach by majorities.

• GM resolutions that offend this general principles are often called a fraud on the minority

• Redmond notes that the cases which follows are attempted to be put into categories but notes that it is difficult to be confident that these categories identify the principles that prompt courts to invoke the doctrine or provide a reliable predictor of future judicial decision

• Thus in Crumpton v Morrine Hall Jacobs J commented that “no amount of legal analysis or analytical reasoning can conceal the fact that the decision in the past turned, and must turn ultimately, on a value judgment formed in respect of the conduct of the majority – a judgment formed not by any strict process of reasoning or bare principle of law but upon the view taken of the conduct”

[8.45] Alterations of the company’s constitution that prejudice shareholder rights

• A company’s constitution can be altered by special resolution – but this is subject to any requirements already placed in the company’s constitution

• One challenge under the ‘fraud upon the minority’ doctrine concerns resolutions for the alteration of company constitutions that prejudicially affect the rights of some members

• The classic statement in Allen v Gold Reefs that powers of majorities must be exercised in ‘bona fide for the benefit of the company as a whole’ was made in the context of reviewing an alteration of company articles

  • But the difficulty under this and other formulations of the fraud doctrine is distinguishing between alterations that are proper, even if they prejudice/extinguish shareholder rights and those that offend the equitable limitation

  • The worst of such alteration is introducing machinery to appropriate the minority’s shareholdings