CORPORATE MANAGEMENT NOTES
WS 1
Date: January 27 th , 2004.
The Distribution of Power Within A Company
The concept of power is complex, it may cover: - a.
c.
b.
power to control the actual exercise of control the probability that a command with a specific content will be obeyed d.
domination and restraint.
Berle and Means regard control as something apart from ownership or management. Their theory rests on three foundations: -
1.
2.
The dispersal of shareholders so that no one shareholder holds a significant fraction of the stock.
The smallholdings of management.
3.
The divergence of interests between stockholders and mangers.
They agree that corporate powers are powers in trust. They stated: -
“
All powers granted to a corporation or to the managers of a corporation or to any group within the corporation whether derive from statute or charter or both are necessarily and at all times exerciseable only for the rateable benefit of all the shareholders as their interest appears. That in consequence the use of power is subject to equitable limitation when the power has been exercised to the detriment of their interest. However absolute the grant of power may be in terms and however correct the technical exercise of it may have been
.”
Institutional investors such as life insurance companies pose a challenge to Berle and Means theory. Berle and Means adopted as the core of their concept of control, the actual power to select the board of directors or its majority, either by controlling a majority of the votes directly or through some legal device or by exerting pressure which influences their choice. Their view is that if one could determine who has the power to select the directors then one has located the persons who for practical purposes could be regarded as the control. In small companies Berle and Means theory does not apply as there is no divergence of ownership and control or management.
The Characteristics of Public Companies a.
b.
c.
Diffuse shareholders
Delegation of power to executive directors or executive director committees
The principal mechanism, which operates to vest and perpetuate power in the mangers, is the proxy system. Under this arrangement, the majority of shares are given by proxy to the incumbent managers to be voted as they deem to be in the best d.
interest of the company.
The average shareholder has little say (except possibly in the rare event of a proxy contest or a take-over bid), in the selection of management or the determination of the companies policies. An element of debate however, is how far are we moving away from the classical model and theory of corporate governance. The institutional investor and the stock exchange are challenging the distinction between ownership and control with respect to the power of public companies. Studies suggest that institutional investors influence management and indeed are consulted by management. One must also ask whether these institutional investors champion the rights of small shareholders.
Characteristics of Small Companies
1. Restrictions on the transferability of shares. Share transfer and transmission restrictions are needed; - a.
To prevent intrusion of undesirable business associates. b.
To preserve the relative interest of owners. c.
To resolve deadlock or as a controlling device.
There are several types of pre-emptive rights clauses; -
1.
absolute restriction
2.
3.
4.
5.
consent restriction first option event option buy sell agreement
A Buy/Sell agreement is an agreement between all shareholders which provides that on the death of a shareholder his executors are obliged to sell the shares to the remaining shareholders at a specified price, and shareholders are also obligated
2.
3.
to purchase shares when offered. See the cases of Re Smith & Fawcett [1942] 1 All ER 542 and Lyle & Scott v. Scotts
Trustees [1959] AC 63, these cases provide a judicial interpretation of such restrictions.
{A closed or controlled company is a company that is controlled by five or fewer directors See Trinidad & Tobago
Companies Act S.7}
The principal or sole source of income of the shareholders will be derived from the company itself.
Statutory requirements as to directors and shareholders meetings the filing of documents and registers are relaxed. The elaborate machinery designed to prevent fraudulent activity and to enable minority shareholders to be kept informed of the progress of the business is often ignored.
The Characteristics of Holding & Subsidiary Companies
This type of relationship refer to a company which is able to control or materially influence the management of another company.
Control is either factual or capitalist by virtue of ownership of shares or debentures in another company.
Please note that: -
1.
The holding company will almost always be able to nominate and control a majority of the board of directors of the subsidiary company. Under these circumstances, the minority shareholders cannot realistically expect to have the same level
2.
of protection and consideration of their interest as they would from a free and independent board.
Potential conflict of interest and duty confronting nominee directors sitting on the board of a subsidiary company. Nominee directors are required to act in the interest of the subsidiary alone even though appointed by the holding company.
There may be a conflict of interest between the holding and subsidiary company. We can see that the minority shareholders 3.
in the subsidiary companies are extremely vulnerable and should attempt to secure representation on the board of directors.
The shareholders must possess a class of shares that would enable him to secure representation.
Characteristics of Joint Venture Companies

This is a temporary partnership formed to conduct a joint undertaking, it involves large expenditure and considerable risk. It is aimed at distributing the cost and risk among participants. a.
Shareholders in a joint venture corporation are few in number. b.
Participants are usually given a veto over fundamental corporate policies. c.
d.
Participants are usually granted the power to select and remove a specified number of directors.
There are arbitration procedures to avoid deadlock.
The Board of Directors
In examining the allocation of internal control, legislation is neither clear nor comprehensive in allocating totality of decision making functions to the directors or to the shareholders. Statute vests the power to manage in the board of directors. The Barbados
Companies Act S.58, Jamaica Art. 64 of Table A.
It is important to note that the directors though elected by the shareholders are answerable only to their institutional principal (i.e. the company). See the case of Automatic Self-cleaning Filter Syndicate Co. v. Cunningham [1906] 2 Ch. 34 as well as Gramophone &
Typewriter Ltd. v. Shaw [1935] 2 KB 113 1 , contrast these cases with the case of Isle of Wright Railway v. Tahourdon [1883] 25 Ch.D
320 .
Also note: -
1.
The sovereignty of directors is dependent upon the limits of the powers conferred upon the director by the Articles of
Association in Belize and Jamaica and the Bylaws in new law jurisdictions. See the cases of Shaw (John) & Sons
(Salford) Ltd. v. Shaw [1935] 2 KB 113 2 and Automatic Self-cleaning Filter Syndicate Co. v. Cunningham [1906] 2 Ch.
2.
34.
In memorandum jurisdictions, the decision as to where management power is to be allocated is vested in the shareholders by virtue of their control of the articles of association, i.e. through the section 20 contract. This allows the shareholders to shape the management structure that is best suited to the company’s needs.
In new law jurisdictions the bylaws are the source of directors power and the bylaws are regulatory in nature. 3.
Role Function & Procedure
The classical function of the board of directors include: -
1.
2.
establishing basic objectives, corporate strategies and policies the power of selection
The convening of meetings is usually by a director and the general rule is that notice of the meeting must be given to all directors entitled to receive notice. See the Barbados Companies Act S.75, Jamaica S.128-129. The bylaws themselves can provide that meetings be held at a particular time and place. A point of issue is whether it is necessary to give notice as to not only time and place but also as to the business to be conducted.
See the article “Corporate Power in Barbados: The Mutual Affair” by Hilary Beckles.
As a matter of prudence, notice of the nature of the meeting is given, however, as a matter of law notice of the nature of the meeting is not necessary. As to what constitutes notice of the meeting see the cases of Re Homer District Consolidated Gold Mines Ltd. Exp.
Smith [1888] 39 Ch. 564, Browne v. La Trinidad (1887) 37 Ch. D 1. See the Barbados Companies Act S.62(2) which provides that five days notice of meetings must be given to each directors stating time and place.
CORPORATE MANAGEMENT
WS1, 3 TUTORIAL

The authority to enter into the contracts of the kind entered into

The nature of their appointed. Shareholders usually appoint

The fact that the minutes do not reflect their appointment

Do directors have the power to fill vacancies? Yes s72 Barb. (manual p77) the filling of casual vacancies. Enables flexibility in the operation of the company. If there is no quorum requirement then the shareholders must elect. This reflects the balancing of interests between shareholders and directors.
 “Tendered their resignation” – Directors should resign in writing. In practice this rule may not necessarily followed.

