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Comprehensive Remedy for Aggrieved Shareholders

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Introduction:

The principle of majority rule is enshrined in company law. While the law recognises that it is the right of the majority shareholder’s to conduct the company’s business in what they see as its best interests, it often happens that a majority may behave in a manner which is damaging to the interests of a minority of members. Therefore, the law has developed protection for the minority under both the common law and through statute provisions[1]. Section 205 of the Companies Act 1963 has become the primary outlet for aggrieved petitioners.

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It has had significant influence in reducing the total control majority shareholders and director’s initially had at their disposal, and has enabled the minority shareholders with the ability to effect change where they would have been incapable of doing so before.

Nonetheless, s 205 is limited in its scope, and its application can be invariably restricted. Prior to the enactment of this provision, shareholder’ grievances within a company were governed by the general rule established in Foss v Harbottle[2], which protects companies and their separate legal identity from claims of adverse conduct.

This rule ensures that only a company may institute proceedings in respect of wrongs done to it, and it set limits to the right of an individual member of a company to sue upon such an assertion. Under this rule, exceptions allow a minority shareholder to bring a personal, representative or derivative action against a company on the basis of an alleged wrong. Yet due to the nature of this rule and the responsibility of the courts to ensure that the floodgates remain firmly closed, it would seem as though there is a necessity to favour the legal over the natural person[3].

Unless a shareholder could bring himself within one of the exceptions to the rule, his only remedy (prior to the enactment of s 205) for oppressive conduct was to make a petition for the winding up of the company on the grounds that it was ‘just and equitable’ to do so, which is not always beneficial to the aggrieved members. Consequently, Section 205 was created to redress the balance of rights given to shareholders, and it is now the most common remedy sought where the interests of a shareholder are being prejudiced. However to what extent it is a successful remedy remains ambiguous and it is pertinent therefore to explore its efficacy in more detail.

Basis of Section 205:

The foundation of s 205 was modelled on section 210 of the Companies Act 1948 (UK), the legislative forerunner to s 459 of the companies act 1985 (UK)[4]. These acts are broadly similar, notwithstanding certain aspects. While a precondition of s 210 required the court to be prepared to wind up a company on just and equitable grounds before it could consider granting an alternative remedy, this is not required in s 205.

“This was the most fundamental departure from the British model, and British authorities…should always be treated with caution because of the absence of this restrictive element from the Irish jurisdiction.”[5]

As a result, this reduces the threshold required to make a section 205 petition under Irish law. Once the court is satisfied that s 205 relief is required, there are a number of remedies available to ‘end the matters complained of’[6]. The court has the power to make several orders including: –

1. Compelling the oppressor to buy the aggrieved petitioners shares;

2. Instructing the petitioner to buy the oppressors shares;

3. Ordering the company to buy the shares of either party;

4. Seeking the amendment of the company’s memorandum and/or articles of association;

5. Directing the company to be wound up.

Moreover, s 205 is more extensive then commonly thought. It is not simply confined to the protection of minority shareholders, but in fact covers instances where a 50/50 per cent shareholder, or indeed a majority shareholder is oppressed. Even though the word ‘minorities’ appears as a cross-heading above s 205, it fails to mention the word ‘minority within the section itself.

Application & Utility of Section 205:

There are two types of conduct prohibited under this section, namely ‘oppression’ and ‘disregard of interests’ as members. At times there can be an overlap of the two types of behaviour, but oppression is the conduct for which most actions are sought. Within a corporate environment this was commonly described as that which is ‘burdensome, harsh and wrongful’, and even though the courts have not defined this term exhaustively, it created a standard by which behaviour must be met in order to be oppressive. This description was formed by Viscount Simonds in the English Court of Appeal case of Scottish Wholesale Co-operative Society Ltd v Meyer[7]. The court was satisfied that the co-op had acted in an oppressive manner towards the petitioner, by purposely forcing the liquidation of a subsidiary, which was run by the minority shareholder on the behalf of the society. Keane J. was the first to use this definition under Irish law, in Re Greenore Trading Company Ltd[8]. This involved a shareholder who had deliberately appropriated assets of the company in a prohibited manner so as to secure a more dominant position within the company, and was held to have acted oppressively. While the courts must take each case on its own merit, the test for oppression must be satisfied objectively. The first Irish case to consider s 205 was Re Irish Visiting Motorists’ Bureau Ltd[9], in which Kenny J. opined:

“If one defines oppression as harsh conduct or depriving a person of rights to which he is entitled, the person whose conduct is in question may believe that he is exercising his rights in doing what he does.”

