In a world of capitalism and widespread corporate affairs and entities, there will always exist the utilitarian principle

of the majority good for a majority amount of people. This is where the principle of the majority rule stands where shareholders who majorly collectively vote for an agenda during a general meeting will have the upper hand in most of the affairs run by the company. The minority shareholders however, will be expected to conform to the flow and be bound by the decisions agreed upon by the majority. Thus, they shall only thrust themselves into the limelight of decisions when they petition to the court against the unjust acts or omissions made by the directors and/or majority shareholders.

In status quo, there exist three routes where minority shareholders can rely on in order to contest the decisions of directors and majority shareholders: the derivative claim, the unfair prejudice petition, and finally, by enforcing personal entitlements under the articles of association. This paper will analyse the first two remedies that are available for aggrieved minority shareholders.

This paper will not only analyse both the common law and statutory remedies mentioned above separately, but also the procedures and requirements that particular petitioners have to comply with when petitioning to the court as well as the limitations to these remedies. One will also evaluate the rule in Foss v Harbottle (which shall herein be addressed as Foss) and the general attitude of the courts in safeguarding the rule against unjustified, malicious minority shareholders. Finally, the strengths and weaknesses of each respective remedy will be accessed and compared in order to determine the ultimate saviour of minority shareholders rights in a solvent company .

Companies Act 2006 and the Duties of Shareholders

Generally, the duties and capacities of shareholders are illustrated in section 33(1) of the Companies Act 2006 (CA 2006). This section upholds the power of the majority vote where any decision decided upon by the majority shall bind all shareholders within the company.

Thankfully though, there are checks and balances when it comes to equal footings of power dissented shareholders may vote "against the resolution in question" or

they can "alter the articles or...[refuse] to re-elect the directors of whose powers they disapprove." However, as much as a number of shareholders may disapprove of the decisions made in the general meeting, once the final tally of votes is recorded and conceded to, all shareholders are at its mercy regardless of inconsistent attitudes.

As a result, this may highly likely deter smaller shareholders from voting to begin with as they feel like their dissent will hold no water to the decisions of the majority. This will be mutually exclusive to the position of majority shareholders as they consequentially will have "virtually unlimited decision making power" without any hindrance from opposing minority shareholders during general meetings. This is where the exceptions to the Foss rule come into play.

The Rule in Foss v Harbottle

The rule in Foss was developed in order to protect the standing of the company as a whole against fragmented shareholders and it acts as an order in determining locus standi (capacity to sue in court). Status quo has declared the company as the only entity with legal standing to sue when a wrong has been committed against it; and

once an ultimate decision has been reached by the majority no individual shareholder should be allowed to express his or her dissatisfaction "for the simple reason that, if a mere majority of the members of the company...is in favour of what has been done, then cadit quaestio" - meaning that "the question is at an end." That means that all collective decisions are final.

The attitude of the courts has long been "non-interventionist" , in which the courts have steered clear of interfering with the internal management of companies. This is known as the internal management rule. Their justifications are primarily to uphold the rights of the majority shareholders and the choices they make in general meetings, as well as the opinion that the directors themselves are in a far better position to determine how the company should run. The courts also believe that for any decision, the majority will supersede regardless in any way in a collective meeting so there is no constant need for the courts to intervene. Moreover, there is a presumption by the courts that the companies are acting within their powers until proven otherwise. The proof for otherwise will be elaborated in the requirements of derivative claims below.

Derivative Claims

Derivative claims are legal actions brought by a minority shareholder on behalf of a company for a cause and consequence of the companys interests. It is expounded in Section 260 CA 2006 to mean that all actions pursued by the minority shareholder must be tied and largely rooted by the companys best interests and nothing else.

Derivative claims are most greatly known as the top exception to the Foss rule, largely because it manages to overreach the barriers placed by the majority rule in allowing minority shareholders to claim. One must note, however, that this ability provided to minority shareholders does not substantially substitute the rule in Foss, but it namely acts as a last resort or final alternative route to shareholders who have felt that the majority are abusing their powers, and are depriving the minority of their rights in a company.

Although other shareholders actions exist under the CA 2006, namely personal actions and representative actions (group litigation), but it is derivative actions that

have a higher call towards minority shareholders. This is because of the discretionary attitude of the courts as mentioned above.

Personal actions are generally not affected by the Foss rule since it would be an action by a particular shareholder regarding the question of his or her rights, and not on behalf of the company. Such claims will usually be allowed by the courts where the minority will be entitled to come before the court to maintain their rights.