Minutes constitute prime facie evidence s140 JCA (old)
CORPORATE MANAGEMENT
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Delegation to non-director executives
A distinction must be drawn between delegation to managing directors or director committees on the one hand and delegation to nondirector executives on the other. Non-director executives are appointed with well defined limited responsibility. They are not members of the board and are not entitled to attend board meetings without special invitation. NB B’dos s448 which defines a director as “a person occupying the position of a director by whatever name called”. Therefore, an attempted delegation of wide ranging or exclusive powers by the board to such a person would elevate the status of that officer to that of a director.
NB There is a possibility that a purported long term appointment of a non-director executive officer will be considered ultra vires the board. ( Horn v Faulder – here P, a non-director officer, was given a contract to manage a section of the company’s business for a term of 14yrs. Under the contract this management was not to be interfered with by the board except under express and limited conditions.
There was a provision in the articles stating that “the governing directors shall have the supreme control in the management and affairs of the company”. The court noted that such wide ranging delegation would always be invalid.
Shareholders’ meetings
The AGM
In keeping with the philosophy of investor protection it is appropriate that the statute should require the company to hold an annual general meeting at least once every calendar year. Bel s54, Barb s105, T&T 109, St Kitts s87. The business of the AGM generally includes:
1 [1935] All ER 456
2 [1935] All ER Rep. 456

1.
the declaration of the dividend;
2.
consideration of the accounts and reports of the directors and auditors;
3.
the election of directors;
4.
fixing the remuneration of auditors.
It is mandatory that the AGM be held every calendar year and it is to be held in addition to any other general meeting but the company can resolve that a general meeting will be its AGM. The importance of the AGM is born out by the penalties that are imposed for failing to comply with the statutory requirements. St Kitts s88 imposes a maximum fine of $2500, Bel $250, Jamaica $100. NB
Contravention of this provision renders the directors or managers personally liable. If the directors fail to hold an AGM members have the right to petition the court for an order that a meeting be convened. The AGM provides members with a forum at which to question and challenge the directors about the performance and prospects of the company ( Gibson v Barton ). NB The AGM is a general meeting and anything done at a general meeting can be undertaken at the AGM.
General Meetings
GMs can be convened by any director. This means that directors are in a dictatorial position. They prescribe the time, place and the agenda. As Maughn J in Re Dorman Long said, “the dice are loaded in favour of the directors”. NB Notices and circulars are sent out at the company’s cost. The board has plenty of time to consider the nature and content of the circulars. They possess all the facts and proxy forms can be sent out well in advance in favour of certain named directors. Shareholders, however, have minimum information and limited notice.
Notice
Barb s111
Members are to receive 7dys notice of the time, place and the general nature of the business to be transacted. NB The shareholder has power to waive notice of the meeting ( Knight v Knight – failure to deposit the notice of the meeting rendered the meeting and the subsequent appointment of a third director invalid). ( Tiessen v Henderson – notice and the agenda failed to disclose the fact that one of the directors had a strong financial interest in the proposed scheme for reconstruction. The court held that the subsequent resolution was invalid as material facts had not been disclosed.)
NB
1.
Notice must be full and not misleading ( Baille [1915] 1 Ch 503.
2.
Omission of material fact may amount to a finding that the notice is misleading.
3.
Where the notice specifies two items of business, one of which is ultra vires, then the notice is not invalid as regards the intra vires transaction.
4.
A notice convening a shareholders’ meeting for the purpose of confirming a contract in which the directors are interested must give sufficient particulars as to that interest to allow the shareholders to know precisely about which they are to vote
( Tiessen v Henderson ).
Power of the company in the AGM
1.
The company in the general meeting may by ordinary resolution ratify an act of the director which is in the powers of the company but beyond the authority and competence of the directors.
2.
The general management of the company is vested in the directors s58. The company in GM, i.e. the shareholders have no power by ordinary resolution to invalidate the board’s business decisions or given directions to the board ( Automatic Selfcleaning Filter Syndicate Co. v Cunningham )
3.
The articles prevail and hence when the GM purports to ratify an irregular act of the directors it is ineffective if it contravenes the company’s articles of association ( Boschoek Rlwy Co Ltd v Fuke [ Fuke case])
4.
The GM has the power to ratify an act of the directors which is voidable as an irregular exercise of their powers. NB The rationale for this is that the wrong is done to the company and therefore the company can rectify the wrong ( Bamford v
Bamford ).
Extraordinary general meeting
Directors are in a favourable position and in an attempt to redress the imbalance statute has vested power in the shareholders to requisition a GM Jamaica s127, Barb s129, T&T ss113-114. These provisions represent a statutory safeguard for the shareholders’ rights. They enable the holders of not less than one tenth of the issued paid up capital of the company to requisition the directors to call an extraordinary GM forthwith. The problem-may not know who the other shareholders are and may not hold one tenth of the shares. Re Winward Island Enterprises.
NB The requisitioning shareholders are constrained by the terms of the written requisition. A failure to limit the nature of the meeting to the terms of the requisition raises a presumption that the minority is not acting bona fide in requisitioning the GM.
If the shareholders utilise the statutory safeguard they must be in a position to bear the considerable burden of paying the expenses of the meeting themselves. This problem is particularly acute in a large public listed company.
Other meetings

Statutory Meetings
This applies to public companies only who, in soliciting share capital, have issued a prospectus for the first time. Statute requires that a general meeting of the members be held. Failure to observe the statutory requirement is an offence rendering the directors personally liable Jamaica s126(9) which imposes a fine of maximum $100. NB The business of this meeting is primarily to receive the statutory report which contains details of the identity of directors, auditor, corporate secretary and the company’s cash position. NB This statutory meeting occurs only once in the lifetime of the company.

Meetings by the court
Where it is impracticably to call a meeting or to conduct a meeting in the manner prescribed by the articles of association or bye-laws or statute then the court may order a meeting to be held and conducted in such a manner as the court thinks fit Jamaica s129(2), T&T
134. NB The court’s powers under this provision is vast ( Re El Sombrero Ltd; Re Opera Photographic Ltd - Two directors of a corporation held 50 shares each. The only other shareholder had 900 shares. No annual meetings had been held, no annual returns filed. The articles of association provided that the quorum for the GM was two members present in person or by proxy and that if within half an hour a quorum was not present the meeting was to be dissolved. The majority shareholder requisitioned an extraordinary GM for the purpose of removing the 2 directors. The directors deliberately did not attend the meeting with the result that it was dissolved under the provision. The court exercised its discretion for a failure to do so would deprive the majority shareholder of his statutory right to remove the directors and because the directors had failed to perform their duty to call an annual GM the court

