STATUTORY MINORITY PROTECTION

There are two parts of this chapter:

• Winding up of the company under section 122(1)(g) of the Insolvency Act 1986 for just and equitable grounds.

• Remedies for unfairly prejudicial conduct under section 994 of the Companies Act 2006.

BACKGROUND
All powers of the company rests ultimately with either the Board of Directors or the General Meeting. Each of these organs takes decision by a majority vote.
A substantial power is placed in the hands of those who control more than half of the votes on the board or at a shareholders' meeting, and minority members
must accept the decisions of the majority.

Majority rule has many advantages:

 It looks a more efficient way of resolving disagreements. Meetings are usually quite quick and cheap - much cheaper than protracted litigation;
 It keeps disputes within the company, avoiding harmful publicity and perhaps the breakdown of relationships that litigating in front of a judge might
create.
 It minimises judicial interference inside companies. Judges fear they are illequipped to
 It minimises judicial interference inside companies. Judges fear they are illequipped to resolve business disagreements, which are better addressed
by the people who will have to live with the consequences of the decision shareholders. And judges fear a flood of litigation - with four million
companies, and lots of disagreements, judges would struggle to cope.
 It seems more democratic to allow the decision that has more support among shareholders to prevail. Of course, those who buy more shares usually
get more votes but that too looks appropriate: those with most at stake in the decision should arguably have more influence.

The company law primarily takes a non-interventionist approach and the courts will uphold any decision which has been taken with the approval of the
majority. Upholding a decision of the majority may, at times, lead to unfairness to the minority shareholders and thus, law needs to devise mechanism for
pro of the minority shareholders. The minority shareholder is given a right to seek court's assistance under s.122(1)(g) of the Insolvency Act 1986 or s.994 of
the Companies Act 2006.

SECTION 122(1)(G) OF INSOLVENCY ACT 1986 WINDING UP OF THE COMPANY ON JUST & EQUITABLE GROUNDS
 This Section provides the Courts with the power to order winding up of the company where the court is of the opinion that it is just and equitable to
wind up the Company.
 This section is based upon the law on partnership. The courts have the inherent power to dissolve a partnership. On similar terms, the courts have
the power to order winding up of the Company.
 Any member who can show that he has a tangible interest in the winding-up (notwithstanding that his particular shareholding is small) can file for a
petition under this section.

- Examples where courts have used the powers under section 122(1)(g) of Insolvency Act 1986 to wind up the company:
(i) Failure of Company's substratum
If the company's main objects become impossible or illegal, the courts can order winding up upon just and equitable grounds.

Re German Date Coffee (1882). The company was incorporated for obtaining a German patent for manufacturing a coffee substitute from dates. Since
the company never received the German patent, the Court of Appeal ordered winding up of the Company as the Company's substratum had failed.

(ii) Fraud
Company was formed by the promoters to perpetrate a fraud and the winding up is the only solution to allow the shareholders to recover their investment.

Re Thomas Edward Brinsmead (1897). The Company was formed to perpetrate fraud by impersonating another famous company. Court held it was just
and equitable to wind up the company.

(iii) Deadlock
If the relationship between the parties has broken down with no hope of reconciliation, the court may order a dissolution.

(iv) Lack of Probity

In case the company is a quasi-partnership and there is a lack of confidence in the competence or probity of the management.

Loch v John Blackwood (1924) The majority shareholder considered the company as his own and was coercing the minority shareholders to sell off their
shares to him at an undervalue by not decla the dividends on the shares.

(v) Exclusion from management where the company is a quasi-partnership

Quasi-partnership is where the business was in the name of the company but it is practically operated as a partnership, i.e the shares are held amongst a
small number of shareholders and they all have an expectation in the management of the company. Quasi rtnership will generally occur in small private
limited companies. If one of the shareholders is removed from the company's management, the court may issue an order for winding up of the Company.

Ebrahimi v Westbourne Galleries Ltd [1973]

Nazar and Ebrahimi were partners who operated the oriental rug business for approximately 10 years. They later incorporated the company with each having
equal shares and converted their partnership into a corporate structure. Later, Nazar's son joined the company as director and shareholder, and as a result
of this, Ebrahimi became a minority both within the board and at the general meeting, where he could be outvoted by the combined shareholding of Nazar
and his son. Relations between Ebrahimi and Nazar (and his son) broke down and Ebrahimi was voted out of the board.
It was held that even though Ebrahimi had been removed from the board in accordance with the Companies Act and the articles of association, the court has
the jurisdiction to subject the exercise of legal rights to equitable considerations. Since Ebrahimi had agreed to the formation of the company on the basis
that the essence of their business relationship would remain the same as with their prior partnership, his exclusion from the company's management was
clearly in breach of that understanding. It was therefore just and equitable to wind up the company.