More recently, the definition of burdensome, harsh and wrongful, has been criticised as suggesting oppressive conduct must affect some legal right of the applicant, however if the act was unlawful then relief could be sought through other means. Section 205 is designed to aid the shareholder in cases where neither they nor the company would have a right to action against the oppressors at law. Therefore, it is perhaps more suitable to describe oppression as ‘something akin to unconscionable’[10], that can be considered as truly unfair to a shareholders position as a member, as opposed to illegal.

A further distinction between s 210 and s 205 is that a claim of oppression under Irish law does not have to be suffered by a member in his capacity as a member, or ‘qua member’. The British courts previously required this interpretation, as illustrated in Re Lundie Brothers Ltd[11] and Re Westbourne Galleries[12], however since s 210 was replaced by s 459 of the Companies Act 1985 (UK), it has afforded a wider application to claims of oppression. Within s 205, any member of a company may make a petition for oppression, even where the matter complained of is suffered in another capacity, for instance as a director or creditor.

In Re Murph’s Restaurant[13], the respondent had attempted to remove the plaintiff, who was a shareholder-director of the company, and had offered him three months’ salary in return as a redundancy. The court was satisfied that such exclusion amounted to oppression under s 205, regardless of the capacity held by petitioner, even though the case was decided upon other grounds. This distinction is important, as it is often the case that a shareholder of a company may also be a director of the company, and by including all company positions it illustrates how s 205 is an all-inclusive solution to oppressive conduct. In addition to this, there are certain individuals outside of a company who have locus standi to bring s 205 proceedings. These include a personal representative of a deceased member, a trustee, or a person beneficially interested in the shares of a company by virtue of the will or intestacy of a deceased member[14].

Conversely, complaints involving the disregard of members’ interests are required to be qua member, as a reference to ‘disregard of interests’ is wider than referring to a disregard of ones rights as a member[15]. This comes from the English interpretation again, where “The word ‘interests’ is wider than a term such as rights, and…that members may have different interests, even if their rights as members are the same.”[16]Even though much of the behaviour proscribed under s 205 is deemed as oppressive conduct, it is important to differentiate this with disregard of members’ interests.

The seminal Irish case pertaining to conduct in disregard of members’ interests is Re Williams Group Tullamore Ltd[17]. In this instance, the court did not find any evidence to suggest that the ordinary shareholders had been oppressed. Barrington J. was satisfied that the preference shareholders had acted honestly and fairly in their distribution of the dividends to the shareholders, yet he acknowledged that oppression was not the sole conduct prohibited under s 205. He continued by ruling that despite the fact the resolutions passed by the preference shareholders had been put forward in good faith, it still amounted to an objective disregard of the interests of the ordinary shareholders, and ‘…that to persist in implementing it would, in the circumstances, be oppressive…’[18]. This interpretation suggests that even though oppressive conduct is the basis most readily applied under s 205, continuous disregard of members’ interests, albeit in an honest and sincere manner, can amount to oppression, thus establishing a fundamental correlation between the two types of behaviour.

Types of Oppression:

Oppression upon a member can occur in several different ways. Section 205(3) states that where s 205 (1) applies, that the court may ‘make such orders as it thinks fit, whether directing or prohibiting any act, or cancelling or varying any transaction…’. This indicates that the court may exercise its powers in relation to any act, whether it is an isolated act or a continued course of conduct. This was illustrated in Re Westwinds Holding Company Ltd[19], where Kenny J. held that the sale of land at such a gross undervalue was completed in an oppressive manner, and it was on that ground, and ‘that ground alone’ sufficient for the exercise of the powers of the court under s 205(3)[20]. Furthermore, in stating that the court must make orders with a ‘view to bringing to an end the matters complained of’, s 205(3) suggests that the conduct of the affairs of the company, the exercise of the directors’ powers, or the matters complained of, must be on-going up to the date of presenting the petition[21].