found that it was an appropriate exercise of their discretion ( Re Sticky Fingers Restaurant Ltd ). The court has the power to dispense with quorum requirements. Thus the court can direct that one member of the company present in person or by proxy shall constitute a meeting.)
 Creditors’ meetings
Creditors may need to meet where the company or their interests are at stake Jamaica s133(2). Statutory provision is made for a compromise or arrangement between the company and its creditors.
Records
Registers and records are required to be prepared and maintained under all corporate statutes.
1.
Shareholders and creditors as well as their agents and legal representatives are entitled to inspect the records.
2.
The right of inspection ceases when the company is in liquidation.
3.
When a company has only one member and that member takes any decision which may e taken by the company in the GM and which has the effect as if agrees to by the company in the GM then under the principle in East v Bennett Brothers Ltd the member must under penalty provide the company with written record of the decision.
4.
Minutes are not exclusive evidence of what took place at the meeting. They are prima facie evidence which can be rebutted by evidence of persons present at the meeting ( Bartlett v Bartlett [1911] 24 OLR 419)
5.
In Canada a person who, with the intent to defraud, destroys, mutilates, alters, falsifies or makes a false entry in or omits a particular material fact is guilty of an offence under the criminal code.
Voting mechanisms
Cumulative voting
In view of the fact that management is in the hands of a company’s board of directors probably the most important individual shareholders’ right is the right to elect the board of directors. The right of cumulative voting is an important tool to ensure corporate democracy or more appropriately shareholder democracy. Generally, the principle is as follows: where the bye-laws so provide, every shareholder entitled to vote has the right to cast a number of votes equal to the number of votes attached to the shares held by him multiplied by the number of directors to be elected. He can cast all such votes in favour of one candidate or distribute them among the candidates as he thinks fit. This right is given to shareholders in Barbados by virtue of s64 which is on par with s54 of the Ontario Act.
This system of voting is controversial and the main arguments in favour of the system include:
1.
It is the fairest system enabling minority shareholders to attain representation in proportion to their shareholding.
2.
The principle of the majority rule continues to operate since the majority will be able to control the election of a majority of the board of directors.
3.
Cumulative voting allows minority or special interest groups a voice on the board.
4.
The minority can protect itself against potential squeeze plays.
Arguments against cumulative voting:
1.
The election of partisan directors is incompatible with the basic function of the board to represent all interests in the company.
2.
Disharmony on the board can lead to conservation and uncertain management.
3.
There is a potential for conflict of interest. A partisan director may divulge information harming the company.
4.
In large companies the exercise of voting rights under a cumulative system is often a prelude to a battle for control.
5.
The minority may sometimes gain control if the majority shareholders fail to cumulate their votes properly.
CORPORATE MANAGEMENT
WK3
Takeovers and Mergers
Where a company acquires control over another by buying all or a majority holding of its shares this is termed a takeover. A general offer to buy addressed to all shareholders of a company is called a takeover bid. See Barbados s185, T&T 116, OECS s196.
Takeover bid or tender offers are for the most part common methods used to merge one corporate business with another. The companies are usually referred to as the offeror company and/or the target of the offeree.
Significance of TOs in the corporate control market
1.
The maintenance of balance between managerial and ownership interests within companies which are the target of TO attempts.
2.
The maintenance of balance between the interest of predators and shareholders in the target company.
3.
Protection of the public interest.
It is the belief of many commentators that the most significant constraint on corporate managerial power is the market for corporate control and the threat of displacement which it poses to corporate management. The threat of a TO is a powerful spur towards efficiency in the management of companies. Inefficient managers can be removed by its shareholders accepting the TO bid induced by poor performance and a consequent reduction in stock value.
Classification
1.
Horizontal TO: This involves the acquisition of another company which is a direct competitor operating in the same market.
Operation in the same sphere of business.
2.
Vertical TO: This arises out of efforts by a corporation to achieve vertical integration and involves one firm acquiring another firm at a different stage in the production process.
3.
Conglomerate mergers/TOs: This extends a company’s product range or geographical reach.
TOs may e hostile or consensual.

The duty of directors
1.
To act honestly and in good faith in the best interest of the company.
2.
To act with the care, diligence and skill of prudent man operating within the same circumstances.
Directors are placed in a difficult position by a TO bid. There is a reasonable chance that the directors will be removed from office if their company is acquired. As soon as a tender bid is made an offeree director is placed in a position of potential conflict between his duty and his personal interest. A fundamental problem is that the rubric “in the interest of the company” is unclear.
No duty is owed to the employees.
TO defensive strategies
Corporations may seek to defend themselves from an unwelcomed TO by resorting to a number of defensive measures. Defensive tactics are varied and will usually be considered so as to gain time.

Litigation is frequently used as a TO defensive measure tying up the matter in court.

The media (dirty campaigning) is also used. In 1993 CLICO attempted to acquire a controlling interest in T Geddes Grant, a company listed on the stock exchange of T&T. CLICO was a significant shareholder in T Geddes Grant.

White Knight is where the target company exchanges shares with other friendly companies who are invited to assume a major ownership position in the target company. A certain amount of risk is involved, however, as friendly companies have been found to be less friendly than at first believed.

Diluting or watering down the overall shareholding of the raider. The difficulty is that the power to issue shares must not be used for an improper purpose ( Hogg v Cramphorn ).

Lock up stock options. The grant of an option to acquire a block of stock. Such a right is triggered on the acquisition of a percentage of the target company. NB A lock up option gives an option holder the possibility of control whereas a leg up stock option merely gives him an advantage.
Manipulation of the articles or memorandum to prevent the acquisition of the shares.

Termination clauses or break up fees. Fees enacted by the white knight from the target company if the transaction is not consummated.

Share repellent provisions. These take a variety of forms such as special classes of voting stock and staggered terms for directors.

Bear hugs. To over attempt that consists of a proposal made to the directors.

Grey Knights. A bidder who has not been solicited by a target but who tries to take advantage of the resistance of the target.

Golden parachute. These protect the directors and managers from the consequences of a hostile bid. They usually take the form of service agreements or pension plans.

Stand still agreements. A kind of treaty between a company and one or more of its major investors. By entering into such an agreement the directors ensure an element of stability but usually it is at the cost of providing certain advantages to the investor.
The response of management
Stena Finance BV & Another v Sea Container Ltd & Ors
The pure passivity rule
This is a rule advocated by Easterbrook & Fischel who contend that target directors should refrain from defensive tactics and leave it to the shareholder to decide whether to sell.
The modified passivity rule
According to Bedchuck & Gibson target directors should be allowed to solicit rival bids as wells as engage in propaganda but do nothing more.
The differential regulation principle
The more complex the defence the more complex the rule, i.e. different defences are to be governed by different rules
The primary purpose rule
This is distinct from the business judgment rule which operates in the United States.
The proper purpose rule
This is the dominant approach in the Commonwealth Caribbean where if the target management can establish that a particular response was pursued for the primary purpose of implementing a legitimate corporate object, the action cannot be challenged. This approach is based on the fiduciary duties of management:

Directors must act bona fide in the best interest of the company

They must exercise the powers for the particular purpose for which they were conferred and not for some extraneous purpose

They must not fetter their discretion

They must not without the consent of the company place themselves in a position in which there is a conflict between their duties and their personal interest
For the application of the Proper Purpose test see the Canadian case of Teck Corp Ltd v Millar . There Justice Berger upheld the validity of an agreement conferring exclusive exploitation rights on a white knight.