Reflective loss on the other hand, will not be entitled to claim under personal actions. This is where the only loss encountered by the shareholder is exhibited by the diminution of finances by the company itself. It is said that a shareholder cannotrecover damages merely because the company in which he is interested has suffered damage. A shareholder cannot claim where he has not been compelled to endure a personal loss near and dear to him, but simply a loss faced by the company. Such loss is not reciprocal onto the shareholder. On the other hand, if a shareholder can prove that the defendant had indeed breached a duty that correlated to his rights personally for example, under a contract or a tort and it results in a personal loss,

separate and distinct from that suffered by the company, and said shareholder manages to establish all other requirements demanded by the courts, then said shareholder may be authorised to bring a personal action.

Representative actions (or group litigations) on the other hand, are much more precarious. Although it brings the benefit of reducing the amount of identical suits against the company, but the requirements are specific in which under rule 19.6 of the Civil Procedure Rules (CPR), a class right has been violated and there must be more than one individual who has an interest in a claim. Rule 19.6(4)(a) CPR also states that whatever resulting judgement will be binding on all persons represented in the claim.

Requirements of Derivative Claims

In order for a minority shareholder to bring forward a derivative claim, one must first establish the requirements set out by the courts. The most important aspect is the fact that the wrongdoing as specified by the minority shareholder is being controlled by the defendant directors and it is those who are in control that are thwarting the company

from launching an action. It is here that the company will no longer be the ultimate claimant, but will also be included as the defendant with the actual perpetrators; so that the company can both receive compensation for the wrong done onto it as well as be bound by any resulting decision made by the courts.

Another important element to note is that there must be a majority of the minority [that] wish the action to proceed otherwise the derivative action will fail. This is important in that it is the corporation that would highly likely bear the costs of the derivative action in question and thus, there must be some collective consensus amongst the aggrieved.

Generally, there are a number of exceptions to the rule in Foss before a minority shareholder can pursue a derivative action. The first requirement is that the act(s) forwarded by the company was illegal or [was] wholly ultra vires the company. This was where the directors propelled decisions that surpassed and exceeded beyond the boundary of their duties. In the event this occurs, it becomes nearly impossible for the

remaining shareholders to ratify the transaction or rectify any informality or irregularity found in the decisions of the company.

The second requirement is where the subject in question requires the sanction of a special majority or there exists non-adherence of a special procedure. If a particular decision of the company requires a special resolution but there is no approval by the special majority, then the individual minority shareholder will have enough basis to sue via a derivative claim.

The third requirement is on the notion that an individual members direct rights have been violated. Two obstacles must be overcome before this requirement can be satisfied. Firstly, there must be a distinction between outsider and insider rights in which only the latter is enforceable. The second obstacle is the distinguishment by the courts on whether the wrong was only inside irregularities which can be waived by a majority vote or that it is a constitutional right or constitutional infringement in which the claimant would be allowed the cause for claiming.

The fourth requirement is the execution of fraud against minority shareholders. Fraud can be defined as an abuse or misuse of power; or as when the majority are endeavouring directly or indirectly to appropriate to themselves [] which means the seizing of benefits which would otherwise belong to the company or other shareholders. Surprisingly, the definition for fraud has been rather wide in which the courts have even allowed a claim albeit the presence of an actual fraud where the directors have misused their powers intentionally or unintentionally, fraudulently or negligently, in a manner which benefits themselves at the expense of the company. The requirement for fraud would also be met if particular shareholders attempt to use their voting power to stultify any proceedings being taken against them.

Apart from that, there is the minor exception where a shareholder can sue when the interests of justice demands it. This is the ultimate last resort for minority shareholders when no other viable and visible remedy exists except that of a suit by individual corporators. It is only then that the claims of justice would be found superior to all the barriers initially placed by the technicalities of the derivative actions.

Limitations of Derivative Claims

As much as the courts and the rules of justice intend to uphold the rights of minority shareholders in a company, there must exist some limitations to derivative claims as to safeguard not only the company as a whole but also innocent shareholders who have not been tainted by the actions and decisions of the wrongdoers, as well as shadow directors (third parties who assist the directors or former directors) who may or may not be equally guilty.

In Smith v Croft (No 2), the courts took into account shareholders who were independent of the wrongdoers and the fact that they refused for actions to be commenced for disinterested reasons. For this reason, the individual member seeing for derivative action would not be able to be successful without the support of the majority inside the minority.

It is also said that all derivative actions must be sought bona fide on behalf of the company and there cannot exist any reasonable doubt of the member being enticed by external interests or possessing any ulterior motives. This is primarily to protect the

company from any frustrated shareholders who may be acting through malice or misjudgement and end up consuming a hefty amount of time, trouble and expense for the company.