It has been held that fraudulent and unlawful transactions can constitute oppressive behaviour, despite the effort to confine s 205 to conduct that is beyond a legal resolution. Again, in Re Westwinds Holding Company Ltd[22], the court found that the applicant shareholder had had his signature forged by the other shareholder who executed the transfer of deeds of company land. This case is encouraging as it resulted in the court ordering the offending shareholder to purchase the applicant shares at a value that they would have been, had the fraudulent transactions not taken place. Consequently, this embodies a precedent for aggrieved members to seek a comprehensive remedy under s 205 where acts of fraud are committed.

An important issue which arises under s 205 is the extent to which oppressive management can amount to maltreatment. As aforesaid, there is no limit to the wording of s.205 that oppression can only be suffered by a member in his capacity as member.[23]In Irish Press Plc v Ingersoll Irish Publications Ltd[24], the respondent was found to have acted in furtherance of its agenda in managing the subject company[25], and as a result the court held that Ingersoll had acted oppressively within the meaning of s 205 by failing to operate the management agreement properly with the petitioner. Similarly, in the English case of Re Harmer[26], an action was brought by sons against their own father. It was alleged that the father ran the business as if he owned it himself, disregarding the wishes of the board of directors and the interests of the shareholders. It was found that this constituted oppression and the father was directed to be excluded from any further management of the business. In essence, those who purport to adopt a totalitarian style of management which impacts upon the shareholders in an oppressive fashion may be liable to a court order under s.205.

Having said this, proving oppressive management is not always straightforward, and it can be difficult to demonstrate, particularly where the alleged oppression emanates from mere incompetence or mismanagement. In Re Five Minute Car Wash Service Ltd,[27] Buckley J. refused to make a finding of oppressive conduct. Despite the careless and inefficient manner in which the managing director performed his duties, there was no evidence to suggest he had acted ‘unscrupulously, unfairly or with any lack of probity’ towards any of the members of the company.[28] Equally, in Re Clubman Shirts Ltd,[29]O’Hanlon J. held that a failure to comply with the requirements of the companies act may not constitute oppression if it is a result of an innocent or careless omission, unless said failure is part of a deliberate scheme to deprive a shareholder of his rights or to cause him loss or damage.[30]Nonetheless, it was held that under the circumstances that the minority shareholder was entitled to knowledge of any completed transactions that involved the company and that failure to consult with shareholders amounted to oppression. This is authority for the proposition that actions which are not unlawful or intentional can still be oppressive within the meaning of s.205.

Restrictive elements of Section 205:

An aggrieved shareholder may only petition the court to make an order for oppression or disregard of member’s interests, where they assert that it is as a result of ‘…the affairs of the company…being conducted or…the powers of the directors of the company… being exercised…’[31]Therefore the offending conduct, be it oppression or the disregard of a shareholders interests, must come as a result of the conduct of the shareholders acting together in agreement, or as a consequence of the delegated management powers exercised by the directors of a company. This can work to the detriment of a petitioner, in that oppressive conduct outside of the affairs of the company or the powers of the directors is likely to be precluded under s.205. In Re Leeds United Holdings Plc[32], the petitioner’s claim to restrain a shareholder from selling his shares without first receiving consent, was rejected on the basis that such an action was not within the ‘affairs of the company’. This left the aggrieved applicant without recourse, despite suffering as a result of the sale of the shares. While it is important to limit the remit of s 205 and s 459 actions and protect the abuse of the process, this case demonstrates how the provisions can at times be an insufficient remedy for shareholders.

