Question

olour Paints Ltd (‘Paints’) is a public company of which Black, White and Brown are the directors. Each of these directors controls a 10% shareholding in Paints. No other single shareholder holds more than a 5% shareholding in the company. Paints was established some time ago in order to improve the buying power of a number of smaller retailers of paints so that they might meet the competition of larger retail chains. For 6 years the company has actively pursued the object of purchasing paint from manufacturers on behalf of members at a price comparable to that paid by the large retail chains. However, in the last year, the present directors, who are among the largest of the small retailer members of Paints, have considered introducing scaled benefits for members according to the volume of purchases that they make. They say that the smaller members of Paints will still remain better off than if they were to purchase alone, and that to meet increasing administrative costs, some recognition should be paid to the fact that a small number of Paints' larger members have really been responsible for the benefits received by all members. At various meetings over the past year the directors have continually raised these points. Last week, the board passed a resolution establishing a new members' buying list, by which the larger members of Paints will continue to buy at prices comparable to those paid by the retail chains and the smaller purchasing members will pay 15% more. George Brush, a member holding a 2% shareholding wishes to challenge the directors' actions. REQUIRED: On what legal grounds might George Brush proceed to challenge the actions of the directors and what legal remedies might be available to him?

Answer 1

Oppression of Minority Shareholder is a phenomenon observed in Corporates where Shareholders, who have Majority Shareholding and hence Control or significant influence over it, try to implement policies that Benefit them and are unfair to the Minority Shareholders. Fair Dealing is violated as a consequence.

But now laws prevent Minority Oppression by way of giving the Minority Shareholders their own Rights to protect their Interest.

Minority shareholders of companies incorporated in the United States derive their rights from (i) the statutory and common law of the state in which the company is incorporated and the organisational documents of the company (e.g., certificate of incorporation, also knowns as a “charter,” and bylaws), (ii) the U.S. federal securities laws, including various federal statutes and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”), and (iii) for companies with equity securities listed on a U.S. stock exchange (such as the New York Stock Exchange (“NYSE”) or Nasdaq), the rules of that exchange.

Non-controlling shareholders do not owe fiduciary duties to one another and also generally do not have any rights that could be enforced against other shareholders. However, for companies that have a controlling shareholder, statutory provisions and/or common law provide protection for minority shareholders. Many states, including New York, but not (as discussed below) Delaware, have statutory provisions and common law rules that give minority shareholders rights when they are being “oppressed” by controlling shareholders. Under New York law for example, holders of 20% or more of a closely held corporation the shares of which are not listed on a stock exchange, may petition for dissolution if the directors or shareholders in control of the corporation engage in illegal, fraudulent or oppressive conduct. In such case, New York law gives the controlling shareholder the option to avoid dissolution by purchasing the petitioning shareholder’s shares for “fair value” and sometimes even requires the controlling shareholder to buy-out the minority shareholder. Although Delaware law does not expressly recognize the right of minority shareholders to dissolve a corporation or require a buy-out as remedies against shareholder oppression, Delaware law provides minority shareholders with remedies against controlling shareholders for breaches of fiduciary duty. Controlling shareholders of a Delaware corporation owe fiduciary duties to minority shareholders, similar to the duties of directors. Therefore, conduct that may give rise to an oppression claim in other jurisdictions may give rise to a breach of fiduciary duty claim in Delaware. While organisational documents typically are effectively treated as enforceable contracts between the company in its shareholders, the provisions of such documents typically do not restrain shareholders themselves or give shareholders rights as against each other. Accordingly it would be unusual for shareholders to bring claims asserting that other shareholders were acting in contravention of the organisational documents.