Note: In the US directors must be able to sustain the burden of proof:

That they acted in good faith having perceived a threat to the corporation

They acted after proper investigation

The means adopted to oppose the take over were reason in relation to the threat posed
The remedy is applicable where the powers of the directors of the corporation are/have been exercised in a manner that is oppressive or unfairly prejudicial to or unfairly disregards the interest of any security holder.
Legislation
Common
Residual Companies Legislation
Securities Legislation
The Fair Competition Act regulates mergers and takeovers which arises where there is a possibility that it will result in the creation of
40% market share of that corporation.
Ss185-7 of the Companies Act of Barbados and s153 of Trinidad and Tobago
The legislation aims to secure fair and equal treatment of all shareholders.

Where acceptance is by not less than 10 percent of any class.

The tendering of an offer

By providing notice to dissenting shareholders

Notice of adverse claims to the offeree company

Rules with respect to the delivery of a certificate and the payment for shares
Note: A dissenting offeree has the right to apply to the court to fix the fair value of the shares. The specific provision, however, does not protect predatory shareholders and the thrust is the protection of dissenting or minority shareholders. See Re Bugle Press where there were three shareholders in a private company two of which held 45 % shareholding each and the plaintiff held 10%. After an unsuccessful attempt to purchase the Plaintiff’s shares, the first and second directors incorporated a second company which made a tender offer to all the shareholders of the company and the third shareholder refused to sell. Shareholders One and Two applied under the Compulsory Acquisition provision, similar to s186 of the Barbados Act (acquisition of 90% shares then automatic takeover). On application by the Plaintiff, Justice Buckley held that the acquirer, the offeror, was not truly independent and that while the onus of proof normally rested on the Plaintiff to prove that the offer was unfair, on the facts the onus had shifted by virtue of the lack of independence.
Nominee directors
These have been defined as persons who, independent of the method of appointment but who, in relation to their office, are expected to act in accordance with some understanding or arrangement which creates an obligation or mutual expectation of loyalty to some person or persons other than the company as a whole (1999 Companies and Securities Law Review Committee of Australia). A director is placed in a difficult legal position when he is appointed by a special class of shareholders, debenture holders or the holding company to represent its interest on the board. The law insists that the director disregard his special interest to which he owes his appointment in favour of the company as a whole ( Scottish Co-operative Wholesale Society v Meyer; Boulting v ACTAT ). In the latter
Lord Denning stated: “An agreement which bound a nominee director to act in accordance with the directive of his patron is unlawful.” Therefore, since directors exercise powers held by them in trust for the company, they may not fetter their future discretion by contracting as to how they will vote in the future. Consequently, any agreement to vote on behalf of a special interest will be invalid. See Levin v Clarke where a vendor of shares who had not yet received consideration for the shares obtained security over the shares as part of the sale agreement. Prior to the sale, two of the company’s directors were required to retire from active participation in the affairs of the company only to resume their powers as directors in the event of default in the payment of the purchase price.
Justice Jacobs found that although two of the directors acted primarily in the interest of the mortgagee, that it was permissible to so act thus adopting a lenient approach. Further, it may be in the company’s best interest if the nominee directors represent and advocate only the interest of their patron. In so doing Justice Jacobs recognises the commercial reality of the situation and in determining the nature of the fiduciary duty owed he took into account the terms of the corporate constitution “any expressed or implied authority of the directors and any waver of their duties by those to whom the duty is owed”. His judgment indicates that fiduciary duties are neither absolute nor inflexible. In Re Broadcasting Station the appointment of nominees to the board was secured largely by the use of the voting power of a shareholder. It was alleged that the minority shareholders were being oppressed by the majority. Jacobs did not regard as significant the fact that the directors were expected to act in accordance with the holding company’s wishes.
Two approaches New Zealand and UK narrow approach in Scottish Cooperative Wholesale Society v Meyer
Interlocking Directors
Individuals who are directors of more than one company are significant as an indicator of inter-corporate cohesion and interdependence.
Note: Reasons for the interlock in public sector. The round table of the role of the board of directors of public sector organisations in the Caribbean of the 1980s:

The small size of territories has led to intense social relationship which limit much of the impersonality generally associated with organisational life

The legacy of slavery and colonisation which has bred in the society an attitude of low identification within the workplace and a reluctance to accept responsibility for actions taken.

A difficulty separating political from personal considerations

An acute scarcity of human resources

Pronounced dependence on the outside world for technology, capital and markets which influences corporate strategy to a greater degree
In London & Mashonaland Exploration Co Ltd v New Mashonaland Exploration Co Ltd Justice Chity held that a director would not be restrained from acting as a director of a rival company except where there is a prohibition in the articles or where the director is about to disclose confidential information.
In Abbey Glen Property Corp v Stumbury Justice McDonald thought that the dicta above was too widely expressed and that “there might well be the case in which a director breaches his fiduciary duties to company A merely by acting as a director of company B either where there is no question of passing on confidential information. The matter was considered in the decision of Berlei Hestia
(NZ) Ltd v Fernyhough where Justice Mahon thought that there was a wide distinction between asking a director to account for a profit made out of his fiduciary relationship and asking a director not to join a board of a competing organisation in case he should at some