Unfair Prejudice Rule

The unfair prejudice rule which was previously laid down under Section 459 of the Companies Act 1985 but is now replaced with Section 994 CA 2006 aimed to protect minority shareholders rights where the issue arose from unfairly prejudicial conduct of the companys affairs. Where derivative claims are actions sought by a member on behalf of the company for wrongs done to the company, the unfair prejudice rule on the other hand is partially contradictory in that it is to remedy wrongs done to the shareholder although in rare instances, it can include wrongs done onto both parties.

In order to determine unfairness, the courts resort to an objective approach in which it observes the conduct and demeanour between the company and its members. The Articles of Association can also be utilised as an important benchmark in determining

whether the actions of the company conform to how it should treat its members especially if it relates to any specific shareholder agreements that may be present.

The significant case of Clark v Cutland exemplifies the usage of the unfair prejudice rule where the capacity of the rule has been extended by Arden LJ to include an individual shareholder to acquire a considerable remedy for the company over the injustice committed onto it as well as possiblyobtaining a remedy for themselves personally. As a result of such judgement, there will now be an unavoidable combination of personal and corporate issues of both individual and corporate claims. The claimant shareholder may even obtain a costs order so that it will be the corporation and not the petitioner who will finance the action.

The result from Clark v Cutland has sparked numerous criticisms in allowing the remedy of unfair prejudice to expand so wide as to award minority shareholders an incredible leeway to petition for both personal and company-related claims. Critics exclaim that the methods utilised by the courts in filtering out unnecessary claims is

inadequate and that the collective position of the remaining shareholders in a company should be taken into account.

Thankfully, the case of Hecquet v McCarthy managed to draw the line on minority shareholders gaining unreasonable remedies apart from the sake of the companies they serve. All in all, it is agreed upon that minority shareholders should not be given an indefeasible right to obtain substantive corporate relief under the unfair prejudice rule.

Comparison and Criticisms

The statement for this paper claims that despite the fact that the unfair prejudice rule is more feasible in protecting minority shareholders rights, individual members still opt for derivative claims albeit the presence of a newly fortified Section 994 CA 2006. This statement does appear to be true based on the extended grounds for derivative actions as well as the insufficient accessibility of the unfair prejudice rule.

An advantage of derivative claims is the expansion to incorporate mere negligence and breach of regulatory duties when seeking an action under Section 260 CA 2006.

Although it will still be up to the ultimate discretion of the courts to allow such claims to pass, but it is still a considerable relief from the existing procedural hurdles that surrounds the action.

Another difference between the common law and statutory law rule is that public companies can rely on derivative actions but not the unfair prejudice rule. For derivative actions, the court may declare the corporation to compensate the charges reasonably sustained by the petitioner when bringing an action. However, no such compensation costs exist under the unfair prejudice rule.

Furthermore, there exist numerous criticisms for both remedies respectively. The main criticism of derivative claims is its complicity and the unpredictable scrutiny of the courts in respect to each individual claim. The initiation of any petition on behalf of a company will inevitably cause a substantial diversion of management time and resources and despite all the hurdles intended to reduce unnecessary claims, it will only be evident after the company has endured the long and complex procedures.

As for the unfair prejudice rule, the largest criticism is the lack of accessibility for petitioners to obtain the proof of prejudice. Minority shareholders have to bear the limited accessto the inside corporate information necessary to underpin a shareholders action and thus, will not be able to substantially gather the proof needed for the courts. Exclusion of minority shareholders in small companies is also an issue faced by unfair prejudice petitioners. Moreover, the long length of proceedings as well as their high resulting fees is also a flaw. Lastly, as a result of the decision in Clark v Cutland, there is a risk of a minority shareholder attaining a corporate remedy in response to a corporate wrong without going through the leave and notice requirements which are in place in a derivative action scenario.

Conclusion

Based on the extensive deduction of derivative claims and the unfair prejudice rule, as well as the comparative studies of their strengths and weaknesses, one can finally make a conclusion on the credibility of the statement. With the extension of grounds for petitioning derivative claims to include negligence, minority shareholders still rely on

the common law remedy regardless of the flexible nature of the statutory alternative. It is reasonable to speculate that both remedies will encumber a company of its valuable time and money however, it is practical to conclude that an individual minority shareholder would rather opt for derivative claims as compared to the statutory remedy because of its nature as being the last resort for aggrieved shareholders. Where proof is incredibly difficult to attain due to the stronghold of those in charge of the company, a derivative claim is what remains as the prevailing action for minority shareholders who feel that they have been misled or deceived. It is for this reason that the statement should stand.