Lord Wilberforce listed the typical elements in petitions brought under the just and equitable ground:

 The basis of the business association was a personal relationship and mutual confidence (generally found where a pre-existing partnership has
converted into a limited company).
 An understanding that all or certain shareholders (excluding ‘sleeping’ partners) will participate in management.
 There was a restriction on the transfer of members' interests preventing the petitioner leaving.

Re A & BC Chewing Gum Ltd [1975]

The minority shareholder was entitled under the articles and by virtue of a separate shareholders' agreement to appoint one director to the board, but the
majority shareholder refused to give effect to the appointment. The court, relying on Ebrahimi, held that the company should be wound up since the majority
shareholders had repudiated the minority's right to participate in the management of the company - a right which formed the basis of their participation in
the company.

- Relationship with other remedies

Winding up is a measure of last

In order to make winding up application, the petitioner shall firstly exhaust alternate remedies such as purchase of shares or an order under section 994 CA
2006. This is because winding up has harsh consequences.

The winding up order shall only be issued if depth of the shareholders' disagreement is of grave

UNFAIR PREJUDICIAL CONDUCT-SECTION 994 OF COMPANIES ACT 2006

It was felt that there was a need for an alternative remedy for minority protection other than order for winding up as winding up had harsh consequences.

Section 994 Companies Act 2006 provides:

"A member of a company may apply to the court by petition for an order... on the ground

(a) that the company's affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some
part of its members (including at least himself), or

(b) that any actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.

• Conduct of company's affairs:

It must be the company's affairs that must have given rise to unfairly prejudicial conduct.

Nicholas v Soundcraft Electronics (1993): The parent company had failed to pay debts owed to its subsidiary (in which the claimant was a minority
shareholder). The Court of Appeal held that the omission of recovering the debts from the parent company amounted to actions done as conduct of the
affairs of the company.

Re City Branch Group (2005): The subsidiary's actions were considered as the action of the parent where the subsidiary was wholly-owned by the parent
company and directorship.

Oak Investment Partners XII v Boughtwood

mming School

There is no reason why conduct by a person employed as a senior manager in a business, even if not a director, should not be relevant to the grant of relief
under s 994. Complaint may be made under s 994 even if the mismanagement is not the product of business decisions taken by the board of a company,
but by individual directors or others.

Graham v Every
Breach of a pre-emption provision was held not, in general, to constitute the conduct of the affairs of a company.

- interests of its members:

The petitioner must prove that his interest as member have been unfairly prejudiced. The courts have taken a liberal approach to this requirement. In O'Neill
v Phillips, a company's employee (who had certain shares in the company) was subject to unfair prejudice. Courts held that his interests as a member were
involved but there was no unfair prejudicial conduct on part of the company.

It was the legislative intent to keep the word broader as the statute uses the word 'interests' rather than 'rights'. This was manifested by Peter Gibson J in Re
Sam Weller & Sons Ltd (1990).

However, it doesn't mean that courts have the arbitrary power to declare anything as affecting the interest of the member. The starting point for the courts
will be the rights as contained in the articles.

Re Blue Arrow
Investors are entitled to assume that the whole of the company's constitution is written in the constitution (not some existential "legitimate expectation").
Particularly, the right to be the company president was a personal right (not a class right) and it could be altered by special resolution. Court refused to grant
remedy under s. 994.

- unfairly prejudicial:

The petitioner must establish that his interests qua member have been unfairly prejudiced.

The test for unfair prejudice is objective. (Re Bovey Hotel Ventures (1981)).

In Re Ringtower Holdings plc (1988), Peter Gibson J stated that 'the test is unfair prejudice, not of unlawfulness, and conduct may be lawful but unfairly
prejudicial...' The notion of unfairness was considered by the Jenkins Committee to be 'a visible departure from the standards of fair dealing and a violation
of the conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely'.

In O'Neil v Phillips (1999) Lord Hoffmann held that fairness was to be determined by reference to 'traditional' or 'general' equitable principles. He stressed
that company law developed from the law of partnership - which was treated by equity as a contract of good faith.