time in the future decide to act in breach of his fiduciary duty. Only the former was regulated. It is admitted that the law in this area is in an unsatisfactory state. Apart from the marked absence of West Indian case law, the Australian decisions we are forced to consider are of little guidance. In the decision of Berlei Hestia (NZ) Ltd v Fernyhough Justice Mahon appears to overlook the point that the making of a profit is only one facet of the conflict of interest rule. This rule can apply to render a director in breach of his fiduciary duty even where he makes no profit.
Note: In certain circumstances interlocking directorships may give rise to petition of unfair or prejudicial conduct. In the US in the decision of Remillard Brick Co v Remillard Dandini Co Judge Peters explained the nature and scope of interlocking directorships in the following terms: “The law zealously regards contracts between corporations with interlocking directorates and will carefully scrutinise all such transactions and in the case of unfair dealing to the detriment of minority stock holders, will grant appropriate relief.
The reasons given for nominee and interlocking directorships are unconvincing reasons when balanced against their potential for conflict of interest and breach of regulation.
Disadvantages
1.
Results in the elimination of competition between two companies.
2.
Where the companies are in a supplier- purchaser position it may result in preferential treatment and restrictive trade practices.
3.
An interlock between manufacturing corporations, banks and insurance companies may establish community of interest that would assure adequate credit to a favourite company and the withholding of credit and capital from disfavoured competitors.
4.
Where a director serves on boards of different corporations he owes fiduciary duties and obligations to more than one company. There is a narrow problem that the interest of stock holders may be subordinated to the opportunity for personal gain.
5.
It may result in the deterioration of service on the boards of companies.
Are these regulations practical? Can we check and verify every transaction to ensure that they are in accordance with the regulations?
Do we have the resources to determine whether these linkages are present?
CORPORATE MAMGEMENT (WKSHT 3 Continued)
Shareholders
In the leading case of Percival v Wright the director was charged with using insider information of an impending takeover bid to purchase the shares at a price below that offered by a prospective purchaser. The plaintiff himself approached the director seeking to sell his shares at a quoted price. The director accepted his offer without disclosing information about the impending takeover. It was held that the director had no duty to the shareholder to disclose this information. This decision is generally taken to mean that directors are permitted to use inside information for their own investment purposes and as such it has been attacked as being in conflict and inconsistent with the director’s fiduciary duty not to use the property or confidential information of the company for personal profit.
See the decision of Coleman v Myers where the CA found that Percival v Wright was correctly decided in relation to its particular facts . Here it was the directors who solicited and not the shareholder. See also Allen v Hyatt where the directors were found to be agents of individual shareholders. In Allen v Hyatt we are concerned with a small quasi partnership. The smaller the company the greater the control over the shareholders.
There may be a fiduciary relationship.
In Peskin v Anderson 2000 BCLC 1 Nurembugh J stated: I am satisfied that in appropriate circumstances a director can be under a fiduciary duty to a shareholder. It seems to me that as a general proposition a director’s primary fiduciary duty is to the company. To hold that he has some sort of general fiduciary duty to shareholders:
1.
Would involve placing an unfair, unrealistic and uncertain burden on a director.
2.
Would present him frequently with a position where his two competing duties, namely his undoubted fiduciary duty to the company and his alleged fiduciary duty to shareholders would be in conflict.”
Percival is the law. The directors owe fiduciary duty to the company.
[ Nature of a director, who is he
Obligations and to whom they are owed, the primary of which is to the company
-ordinary shareholders
-preference shareholders- can have cumulative or non, redeemable and non
By whom is a duty owed
While it goes without saying that directors owe a fiduciary duty to the company there is evidence to suggest that officers and shareholders are also capable of owing fiduciary obligations to the company. Thus s95(1) of the BCA, s99 T&T, expressly confers statutory fiduciary duties on directors and officers. Moreover s58 bestows managerial powers on the board of directors to manage the business and affairs of the company and it commences subject to a unanimous shareholders agreement. Logically therefore shareholders agreements can deprive directors of their powers to manage business and affairs of the company and consequently such a shareholder would be catapulted into a fiduciary position by virtue thereof and to the extent to which those powers are curtailed by the agreement. There has also been a broadening of the forum of directorial liability beyond directors properly called because they have been validly appointed to shadow directors and de facto directors.
Shadow directors
The concept of shadow directors is introduced in the JCA 2004. Here a shadow director means a person in accordance with whose directions or instructions the directors of the company are accustomed to act, so however, that a person is not deemed a shadow director by reason only that the director act on advice given by him.
In the English decision of Hydrodam ( Corby) Ltd Millett LJ reviewed the key elements in the UK equivalent. To establish that a defendant is a shadow director of a company it is necessary to allege and prove:
1.
Who are the directors of the company, whether they are de facto or de jure
2.
that the defendant directed those directors in how to act in relation to the company or that he was one of the persons who did so
3.
That those directors acted in accordance with such directions
4.
That they were accustomed to so acting
A number a implications arise:
1.
A controlling shareholder, creditor and or banker is at risk of being classified as a shadow director

2.
The relationship of parent-subsidiary may also give rise to a finding that the parent is operating as a shadow director of the subsidiary company
3.
The relevance to shareholders is that the expansion of the category of directors to include shadow directors extends the platform on which minority shareholder action can be mounted.
In Hydrodam Millett LJ distinguished a shadow director from a less technical term de facto director. A de facto director is a person who assumes to act as a director, he is held out as a director by the company and claims and purports to be a director although never actually or validly appointed as such.
Note: This concept is not unfamiliar to Barbados, T&T or the OECS as it is contemplated by the legislation. Barb ss2, 81
Nature of director’s duties
De fact or de jure appointment
Nature of the fiduciary duty. To act honestly and in good faith with a view to the best interest of the company
Duty of care diligence and skill Re City Equitable Fire Insurance Romer J: Three criteria- of an intimitent nature to be performed at board meeting; need not exhibit in the performance of his duties a greater degree of skill than is normally associated with someone in his position; the are under are entitled to rely on information and advice provided by officers.
Uncertain as to whether it is a subjective or objective test
Brazilian Rubber Neville J introduced an objective test. If you possess special skills the company should benefit from it.
Dovey; Mills - Directors can rely on advice if there is no suspicion of officers
CORPORATE MANAGEMENT
WS3
Director’s Duties
Employees
S95 Barbados states: “A director must have regard to the interest of the company’s employees in general as well as to the interest of its shareholders.” This provision, the creation of social and political considerations, is reflective of perhaps the stake holder theory (posits that the shareholders are not the only constituents that the company has regard. This is also the basis of consumer legislation. Trade obligations environment etc) and it is of uncertain ambit and effect.
Manual p23: It has been suggested that s95 creates a duty between the directors and the employees. The response to this position suggests that you cannot equate the consideration of an interest with the creation of fiduciary duties.
Weaknesses
1.
The interpretation of the interests of the company’s employees in general. Possible interpretation: Interest extends only to those who could reasonably be expected to be affected by the acts of directors themselves acting in their capacity as directors.
This would absolve the directors from considering trivial matters.
2.
The presence of the word in general. Does this provision mean the director’s interest in general or the company’s employees?
In other words does it relate to the scope of the duty or to those who would benefit from the result? The former meaning is fairly restrictive whilst the latter is indicative of a wider class of interest. It is suggested that perhaps the solution is to assume that the effect of the words “in general” when juxtaposed to “employees” is to require the directors to refrain from preferring the interest of any one class of employees and necessitate the taking of an average view of employees’ interest.
Advantages
1.
The policy underlying s95 is the notion that the company must now develop a social conscience and it may be the first step towards the new company law concept of the company as a whole.
Duties and liabilities
An employee has a number of duties at common law including the duty to obey lawful commands and to show due care in the performance of their duties. Breach of these duties would render the employee liable for damages to the employer Lister v Romford
Ice & Cold Storage [1957] 1 All ER 120.
Another duty is that of fidelity and confidentiality. See the decision of Robb v Green [1895] 2 QB 315 where an employee compiled a list of customers from the order book of his employer, left his employment and set up his own business using these names was held liable to the employer for damages and required to return the list.
See also Canadian Aero Service v O’Mally
Note: The duty owed by a high ranking employee can be placed at a much higher level and indeed the obligation may be fiduciary.
The relevance of employees in the corporate structure
In conventional corporate law employees have a very limited role to play in the overall management and deal structure of the company. Traditional company law is concerned only with the relationship between directors, shareholders and creditors. In the decision of Parke v Daily News Ltd the court decided that where a major part of the business had closed down and only a small part continued the directors had no powers to make large ex gratia payments to its former employees. Hence, payments to the employees were ultra vires the company so that the gratuitous payments were void. There is evidence, however, that we are moving towards industrial democracy. Apart from the platform evident in s95(2) there is evidence of positive partnership arrangements between management and workers.
Impetus for a more realistic approach
1.
Role of trade unions
2.
Employee share schemes where there is increased employee share ownership
3.
Employee participation on boards including trade union representation on boards
4.
Creation of two-tiered boards and sub-committees. This increases the profile of the employee in the workplace.
Creditors
The law’s protection of the creditor against acts of the corporate directors is beset with uncertainty. The uncertainties are emphasised by the basic legal duties of directors and their obligation to act in good faith in the interest of the company. In a solvent company the shareholder’s interest dominate although the law does attempt to safeguard creditor’s interest in some respects and hence recognises the importance of their role in the company. T&T Part 4, St Kitts Part 13 s126, Grenada Part2 ss250-265, BARB part2 ss237 & 252,
JA part ss93 -100. These sections require all charges to be registered and also relate to the maintenance of capital.

