11/8/2011
Company Law I
Lecture 11/12:
Shareholder remedies
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Members in general meeting
• How do members exercise their powers?
• General meetings: AGM and EGM.
• Majority rule:
 Ordinary resolutions
 Special resolutions
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Scenarios
• Example 1: What if majority of shareholders vote in a
particular way at a meeting which is against the
interests of minority shareholders - can the minority
shareholders do anything?
• Example 2: What happens if directors breach their
duties - can any shareholder bring an action against
directors?
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Rule in Foss v Harbottle
• First limb: proper plaintiff principle.
• Second limb: irregularity principle.
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Corporate wrongs and personal wrongs
• Distinguish between:
 Wrongs done to the company (example 2 in slide
3)
→
Company has cause of action
 Wrongs done to particular shareholders or class of
shareholders (example 1 in slide 3).
→
Shareholder has (personal) cause of
action
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Wrongs to the company
• Proper plaintiff principle: Foss v Harbottle.
 Wigram VC: the fact that the general meeting (the “governing
body of proprietors”) lawfully confirms “the very acts which are
the subject of the suit” means that the derivative plaintiffs
should be denied to continue the litigation
 Rule:
 Underlying rationality
 What wrong can (or cannot) be ratified? →
 Wigram’s approach:
 Justice?
 “exceptions” to the rule in Foss v Harbottle
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Wrongs to the company
• The “No Reflective Loss Principle”
• Shareholder cannot recover for reflective loss (rule
against reflective loss):
 Prudential Assurance v Newman Industries Ltd [1982] Ch
204
 Johnson v Gore Wood & Co [2002] 2 AC 1
 Landune International Ltd v Cheung Chung Leung Richard
(HK CA)
 Waddington Ltd v Chan Chun Hoo [2008] HKEC 1498,
[2008] HKCU 1381 (CFA)
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Prudential Assurance v Newman Industries Ltd (No 2) [1982] Ch
204 (Chancery Division and Court of Appeal)
• Involving a self-dealing transaction, which is subject to a s/er
approval (?)
• Co’s loss
• s/er’s claim is reflective of co’s loss
• s/er’s loss? *diminution in the market value of shares+
• Rule:
• “Robbery of a cash box”
• Arguments made by the Prudential’s counsel
• What are the unexpected consequences if the s/er’s suit
proceeds?
• What if the co did not want to pursue?
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Johnson v Gore Wood & Co
[2002] 2 AC 1 (House of Lords)
• Further explained the “no reflective loss” principle
• Lord Bingham considered 5 heads of claim pleaded by
Johnson
• When can a s/er sue?
• Further distinguish co’s loss and diminution in the value of
s/er’s shares
• Does this mean that a co and s/ers cannot sue together?
• Exceptions to the “no reflective loss” principle
 Giles v Rhind
 Gardner v Parker
 Perry v Day
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Giles v Rhind [2002] EWCA Civ 1428, [2003] Ch 618
(Court of Appeal)
• What is the rule in this case?
• Court of Appeal:
“Even in relation to that part of the claim for diminution which could be
said to be reflective of the company’s loss, since if the co had no cause of
action to recover that loss the s/er could bring a claim, the same should be
true of a situation in which the wrongdoer has disabled the co from
pursuing that cause of action”
• How to apply Giles v Rhind rule?
 Gardner v Parker
Neuberger LJ: “the court must be satisfied that the sort of
circumstances described in Giles v Rhind … exist”
 Perry v Day → the def is disallowed to say …
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Wrongs to the company
• In summary, what is the “No Reflective Loss
Principle”?
 A def can be sued only once for the same loss
 In doing that, prioritize the co’s claim as a matter of principle
 Regardless of the type of claim (common law or equity), or the form of
remedy (compensation or restitution), or the status of the member
(majority or minority)
 The purpose of this principle is to prevent a person other than the co
suing for the loss
 (even when that person has a cause of action against the def, and
even if the cause of action is different from the co’s)
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Possible remedies
• Compensation or recovery for the company:
 derivative action as exception to the rule in Foss v
Harbottle (common law or under PT IVAA).
• Restraining unlawful or improper conduct:





derivative action
statutory injunction: s 3508
unfair prejudice: s 168A
members’ personal rights
class rights: ss 63, 63A
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Possible remedies
• Compensation or recovery for shareholder:
 unfair prejudice: s 168A
• Other orders:
 unfair prejudice: s 168A
• Winding up:
 winding up of the company where just and equitable: s
177(1)(f)
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Derivative actions - common law
• Ultra vires or unlawful conduct (recovery of
compensation or property for company):
 Edwards v Halliwell [1950] 2 All ER 1064 at 1067
• Fraud on the company by wrongdoers in
control of the company:
 Edwards v Halliwell [1950] 2 All ER 1064 at 1067
• Interests of justice?