O'Neil v Phillips (1999):

The company carried on the business of stripping out asbestos from buildings, and Phillips was its sole shareholder and director. In 1983 he appointed O'Neill
(who had been employed as a manual worker) to the board of directors and gave him a 25% shareholding in the company. In 1985 they discussed informally
Phillip's hope that one day O'Neill would take over the sole management of the company, and he was accordingly allowed a 50% share of the profits of the
business. Shortly afterwards, Phillips retired from the management of the company, leaving O'Neill as de facto managing director.
By 1991, however, the business was struggling, and Phillips became critical of O'Neill's management. He resumed control of the company and repudiated the
profit-sharing agreement. O'Neill filed a petition, arguing that Phillips' conduct amounted to unfair prejudice.

The House of Lords held that, although O'Neill had been prejudiced, it could not be said that Phillips' conduct had been unfair in the circumstances. The fact
that the 1985 discussion had never been formalised was fatal to his petition, as without any firm agreement that O'Neill would manage the company, he had
no basis for the argument that he have the right to do so. As for the profit-sharing agreement, all the evidence established that this only was to subsist so
long as O'Neill was de facto managing director, and following Phillips' resumption of control, the agreement was no longer in force. Lord Hoffman described
O'Neill's petition as amounting to a request to grant a “no-fault divorce”, which the section could not provide.

His Lordship emphasised that the term 'legitimate expectation' refers to an expectation that the company's affairs will be conducted in the manner agreed
by all the members, not a personal hope of the petitioner that other members will so something which they have not in fact agreed to do.

The result recognised that it was not sufficient to found a petition under s.459 (now, s.994) simply to plead a denial of a 'legitimate expectation'.

Lord Hoffmann concluded that a member will not ordinarily be entitled to complain of unfairness unless there has been:

- some breach of the terms on which he agreed that the affairs of the company should be conducted
- some use of the rules in a manner which equity would regard as contrary to good faith - in other words, equitable considerations would make it unfair
for those conducting the affairs of the company to rely on their strict legal powers.

Phoenix Office Supplies Ltd v Larvin

Petitioner cannot enlist s.994 to force a right of exit from the company that does not exist under the company's constitution.

Fulham FC v Richards
A claim under s.994 cannot be brought in a situation where the parties had agreed not to invoke s.994 rights. The rights which are granted under s.994 to
petition the court for unfair prejudice are alienable.
A company that begins as a quasi-partnership might cease to be so as the relationship between its members changes (becoming, perhaps, based less on
personal trust and confidence, and more on formal agreements between the parties): Re AMT Coffee Ltd [2019]. A company might be a quasi-partnership as
between some of the members (who have a close personal relationship) but not as between others (who may lack that close personal relationship): Waldro
v Waldron [2019].

Examples of unfair prejudice includes:

(i) Exclusion from management

Re Ghyll Beck Driving Range Ltd (1993)
A father and son, with two other people, incorporated a company to operate a golf range. Following a fight between the father and the petitioner, the
business was managed without consulting the petitioner. It was held that the petitioner had been unfairly excluded from the management of the company,
since from the start it had been anticipated that all four would participate in managing the business. The court therefore ordered the majority to purchase
the petitioner's shares on the basis that the affairs of the company had been conducted in a manner unfairly prejudicial to his interests.

Re R.A. Noble and Sons [1983]

The company was a quasi - partnership formed on the basis that the petitioner would provide capital and that the respondent would manage the company.
The petitioner alleged that he had been excluded from the management of the company. The respondent contended that this had not been done deliberately.
It was held that it would depend on whether a reasonable bystander would consider the conduct to have unfairly prejudiced the petitioner's interests. Here,
it was prejudicial but not unfair.

(ii) Mismanagement which includes breach of the directors' duties of care and skill Re Elgindata (1991)
Warner J observed that the court would be very reluctant to accept that managerial decisions could form the basis of a section 994 petition but that in an
appropriate case, it might find that serious mismanagement of a company's business did constitute unfairly prejudicial conduct.

Re: Macro (Ipswich) Limited (1994)

There was sufficient serious mismanagement to justify objectively a finding of unfair prejudice.

(iii) Excessive remuneration taken by the directors and the failure to pay dividends Re Sam Weller (1990). Courts may consider it unfairly prejudicial for no
dividends to be paid to the minority shareholder even though the company is profitable while the majority shareholders are benefiting financially by having
significant remuneration packages as directors.