The orthodox position was stated by Dillan LJ in Multinational Gas & Petrochemical v Multinational Gas & Petrochemical where he said, Directors owe fiduciary duties to the company though not to creditors present or future or to individual shareholders.” The crucial question is whether there is any qualification on the nature of director’s duties. In Winkworth the HL decision indicate that there may e a change form the traditional view. Lord Templeman stated: A company owes a duty to its creditors present and future.
The company owes a duty to its creditors to keep its property inviolate and available for repayments of its debts. The conscience of the company as wells as its management is confined to its directors. A duty is owed by the directors to the company to ensure that the affairs of the company are properly administered and that its property is not dissipated or exploited for the benefit of directors themselves to the prejudice of the creditor.” There is no clear indication of the point at which director’s duties may be transformed in favour of creditors’ interests. Further there is no clear definition of the scope of creditors’ interest in this situation. The rule is that a director must act in the interest of the company and despite the separate personality of the company it is clear that directors are not expected to act in the basis on what is for the economic advantage of the corporate entity disregarding the interest of members. As was stated in Greenhagh v Ordern Cinemas the phrase “the company as a whole” does not mean the company as a commercial entity distinct from its incorporators. The case law illustrates that the inset of insolvency heightens the creditors legal status Brady v Brady which involved a complicated corporate division arrangement involving a company’s provision of financial assistance for the acquisition of its own shares. The CA had to consider whether the transaction was contrary to s151 of CA (UK) 1985. The CA held that the transaction did not fall within s153(1) which provides an exception where the assistance is given in good faith and in the interest of the company. Te HL subsequently reversed that decision finding that the interest of the creditors had not been considered and Lord Oliver went on to observe that the portion of the asset being removed was so large as to make it essential for the question of creditors’ interest be considered.
In Re WelFab Engineering [1990] BCLC 393 Here the question was raise what obligations directors owed to company creditors. In this case the creditors did not suffer but rather they could have got a better deal. The engineers had a profitable business up until 1979.
Thereafter they started to decline and decided to sell a freehold property which was subject to a bank charge. The directors considered two options and they accepted the option which offered a sum below the stipulated bank charge but which provided for the employment of all employees and directors. On the subsequent winding up of the company the liquidator alleged that the board’s acceptance of the offer constituted a breach of the director’ fiduciary duty and that aggressive marketing could have achieved a higher sum. Justice Hoffmann, while accepting the liquidator’s argument that the directors were influenced by a consideration of the impact on employees, refused to find the directors in breach thereby dispelling the notion that the fulfilment of the directors’ duty towards creditors necessitates a consideration of those interests in a vacuum. The court found that the board of directors had aced reasonably and honestly.
Summary
1.
The director owes no fiduciary duty to creditors, however, in exercising his duties he must have due regard to the interest of creditors
2.
The board’s duty extends only to avoiding action which would cause loss to creditors. This duty is essentially proscriptive
(outside protection of the law) and one would not necessarily require the directors to give creditors’ interest the sort of positive consideration they would receive in liquidation. Thus at the pre-insolvency stage directors are not compelled to actively advance creditor’s interests
3.
The key element in director’s duties hinges on the fundamental requirement that a director must act in good faith in what he believes is in the interest of the company. See the case of Nickleson v Permakraft where Cooke J held that directors, in taking account of the interest of creditors, must consider whether what they do will prejudice the company’s practical ability to discharge its debts promptly. Note: A similar view was also held by the CA in Winkworth v Edward Baron Development
Co Ltd.
See also Brady v Brady which postulates a subjective test for the determination of good faith.
4.
Once insolvency confronts the company the creditors’ interests become relevant. Their status at this stage means that the directors are no longer able to deal freely with the company’s assets
5.
In construing good faith the knowledge of directors of the impending insolvency is relevant Multinational Gas &
Petrochemical Co v Multinational Gas & Petrochemical
6.
If the directors embark upon a course of action which is reckless in commercial terms and prejudicial to creditors’ interest the question of directors’ liability arises and complainant action in new law jurisdictions.
7.
One must be cognisant of the power of the company in general meeting to authorise and ratify a director’s action
8.
In the HL decision of Lonrho Ltd v Shell Petroleum which concerned alleged conspiracy to breach sanctions by Shell Lord
Diplock said that the best interest of the company are not necessarily those of the shareholders but may include those of creditors. On the other hand, in the CA decision of Re Horsely & Weight Ltd the court held that a pension policy was intra vires and Buckley LJ held: Although it may be somewhat loosely said that directors owe an indirect duty to creditors not to permit any unlawful reduction of capital to occur it was in fact more accurate to say that the directors owe a duty to the company in this respect and if the company went into winding up the liquidators owe a duty to enforce the right to repayment. The law, therefore, is unsettled.
Creditors’ problem defined
1.
Corporate law regards creditors as contractual claimants and shareholders as owners of the corporation. Consequently, creditors are treated as not being entitled to ant more than what has been agreed to under a particular debt-sale service agreement and shareholders as being entitled to unlimited claims on the remaining assets of the corporation.
2.
As both shareholders and creditors are competing for a slice of the pie competition is intense. It may be argues that creditors ought to ensure primacy of their interest by express contract. Note however, that such express contractual stipulation is generally not possible in normal trade service agreements and difficulties are presented in debt contracts. For example, costs, documentation, difficulty in monitoring breaches and the time factor involved in enforcing rights where breaches are detectable
3.
The greater the restrictions imposed on the corporation’s freedom of action the greater the cost and corporations will inevitably spend time trying to avoid such restrictions with the lender. The potential for conflict is recognised by the law which seek to confer priority on creditors’ interests in the event of bankruptcy See Insolvency and Bankruptcy legislation
Note:
Practical perspective. Harmful managerial action. This may take many forms. Managerial inaction can be just as harmful.
4.
Managerial sherking or under-investments. This is where gains or profits from a particular venture are required to be paid to the lender. Management may be tempted to invest less effort in this venture and concentrate on opportunities that do not require their rewards to be shared with the creditor
5.
Underinvestment. This is a variation of sherking, especially where a substantial part of the value of the corporation is composed of intangible assets, For example, future investment opportunities. Management may reject projects which have a positive net present value if the benefits of developing these projects will accrue to debenture holders whose claims mature over a long period of time.