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Edward v Halliwell
[1950] 2 All ER 1064 at 1067
•
•
•
•
Still applies the proper plaintiff rule
Jenkins LJ: the rule in Foss v Harbottle is no more than 2 points.
Jenkins LJ: there are 3 exceptions to the rule in Foss v Harbottle.
The difficult one: “fraud on minority” exception to the Foss v
Harbottle rule
• Don’t be misled by the label “fraud” here: what’s the fraud?
• 2 criteria
• 2 significant flaws in this Foss v Harbottle approach
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Fraud on the company
• Cook v Deeks [1916] 1 AC 554
Toronto Construction
Cook Deeks Deeks Hinds
Dominion Construction
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Fraud on the company
• 2 elements: fraud + control
• Fraud:
 wider than common law fraud
 is negligence covered? (Pavlides v Jensen; Daniels
v Daniels)
• Control:
 voting power in general meeting
 nominee shareholders: Pavlides v Jensen
• Establishing standing:
 Waddington Ltd v Chan Chun Hoo [2008] HKEC
1498, [2008] HKCU 1381 (CFA)
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Statutory derivative action - PT IVAA
• Member can bring action on behalf of company in
relation to misfeasance: ss 168BB, 168BC.
• Leave is required.
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Statutory derivative action - PT IVAA
• Relevant factors (s 168BC(3)):
 lt appears to be prima facie in the interests of the
company.
 There is a serious question to be tried.
•
•
•
•
Re F & S Express
Re Myway Ltd [2008] 3 HKLRD 614
Effect of ratification: s 168BF
Common law actions still possible: s 168BC(4)
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Members’ personal rights of action –
general law
• Not derivative action.
• Examples:
 Action done by ordinary resolution where special
resolution required: Edwards v Halliwell
 Denial of voting rights: Pender v Lushington Contraventions
of articles? (see s 23)
 Restraining ultra vires I unlawful conduct: Hope v
International Financial Society (1876) 4 Ch D 327; and see
also s 350B.
 “Fraud on the minority”
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Pender v Lushington (1877) 6 Ch D 70
(Court of Chancery) (Master of the Rolls)
• The Master of the Rolls (i) granted Pender an injunction; (ii) held
that Pender had a right to sue in the co’s name; and (iii) a further
right to sue in his own name
• Jessel MR: *Pender+ has a right to say: ‘whether I vote in the
majority or minority, you shall record my vote, as that is a right of
property belonging to my interest in this country, and if you refuse
to record my vote I will institute legal proceedings against you to
compel you.’
• Rationality: an individual right in respect of which he has a right to
sue
• “constitutional rights” cases vs. “procedural irregularity” cases
• What if the member waives?
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Statutory derivative action - PT IVAA
• Fraud on the minority.
 Equitable doctrine of fraud on a power.
 Shareholders are not fiduciaries.
 But s/ers cannot exercise power in a way which
secures some personal or particular gain which
does not fairly arise out of the subjects dealt with
by the power and is outside or inconsistent with
the contemplated objects of the power.
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S 168A: unfair prejudice
• s 168A(1): “Any member of a company who
complains that the affairs of the company are being
or have been conducted in a manner unfairly
prejudicial to the interests of the members generally
or of some part of the members (including himself)
... may make an application to the court by petition
for an order under this section.”
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When is conduct unfairly prejudicial?
• Both unfairness and prejudice must be established: Re
Taiwa Land Investment Co Ltd.
 Specific factors rather than general fairness review power: Re
Saul D Harrison & Sons Ltd [1995] 1 BCLC 4
 One group of such rules is in relation to the equitable
considerations category
 Umbrella category: legitimate expectations (informal contract-like
understandings): O’Neill
 Sub-category: quasi-partnerships: Ebrahimi
• Prejudicial conduct is conduct which causes detriment
or damage
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When is conduct unfairly prejudicial?
• Conduct which infringes legal rights of members; or
• Situations where equity would intervene to give
effect to what is considered to have been the true
intentions of the parties by restraining the exercise of
legal rights.
