Question

Even though a company is run in accordance with the wishes of the majority shareholders, it does not mean that the majority shareholders can pass resolutions at will. The law will protect minority shareholders when their interests are affected. The most important question, however, is whether existing laws to protect minority shareholders are sufficient. Equally important is whether minority shareholders play an active role in monitoring the company's operations, namely shareholder activism.

Discuss and critically examine the above statements. Include the legal status in the UK, Australia. Such comparisons should indicate a more comprehensive approach to the protection of minority shareholders

Answer 1

The protection offered to minority shareholders and their effectiveness :

Protecting the interest of the minority is mandated by law and it is part of the life of a corporate entity.This right however does not empower the minority to make decisions on the company’s nor does it allow company policies to be set up exclusively by the majority . A recent quantitative study indicates that levels of shareholder protection in Australia and the United Kingdom are stronger than levels of protection in the United States and other countires.

legal status in Australia : Minority shareholders in Australia have various rights and protections under Australian Law – for instance, the right to be heard at company meetings. Majority shareholders often have a lot of power and influence, and in some circumstances, they may even have the ability to elect the whole Board of Directors and effectively control the company entirely. However, the law has always had some regard for minority interests.

There are certain remedies available to protect the interest of minority shareholders ; they are ( UK ) ,

1. Petition on the ground of Unfair Prejudice :  This remedy is found in s 994 CA 2006 which was formally s 459 of the CA 1985. This action can furnish an allegation if it is found that the conduct of the majority are performed in an unfairly prejudicial manner against the interest of the stakeholders including the claimant, or that an act or proposed omission of the company is or would likely be prejudicial against the stakeholders by the company. It is worth noting that only company members have a right to petition under this remedy.

2. Just and Equitable Winding Up : The Insolvency Act (IA) 1986 provides shareholders with a statutory remedy in the form of a winding-up order on a just and equitable ground pursuant to certain provisions and rights inherent in the CA 2006. The aim of a petition via this remedy in the IA 1986 is to oblige the company to seek a validation order thereby putting pressure on the company if a petition for unfair prejudice has also been brought in tandem. the just and equitable winding up remedy will most likely be useful only if s 994 CA 2006 does not satisfactorily mend the wrongdoing complained of by the minority shareholders.

3. The Derivative Claim Principle : A derivative action is normally for the benefit of the company which contrasts with s 994 unfair prejudice remedy.  If a shareholder brings a petition against the majority instead of a derivative action, the court will not set aside the claim per incuriam but will require the petitioner to bring a derivative action if the wrongdoing is against the company.  a derivative claim may be instituted in court against any member including ex-directors or shadow directors or any other person who is directly involved in the accused breach;it could be brought where there is negligence, default or breach of trust and duty by a director of the who failed to act in accordance with his duties.

Minority shareholders in shareholder activism : Shareholder voice has an intrinsic value that is independent of any utility it may yield. Shareholder suffrage is a fundamental right and should therefore be granted special status and protection under corporate law. The most seen trend is that the minority shareholders tend not to participate in the decision-making process of companies with a controlling shareholder, and their voice is rarely heard. Even when they disagree with how the company is being managed, they prefer to express this dissatisfaction through exit, ie, by selling their shares, rather than by expressing their voice at a shareholder meeting.

It has been recognised that certain discrepancies were inherent in the common law such as the fraud on the minority and majority rule which didn’t suit the minority shareholders because of its uncertain nature as to whether they had the locus standi to sue and also the disadvantage of power concentration with the majority. Crucially, the advent of the 2006 CA has now filled the void which the common law failed to address adequately. The rigid exceptions in the common law have been relatively softened by the CA.So , we can assume that the laws have improved /changed to protect the interest of minority shareholders . Because if the courts decide to condone a liberal attitude, the company will be subjected to unnecessary and trivial claims while if it adopts a strict procedure, the minority will be parachuted to the pre-2006 CA situation where the rules where quite restrictive. Nevertheless, the most important objective is to protect the minority from majority shareholder abuse, at the same time, uphold the needs of the majority.