6.
Asset substitution. This is where the company makes the business venture for which the loan was advanced riskier. Where the additional risk pays off and the project succeeds the market value of the firm increases but the shareholders pick most of the gain. Conversely, if the project fails the market value of the firm decreases but the bond holders bare the loss.
CORPORATE MANAGEMENT
CORPORATE MANAGEMENT
WS4
The Auditor
One of the basic reasons for incorporating a company is to create a vehicle for raising money from the public by way of investment through shares or by loans and through credit extended to a company by trade creditors. Corporate legislation recognises that persons in those groups have a legitimate interest in the financial stake of the company by requiring that companies maintain accounts and publish financial statements. Barb s147 which contains the financial disclosure provisions. St Vincent s149, Bel s111, Gren s149, JA s142.
In JA ss36-40 of the Insurance Act 2001 provisions govern corporate governance, the appointment of the auditor and actuary, the establishment of conduct, investment and loan and audit committees, and outlines guidelines for the responsibility of auditors.
S36 provides: For the purpose of discharging his duty to act honestly and in good faith with a view to the best interest of an insurance company a director or senior officer thereof shall take into account the interest of the company’s policy holders. S37 provides that every registered insurer, agent and broker shall appoint an auditor and shall forthwith notify the commission of: a) The auditor’s appointment or the auditor’s resignation. b) The removal of the auditor and the reasons therefore. c) Any other occurrence that causes a vacancy in the office of auditor.
This has tightened the regulations of auditors
Nature and qualifications
Legislation imposes minimum standards in order to ensure the competence and ability of the persons undertaking the audit. These are basically educational requirements. Barb s153(1): Individuals must be members of the Institute of Chartered Accountants of Barb.
Note further, the applicant is further required to have practical experience in auditing.
Note: The statutory requirements represent part of the process of protection of persons dealing with the company. Statute takes a further step by imposing an obligation that the accounts and published statements be audited and in this way statute seeks to provide those persons who rely on the statements or who have an interest in the company’s financial position with a competent assessment of the company’s financial status. The first auditors of the company may be appointed by the directors, Barb s62, Bel s111. They hold office until the first AGM and thereafter the legislation requires that shareholders of the company by ordinary resolution at the first
AGM and at each subsequent AGM appoint an auditor to hold office.
The initial and subsequent appointment is an important indication of the role of the auditor. The fact tat the company at the AGM appoint the auditor underscores the fact that the role of the auditor is to share the interest of the shareholders.
Note:
1.
An auditor can be removed from office by an ordinary resolution. Special notice must be given.
2.
The auditor must be sent a copy of the resolution and of any notices of meetings at which his term of office is to be considered.
3.
The independence of the auditor from the directors and management of the company is a strong XXXX of regional legislation. Barb s154(1): An individual is not qualified to be an auditor of the company if he is not independent of the company and of the directors and officers of the company and its affiliated companies. Note Barb s155(4): Remuneration of an auditor may be fixed by ordinary resolution of the shareholders or if not so fixed it may be fixed by the directors.
The powers and duties of auditors
One of the problems with auditors is that there is a difference between what the public opinion of their role and their own opinion thereof. There is also considerable consolidation in the accounting arena. There is also a blur of the distinction between the role of the auditors and the lawyers where the former have begun to incorporate companies themselves. For an example of the blurring of the line see the case of Ward v Mount Gay Rum which involved a corporate secretary. Corporate secretarial practice and accounting practice.
1.
An auditor is under a fiduciary duty to use reasonable care, skill and caution which a reasonable, competent, careful and cautious auditor would use. Re Kingston Cotton Mill Co. No. 2 1986 Ch 279. There Lopez LJ described the auditor as a watch dog but not blood hound.
2.
An auditor must certify to the shareholders only what he believes to be true. Re London & General Bank No. 2 where Lindley
LJ stated: It is no part of an auditor’s duty to give advice either to the directors or shareholders as to what they ought to do.
3.
An auditor is entitled to rely on a report submitted by a manager or other apparently responsible employee in the absence of suspicion.
4.
An auditor who has certified accounts may be liable to investors where they have suffered loss. JEB Fastners Ltd. v Marks
Bloom & Co.; Anns Merton London Borough Council.
Note: Wolfe J stated that in principle there may be liability to any potential investor or creditor who might rely on the accounts, subject only to the test of reasonable foreseeability.
Note: English law imposes a significant limitation on the duty of care under tort law. See the case of Caparo Industries PLC v
Dickman which has had an important impact on the legal liabilities associated with various professions. In this case the HL held that the duty of care of an auditor of a public company is owed only to his client company and its shareholders collectively and individually and not to a potential investor.
Corporate Secretary
1.
The Secretary can bind the company if he has authority to do so. His implied or usual authority is a question of fact to be decided in each case. His implied or usual authority is that which arises from his office rather than from any expressed permission or previous course of dealing Panorama Development (Gilford) Ltd v Fidelis Furnishing Fabrics Ltd. [In this case the court recognised that by virtue of his office the corporate secretary may enter into many contracts on behalf of the corporation.]

2.
Generally, the corporate secretary has authority to enter into contracts concerned with administration. His authority to enter into managerial contracts is dependent upon either expressed or apparent authority from the company.
3.
The duties of the corporate secretary depend upon the size of the company involved. Usually he will be present at all corporate meetings and directors’ meetings. He conducts all correspondence with shareholders in respect of their shares including transfers. He is responsible for the internal books of the company, for example, all registers. He sends notices of meetings and is the person authorised to accept notices on behalf of the company including legal documents.
Note: Statue places certain duties directly upon the secretary, for example, to sign annual returns, authenticate documents and to affix the corporate seal.
4.
The secretary owes a duty to the company to act with reasonable care, diligence and skill in carrying out his functions. On the question of liability, if negligence is proved and consequential loss the secretary can be sued by the company for damages. If the secretary fails to give advice or to draw matters to the attention of the board of directors he may incur personal liability.
In Re Maystone the corporate secretary failed to inform the directors that the company was either insolvent or likely to become insolvent if it carried on business and more importantly he failed to point out the consequences to them of allowing the company to continue in such circumstances.
5.
The corporate secretary is the moral conscience of the company. The privileged position gives rise to confidentiality and he is a prime candidate for insider trading.
WK4- Assignment
Conflict of interest: The panel must be independent and fair.
Vulnerability of Shareholders
See Wk1 Berle and Meanes: There is a divergence between management and control. Control is shared in the jurisdiction of the
Caribbean. S58 grants directors the power to manage the company on behalf of the shareholders. The relationship is a shared one. In
Jamaica the legislation is silent. Where the director is located impacts on his duties, in Jamaica his duties are not as clear cut as those located in the new law jurisdiction (allocation of control). In Jamaica the shareholders have the s20 contract (s22)-the articles and memorandum operate, inter se, as if signed by each member. Hence, there the relationship between the company and each shareholder is contractual. Although it neglected to refer to the separate legal entity of the company, however, by virtue of case law we are aware of such an identity.
In Barbados the by-laws are regulatory only. If the premise of the relationship is not contractual then this impacts on the rights of the shareholder. Here there are also clear statements of the powers of the directors.
Separation of ownership and control (B&M) Berle held that management powers are powers held in trust. Thus while acknowledging that shareholders are pre-eminent, their rights are deflated with respect to participation ie cannot participate directly in the management of the company. Thus they are virtually helpless. The role of shareholder can be understood by tracing their behaviour via commercial …., cases and legislation …..
Manual p21 p22
Court and
Prudential v Newman Industries
Smith v Croft (No 2) D controlled 65precennt of shares P held 12 and had the support of another with 2.5. Remaining shareholder was a company called REN who was the institutional shareholder who held 20 in the company. He indicated his opposition to the shareholder action. Knox rejected the action brought by P stating that there needed to be a majority among the minority which he failed to garner. Manual p226 on p256
CORPORATE MANAGEMENT
WS5
Remedial action for maladministration
Shareholders’ rights
The rule in Foss v Harbottle remains one of the deep mysteries of corporate law in its challenge to the doctrine of separate legal personality whereby the law looks towards the company’s shareholders to vindicate wrongs committed against the company as a separate legal person. The procedural difficulties are well documented.
At common law it is difficult to draw a clear line between the three causes of actions-personal, representative and derivative. The plaintiff might well find that his action is being struck out an abuse of the courts if the court found that he resorted to the wrong procedure. In order to circumvent the rule the plaintiff had to bring his action in one of the exceptions to the rule in Foss v Harbottle which were identified by Jenkins LJ in the decision of Edwards v Halliwell:

Ultra vires

Individual rights

Special majorities

Fraud on the minority. The are two aspects:
There must be fraud on the minority. There are many categories of fraud:
1.
appropriation of property Cook v Deeks
2.
Negligence Pavlides v Jensen -mere negligence is insufficient. There must be gross negligence where the directors are benefiting from the wrong.
3.
Abuse of power-focusing on ratification.
The wrongdoers must have been in control.
The cases reveal three reasons for the Rule:
1.
A refusal by the court to be involved in disputed over business policy [the hands off approach]. Cases that illustrate this stance are Shettleworth v Cox [1927] KB 9, Carlen v Drewey (1812) 35 ER 61 where Lord Eldon said that it was not the role of the court to assume the management of every playhouse and brew house in the kingdom. Similar sentiments are being expressed today in the Caribbean.

2.
The view that disputes among members should be determined or settled by the members themselves in general meeting.
3.
The flood gates argument, the fear of multiplicity of suits.
3 Positions:
Jamaica ss196 and 203 of the Companies Act 1973. The framework for minority ction in Jamaica was contained in ss196 and 203. The former provided that:
(1) An application to the court may be made by petition for an order either:

By any member of the company who companies that the affairs of the company are being conducted in a manner oppressive to some or part of the members; or

By the minister.
(2) If the court is of the opinion that the company’s affairs are bring conducted as aforementioned the court may make such order as it thinks fit.
(6) For the purposes of this section the word oppressive shall include any instance of
oppression whether constituted by a single act or by a course of conduct.
Under s203 the applicant could apply to the court for just and equitable winding up. This is a draconian measure.
There have been several cases interpreting the statutory provisions in Jamaica. In Chinatown Restaurant Ltd v Wong the respondent brought a petition for the winding up of the company o the ground that the affairs of the company were being conducted in manner oppressive to him as a member of the company. The CA found that the respondent had no locus standi to present the petition under ss196 and 203, as at the time he signed the memorandum of association he was not resident in Jamaica. A similar result was evident in the decision of Win-Daws v Brian where the respondent, the minority shareholders and majority directors of W Ltd brought a petition against the company and it managing director and the majority shareholder, the appellants. The petition complained of oppressive conduct. They alleged that no directors’ or general meetings had been held, no dividends had been declared, no shares certificates had been issued. The managing director had purchased a horse, an apartment and a house out of the company’s money and that he had made $400,000 by an illegal deal which invaded excise duty. The CA of Jamaica struck out the action as being an abuse of the process of the court and/or frivolous and vexatious. The court also contended that even if the allegations were truthful they could not amount to oppression within the meaning of s196 of the Act.
New law jurisdictions: Barbados ss225-230 This is a result of the CLI which drafted a bill in 1971. It is Canadian in its philosophy and approach. There is a wide definition of complainant. Barb s225 defines a complainant as a shareholder or former shareholder of the company ir any of its affiliates, a director of former director of the company or any of its affiliates, a debenture holder or former debenture holder…and the registrar and any other person who is a [fit] and proper person to bring the action. We can contrast the definition here with the approach taken in Jamaica in 2004 by s213(3) which defines a complainant narrowly to mean (a), (b) and (c) as mentioned above. Hence it does not include the registrar….proper person….
The complainant may apply to the court by petition for an order that the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to the interest of its members. In the decision of Ward v Mound Gay Ltd et al William CJ stated that s228 (Bar) ‘connotes a jurisdiction in which the court’s hands would not be ties in seeking to do justice’.
In Barbados and Trinidad the discretion is founded on three pillars:

Oppression

Unfair prejudicial

Unfairly disregards the interests.
Note:
S213(A) of the 2004 Act in Jamaica recognises two categories of conduct which can trigger the oppression remedy namely, oppressive and unfairly prejudicial. a) Oppressive has been interpreted as burdensome, harsh and wrongful Scottish Cooperative Wholesale Society v Meyer HL Lord
Wilberforce b) Unfairly prejudicial has been interpreted to refer to acts which are unjustly or inequitably detrimental c) Unfairly disregards has been interpreted to mean unjustly without cause paying no attention to to ignore or to treat as of no importance.
While in Barbados and Trinidad a complainant is widely defined the position in Jamaica is quite different. Consider Canwest
International and Atlantic 1994 30 Barb LR 226 where the CA found that a party who acquired rights under a pre-incorporation contract was a fit and proper person to bring an action under ss225 – 230. They, therefore, recognised that the court has a wide discretion and exercised it. This is one of the reasons why Jamaica has a narrow definition of a complainant. Five Star Medical causes concern [Manual]. There the court found that a corporate customer had locus standi to bring an action under s239 of T&T CA.
Moreover, this corporate customer was entitled to be indemnified for costs.
S174 of Jamaica 2004 says that a director and officer must act honestly and in good faith with a view to the best interest of the company. Sub-s 4 expressly states that in determining what is in the best interest of the company the directors and officers may have regard to the company’s shareholders and employees and the community in which the company operates. The fact that it is permissive
–“may” have regard. What are they referring to when they speak to the community.
Jamaica Companies Act 2004 ss213-22
Lalla v TCL [Manual p357] The CA refused to find as an absolute rule that the court will not enforce a contact of personal service under s242. This case also illuminates on the meanings of the phrases oppressive, unfairly prejudicial and unfairly disregards.
Note: As to the meaning of unfairly prejudicial see the case of Re Saul The words unfairly prejudicial are general words….(see wks p38)
As to the meaning of interest see R a member is not entitled to complain that the company’s operation on lands adjoining his house is lowering the market value. Note: s174 and the definition of complainant in Five Star Medical. Re Cumana Ltd conduct that affects all

members may be prejudicial to the interest of some. The case dealt with a rights issue but the minority shareholders could not subscribe thereto as a result of their financial position.
Harm must be in a commercial sense not merely in an emotional one. Re Unisoft Group Ltd
In quasi-partnership companies the concept of legitimate expectation may be relevant This is an equitable constraint. O’Neill v
Phillips . Members may have legitimate expectation that the company will be run in a particular way. The court has regard to the personal relationship or personal dealings, agreements and tacit understanding by word or conduct.
Having established the requirements of the conduct ie oppression etc one must then consider the remedies
Whether the statutory remedies are exhaustive.
Whether the rules in the legislation encompass suing for loss of value of shares ie reflective loss.
Verderame v Commercial Union Assurance Co. There was a policy of insurance, however the insurance covered their personal property and not that of the corporation [separate legal personality]. Action was brought to sue the broker of the policy. The court found that the company was the proper person.
This reflects the general position in Prudential Assurance v Newman which shows the reluctance of the court to award for reflective loss, diminution in the value of the shares.
One available remedy is selling the shares.
The value of the shares is determined on equitable terms ‘he who seeks equity must do equity’.