(iv) Breach of fiduciary duties (even though the duties are owed by director towards the company, the case law under $.994 shows that personal remedy may
be obtained)

Re London School of Electronics (1986)

The plaintiff and defendants were directors of the college. The Defendants had breached their fiduciary duty by diverting a corporate opportunity towards
another company. The plaintiff, when got to know of this, also set up a competing business and subsequently filed for remedy under s.994 (previously, s.75,
CA 1985). The plaintiff was allowed a remedy even though there was wrongdoings on his end as well, as there was no requirement for clean hands for getting
remedy under this section.

(v) Re Baumler (UK) Ltd, George Bompas QC (sitting as a Deputy Judge of the High Court) observed that in the case of a quasi-partnership company, a breach
of duty by one participant may lead to such a loss of confidence on the part of the innocent participant and breakdown in relations that the innocent
participant is entitled to relief under s.996 of the CA 2006. The judge noted that, in effect, the unfairness lies in compelling the innocent participant to remain
a member of the company.

General Point
In Re Saul D Harrison and O'Neill v Phillips Lord Hoffmann took the opportunity to inject content into the concept of fairness. He reaffirmed the sanctity of
the s.33 contract. The House of Lords stressed that the remedy did not confer on the petitioner a unilateral right to withdraw their capital. In order to succeed
under s.994 a petitioner will need to prove either a breach of contract (including the s.33 contract) or breach of a fundamental understanding which, although
lacking contractual force, makes it inequitable for the majority to go back on the 'promise'.

REMEDIES FOR UNFAIRLY PREJUDICIAL CONDUCT

Remedies for UPC are set out in Section 996 of the Companies Act 2006.

The court can give, inter alia, following orders:

Regulate the company's affairs by either altering its constitution or forbidding the alteration of its constitution:

Require the company to do or refrain from doing a particular action

Provide for the purchase of shares of any members of the company by the other members or by the company itself (most common form of remedy) (Grace v
Biagioli)

Valuing shares in quoted companies is a fairly straightforward exercise because reference can be made to their market price. For unquoted companies – and
the vast majority of s.994 petitions fall within this category – the valuation exercise is a far more difficult undertaking. The court has a wide discretion to do
what is fair and equitable in all the circumstances of the case. Two important points stand out. First, the shares must usually be valued by an 'independent
valuer' (O'Neill v Phillips). The auditors would usually not be considered independent. The second point concerns whether the valuation should be 'pro rata'
or 'discounted'. Re Bird Precision Bellows Ltd [1984] reviewed this issue. It was stressed that the overriding objective was to achieve a fair price and that
normally no discount would be applied. Thus, a 49 per cent shareholding in the company will be valued pro rata, being worth 49 per cent of whatever the
company as a whole is worth. This (generous) approach was justified on the grounds that the petitioner is an unwilling vendor of what is, in effect, a
partnership share.

The general rule was that there was presumption in favour of a pro rata valuation should apply to all companies or only to those companies that are quasi-
partnerships. In Irvine v Irvine [2006]. In Re Blue Index Ltd [2014], on the other hand, the court felt that restricting the pro rata approach to quasi-partnerships
was inappropriate and declared that the pro rata principle would apply in all companies. However, in Estera Trust (Jersey) Ltd v Singh [2018], the court
suggested, again, that the pro rata presumption applied only to quasi-partnerships. The law on this point, then, remains rather uncertain.

When ordering a buy-out, the court will determine the approach for the valuation of shares. In reaching a fair value of the minority's shares, generally, no
discount will be applied (O'Neill v Phillips) (Re Addbins Ltd). However, the exception is where shareholders acquired their shares as an investment (so they
probably would have paid less for a minority stake anyway). (Re Bird Precision Bellows Ltd (1984))

Re Blue Index (2014)

It was inappropriate to apply a discount because of the special circumstances of this case.

Oak Investment Partners XII v Boughtwood

Generally, the courts will order the wrongdoer to buy out the shares of the however, the court ordered that the wrongdoer had to sell his shares to the
petitioner.

Grace v Biagioli and others

The Court of Appeal has held that the court is given a wide discretion under section 996 as to the relief which should be granted - it is not limited merely to
reversing or putting right the immediate conduct. The court is entitled to look at the reality and practicalities of the overall situation, past, present and future.

Virdi v Abbey Leisure Ltd [1990]

In a winding-up, the liquidator would be in a better position than a valuer to determine the value of Claimant's share and to ensure that the price paid to
Claimant for his stake was similar to that paid to another shareholder for a similar stake.

Anderson v Hogg
The existence of the alternate more straightforward method of making a claim does not invalidate the request for order under s.994 (previously, s. 459 CA
1985).