• O’Neill v Phillips
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O’Neill v Phillips [1998] BCC 405; [1999] 2 BCLC 1
• 1st instance: O’Neill’s petition was rejected. *why?+
• Court of Appeal: a “quasi-partnership” → legitimate
expectation
• Phillips appealed.
• House of Lords: O’Neill’s decision was not the result of
anything wrong or unfair which Phillips had done.
• Lord Hoffmann discussed: (i) ‘unfair prejudicial’; (ii) legitimate
expectations; and (iii) was Phillips unfair?
• (i) the CA chose this concept to free the court from technical
considerations of legal right and to confer a wide power to do
what appeared just and equitable.
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O’Neill v Phillips [1998] BCC 405; [1999] 2 BCLC 1
• Warner J in Re J.E. Cade & Son Ltd said: the court … has a very
wide discretion, but it does not sit under a palm tree.
• Lord Hoffmann: to apply fairness, context and background are
very important. The background has 2 features.
• These features suggest that unfairness means …
• Lord Hoffman’s approach to “fairness”
• “cross-check” one question
• (ii) legitimate expectations: an example exemplified in Re Saul
D. Harrison plc
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O’Neill v Phillips [1998] BCC 405; [1999] 2 BCLC 1
•
•
•
•
•
(iii) Was Phillips unfair?
To take the shareholdings first:
To take the sharing of profits second:
Held:
To recap:
 What’s Lord Hoffmann’s approach in applying the unfair prejudice
remedy?
 What is the meaning of “legitimate expectations”?
 What does the equitable considerations category of the unfair
prejudice remedy actually do?
 What are the key elements in this case?
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Some examples
• Persistent breaches of articles or shareholder
agreements
• Directors’ breaches of fiduciary duties
• Improper alterations of articles
• Breaches of understandings that equity would
uphold: cf O’Neill v Phillips
• Other examples: see Sweet and Maxwell’s Company
Law in Hong Kong.
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Orders under S 168A(2)
• Orders:
 Restrain the conduct complained of
 Authorise proceedings to be brought on behalf of company
 Appoint receiver or manager of whole or part of the
company’s
 Property
 Regulate conduct of company’s affairs in future
 Obliging majority or the company to buy minority shares
 Any other order as the court thinks fit (eg alter
memorandum or articles)
 Damages (but not for the company’s loss).
• Relationship between s 168A and derivative action:
Re Chime Corp Ltd (CFA).
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S 177(1)(f) Winding up
where just and equitable
• Relationship with s 168A.
• Examples:
 Substratum disappeared
 “Quasi-partnerships” or “in substance
partnership”: Ebrahimi v Westbourne Galleries Ltd
[1973] AC 360
Company
Ebrahimi
Nazar
Nazar’s son
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Ebrahimi v Westbourne Galleries Ltd
[1973] AC 360
• Ebrahimi sued for just and equitable winding-up
• 1st instance: granted
• Lord Russell: in a quasi-partnership co, majority exercising power in
a general meeting under the articles to remove a director from his
office and exclude him from participation in the management of
business does not constitute a just and equitable ground for
winding up unless power is not exercised bona fide in the interests
of co
• 2nd instance
• Lord Wilberforce: a quasi-partnership co suggests that a limited co
is more than a mere judicial entity, number of people behind it is
not equitable consideration
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Ebrahimi v Westbourne Galleries Ltd
[1973] AC 360
• What are the equitable considerations?
• Partnership law
• Expulsion case: the question is whether it is equitable to allow
one to make use of his legal rights to the prejudice of his
associates? → usually, to remove a director is acceptable
unless the removed director undertakes the burden of
proving fraud or mala fides
• Is there a potential basis for a winding up order under the
just/equitable ground?
• Lord Wilberforce went through the 1st trial ruling in details
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Ebrahimi v Westbourne Galleries Ltd
[1973] AC 360
• Holding: if co is deemed to be a quasi-partnership, s/er
rights/powers in the general meeting are not limited to the articles,
co, bona fide for the benefits of the co as a whole, also limited by
“equitable considerations”
• How to apply “equitable considerations” here?
• What else (or other elements) did the court look for?
• Does this element guarantee a just/equitable winding up?
• How to understand this quasi-partnership company?
• Piecing the corporate veil?
• Lord Wiberforce: 3 criteria of relevance
• Ebrahimi – an easy case in the sense that …. What if …?
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Other statutory rights
• Statutory injunction: s 350B
• Special rights attached to shares:
 Alteration in accordance with s 63A.
 Applications to court under s 64.
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