An order for the purchase of a petitioner’s shares is the most commonly invoked remedy to end the matters complained of, however petitions involving a quasi-partnership subsisting within a company can often make a s.205 action difficult to enforce. This is due to the nature of the company structure, based on a personal relationship of ‘equality, mutuality, trust and confidence’,[33] between small groups of members. Owing to the underlying understanding between shareholders of a quasi-partnership, there tends to be a belief that all shareholders will have an equal say in the management of the company, even though such an agreement may not be expressly set down in writing. The court will be inclined to apply equitable considerations through s.205 and come to the aid of a person who has suffered a breach of that underlying understanding. However such a remedy may be inappropriate and it may be more suitable to have the company wound up on ‘just and equitable’ grounds. In Re Murph’s Restaurant,[34]this issue was in fact addressed, where the petitioner sought to have the company wound up on the basis of oppression under s.205, and also on the just and equitable ground under s213(f). In view of the fundamental breakdown in the relationship between the shareholders, Gannon J. found that it would be inappropriate to make an order under s.205 as the removal of the petitioner from the company was a,

“Deliberate and calculated repudiation of the relationship of equality, mutuality, trust and confidence between the three of them…”[35]

Consequently, he based his judgement on that of Lord Wilberforce in Ebrahami v Westbourne Galleries Ltd[36], where the nature of the quasi-partnership was considered. Here it was stated that if the understanding or ‘legitimate expectation’ breached is of significance, and the partners no longer have confidence in one another, then it is unlikely that a s.205 order will suffice. The parties will no longer be capable of working together in the way originally contemplated, and quite often the association between the parties must be dissolved. In this instance it was deemed appropriate for the company to be wound up on the ‘just and equitable’ grounds of s.213(f). Similarly, in Re Zinotty Properties Ltd,[37]the majority shareholders refused to elect a particular individual to the board of directors, despite proving a legitimate expectation that he would be elected on foot of purchasing shares in the company. It was held that a s.205 remedy was not suitable and the company was ordered to be wound up on that assertion.

Another instance where s.205 does not provide a comprehensive remedy is where a company is wound up on just and equitable grounds because of an impasse between shareholders. Under s213(g) of the companies act 1963, the court may order the winding up of a company in the circumstances in which s.205 applies if,

“…Despite the existence of an alternative remedy, winding up would be justified in the general circumstances of the case…”[38]

In Re Vehicle Buildings and Insulations Ltd,[39]Murphy J. found objectively that because the two shareholders in the company were incapable of cooperating with each other, the company could not be legally or practically administered, and therefore had to be wound up. More recently, in Re Tradalco Ltd,[40]a company was established through a joint venture of two other companies. Subsequently, a deadlock arose between the founding companies which had a detrimental effect on the creditors and shareholders and accordingly, Lavan J. ordered that the company be wound up. While s 213(f) and s 213(g) are effective in their application, they are not always the most desirable remedy. Having said this, there is limited choice where situations such as this occur, and it is unfortunate that there is not more protection afforded through s.205.

Conclusion:

It is evident from this discussion that s205 is regularly effective in its application, and has become the foremost remedy for petitions brought by aggrieved shareholders. It is capable of quelling the unfairly prejudicial conduct that may arise within the running of a company, and restricts the manifestation of tyrannical directorship and oppressive management. The test in s.205 appears to be less constraining than that of s.459, and there is no precondition to find it ‘just and equitable’ to have a company wound up prior to engaging in an alternative remedy. Furthermore, it allows claims of oppressive conduct qua member, and the ability to take an action upon an isolated issue. Nonetheless s.205 is not easily employed, and it consists of several restrictive measures to ensure that there is no abuse of the remedial process, including confining petitions to those which come as a consequence of company affairs and powers of directors. Each of these elements are central to s.205 and give the statute provision its significance, yet there are certain aspects outlined above which preclude s.205 from being a comprehensive remedy.

Ambiguity still exists with regard to the availability of s.205 redress where the illicit behaviour transpires as a result of mere incompetence. This can be problematic for an aggrieved shareholder as it is difficult to show malevolence where it does not exist. However, Keane argues that such a loophole might not exist in Ireland as it does under the British jurisdiction, and that where conduct, be it incompetent or deliberate, has serious detrimental consequences for the applicant, such behaviour could be reasonably described as oppressive even where the oppressor genuinely believed what they were doing was right.[41]

More specifically, petitions that involve quasi-partnership companies can be difficult to resolve as aforementioned, and s.205 redress can often be ineffective. Liquidation can often result in the sale of the assets at break-up value without regard to goodwill and the know-how of the company members. A winding up by the court can also be lengthy and costly, and it may be that the only available purchasers are the very majority whose oppression had compelled the minority to seek redress.[42]Nevertheless, where a court cannot end the matter in question under s.205, then it is obligated to employ the residual jurisdiction under s213(g) to wind up the company.

In conclusion, it cannot be denied that section 205 has been effective in redressing the inequality for parties dealing with companies, however only insofar as is in keeping with pre-existing case law and company law statutes. As a whole, it endeavours to redress all shareholder grievances that develop, however it is overly restricted and perhaps not as important a remedy as it could otherwise be.[43]

Bibliography:

Text Books:

1. Thomas Courtney, The Law of Private Companies (2nd Edition, Tottel Publishing 2009)

2. Company Law in Ireland (Sweet and Maxwell, Dublin)

3. Forde, Company Law (2nd edition, Mercier Press, 1992)

4. McCann, Companies Act 1963-1990 (Butterworth Ireland, 1993)

Articles:

1. Derek Dunne, ‘The position of the Quasi-partnership type company’ [2004 4(1) JSIJ 108]

2. Lisa Glennon, ‘The residual Nature of the Minority shareholder Remedy’ [2000] 7 CLP 14

3. Howard Linnane, ‘Oppression of Members: section 205 Companies Act 1963’

Websites:

1. Justis

2. Heinonline

3. Westlaw.ie

______________________________________________

________________

[1] Howard Linnane, ‘Oppression of Members: section 205 Companies Act 1963’

[2] (1843) 67 ER 189

[3] Derek Dunne, ‘The position of the Quasi-partnership type company’ [2004 4(1) JSIJ 108]

[4] Lisa Glennon, ‘The residual Nature of the Minority shareholder Remedy’ [2000] 7 CLP 14

[5] Company Law in Ireland (Sweet and Maxwell, Dublin 1986) 256

[6] Companies Act 1963, s 205(3)

[7] [1959] AC 324

[8] [1980] ILRM 94

[9] (7 February 1972, unreported) High Court

[10] Forde, Company Law (2nd edition, Mercier Press, 1992) 357

[11] [1965] 1 WLR 1051

[12] [1971] 2 WLR 618

[13] [1979] ILRM 141

[14] Section 205(6)

[15] McCann, Companies Act 1963-1990 (Butterworth Ireland, 1993) 203

[16] Re Sam Weller &Sons [1990] BCLC 80

[17] [1985] IR 613

[18] [1985] IR 613 at 622

[19] [1974] 21st May, High Court, unreported

[20] [1974] 21st May, High Court, unreported, 17

[21] Howard Linnane, ‘Oppression of Members: section 205 Companies Act 1963’

[22] [1974] 21st May, High Court, unreported

[23] Keane, Company Law (4th Ed) para 24.46

[24] [1993] 15th December, High Court, Unreported

[25] Thomas Courtney, The Law of Private Companies (2nd Edition, Tottel Publishing 2009) 1098

[26] [1958] 3 ALL ER 689

[27] [1966] 1 A11 ER 242

[28] Thomas Courtney, The Law of Private Companies (2nd Edition, Tottel Publishing 2009) 1098

[29] [1983]ILRM 323

[30] [1983]ILRM 323 at 327

[31] Section 205(1) Companies Act 1963

[32] [1996] 2 BCLC 545

[33] Re Murph’s Restaurant Ltd [1979] ILRM 141 at 151

[34] [1979] ILRM 141

[35] [1979] ILRM 141

[36] [1972] 2 A11 ER 492

[37] [1984] 3 A11 ER 754

[38] Section 213(g), Companies Act 1963

[39] [1986] ILRM 239

[40] [2001] 9th May, High Court, Unreported

[41] Keane, Company Law (4th Ed) para 26.56

[42] Howard Linnane, ‘Oppression of Members: section 205 Companies Act 1963’ 22

[43] Derek Dunne, ‘The position of the Quasi-partnership type company’ [2004 4(1) JSIJ 108]

Cite this Comprehensive Remedy for Aggrieved Shareholders

Comprehensive Remedy for Aggrieved Shareholders. (2017, Dec 24). Retrieved from https://graduateway.com/comprehensive-remedy-aggrieved-shareholders/

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