Company Law Lecturer: Ms. Lesley Walcott Date: September 16th, 2003

Share Holders Rights

1. 
   Common law
   
2. 
   Statute
   
3. 
   Contract
   

This is a protective provision inserted in the articles of a company or bylaws prescribing the conditions, which must be, fulfilled in order to later the rights attached to a particular class of shares. It is an internal restriction. Note however, that an insertion of such a clause may in itself amount to an alteration of substantive rights, where there was no previous provision. The effectiveness of a variation of rights clause is dependent upon whether a company is bound to adhere to the conditions stipulated in the variation of rights clause. One must examine two conflicting decisions in the cases of Fischer v. Easthaven Ltd. [1964] NSWR 261 and Crumpton v. Morrine Hall Pty. Ltd. [1965] NSWR 240. In the case of Fischer v. Easthaven Ltd.¹⁰³the company failed to comply with a variation of rights clause contained in the company’s articles. The company attempted to hold a general meeting to alter the rights including one right, which affected the plaintiff. The court held that the variation of rights clause was not binding on the company. However, in Crumpton v. Morrine Hall Pty. Ltd.¹⁰⁴ the variation of rights clause was upheld as binding on the company on the ground that the action of the company operated as a fraud on the minority.

“The word class is not a technical word, but the rights of persons in the same class must be capable of being ascertained by a common system of valuation.”

In Cumbrian Newspapers Group Ltd. v. Cumberland & Westmoreland Herald Newspaper & Printing Co. Ltd. [1986] 2 All ER 816¹⁰⁷ Scott J had to determine whether there had been a variation of rights clause attached to a class of shares. He stated that the: -

“Rights or benefits which may be contained in articles may be divided into three different categories.

1. 
   First, there are rights or benefits which are annexed to particular shares. Classic examples of rights of this character are dividend rights and rights to participate in surplus assets on a winding up. And the right to vote…
   
2. 
   A second category of rights which may be contained in the articles (although it may be that neither ‘rights’ nor ‘benefits’ is an apt description), would cover rights or benefits conferred on individuals not in the capacity of members or shareholders of the company but, for ulterior reasons, connected with the administration of the company’s affairs or the conduct of its business. For example the tenure of directors. Eley v. Positive Government Security Life Assurance Co Ltd¹⁰⁸ was a case where the articles of the defendant company had included a provision that the plaintiff should be the company solicitor. The plaintiff sought to enforce that provision as a contract between himself and the company. He failed. The reasons why he failed are not here relevant, and I cite the case only to draw attention to an article which, on its terms conferred a benefit on an individual but not in the capacity as a member or shareholder of the company.
   
3. 
   This category would cover rights or benefits that, although not attached to any particular shares, were nonetheless conferred on the beneficiary in the capacity of member or shareholder of the company.
   

It is contended that this decision represents a widening of the definition of class rights.

The courts unwillingness to interfere in the internal management of the company is evident in the restrictive interpretation of variation. See the case of Adelaide Electrical Co. v. Prudential [1933] All ER 82 where the place of the payment of a fixed preferential dividend was changed from England to Australia, the Australian £ was less than the English £ causing a decrease in the value of dividends paid to preference shareholders. The court found no abrogation of preference shareholders rights.

“There is to my mind a distinction, a sensible distinction between an affecting of the rights and an affecting of the enjoyment of the right.”

Note that there is no need to comply with a variation of rights clause where there has been a mere alteration of the enjoyment of the right.
See the House of Lords decision in the case of Re House of Fraser plc [1987] BCLC 293 where the company at an extraordinary general meeting passed a special resolution reducing the capital of the company and paid off and cancelled its cumulative preference shares. No class meeting of the preference shareholders had been held, and the preference shareholders argued (held) that this failure contravene the articles of the company. The House of lords held there had been no variation of rights.

****Mention was made that Work Sheets 5, 6, & 7 are in fact linked****
Lecturer: Ms. Lesley Walcott

Date: November 5^th, 2003.
Alteration of The Articles of Association…

Forms of Corporate Action

There are three forms of corporate action: -

1. 
   Personal
   
2. 
   Representative
   
3. 
   Derivative
   

This is brought by an individual shareholder who has been wronged, and wishes to recover on his own behalf. Such an action may be undertaken by a shareholder so as to restrain a company from performing an ultra vires act. It is also appropriate for the vindication of contractual rights conferred on a shareholder by the Jamaica Companies Act S. 22 or S14 ***. Authority for this is the case of Pender v. Lushington (1877) 6 Ch.D 70 where the shareholders right to vote was abrogated, the shareholder was held to be entitled to have his vote counted and to compel the observance of the articles of association.

This is an appropriate action where a shareholder brings an action on behalf of himself and remaining shareholders to enforce collective personal rights. The relief sought is beneficial to all the shareholder and any judgment obtained binds all the shareholders represented. This prevents duplicity of action  (See the Rules of the Supreme Court Ord 15 Rule 12)

Where a company has been injured by some wrongdoing, a shareholder has also arguably been injured throughout the diminution in the value of their shares. This is traceable to the corporate injury. The courts followed by statute have developed a derivative action whereby a shareholder is permitted to bring an action to rectify a wrong committed against a company for which management did not seek redress, perhaps because management or one of their members were the alleged wrongdoers. Under a derivative action, a shareholder on behalf of a corporation brings an action which is derived from the companies cause of action. This is an indirect action in contrast to a personal action which is direct.

Note the following: -

1. 
   A derivative action cannot be brought by a shareholder who participated in the wrongdoing.
   
2. 
   Judgment is given in favour of the company. The individual plaintiff or applicant does not directly benefit.
   
3. 
   The company must be joined in the action and must indemnify the shareholder who acted on its behalf if the action is successful, or if it was reasonable and prudent in the circumstances.
   
4. 
   If the company asks the court to strike out a derivative action prior to the commencement of proceedings, the action will be allowed to continue only if allegations in the statement of claim justify a derivative action and a prima facie case is proved the authority for this is Prudential Assurance Co. Ltd. v. Newman Industries Ltd.(No. 2) [1981] Ch. 257¹¹³.
   

1. Ultra vires: - In cases where the act complained of is ultra vires the company, the Foss v. Harbottle¹¹⁴ rule has no application because there is no question of the transaction being confirmed by any majority ¹¹⁵. See the case on point Russell v. Wakefield Waterworks Co. (1875) LR 20 Eq. 474.

2. Individual or Personal Rights: - The rule has no application where the personal or individual rights of members have been infringed, if the wrong done is not to the company but to the member. The problem with this exception is that the line between a personal action and a derivative action is not clear or settled. And, the shareholder who brings his suit believing he has a personal right of action may be confronted with the ruling that the wrong is not a wrong to him but to the company.

3. Special Majority or Special Resolution: - Where the activity undertaken must be sanctioned by a special resolution, a shareholder is entitled to apply to the court to restrain the breach of the article. The shareholder can sue by way of representative action. Note that if the breach was actually committed, he can sue in his personal capacity on the basis of his contractual rights.

1. 
   There was fraud on the minority, and
   
2. 
   The perpetrators were in a position of control of the company.
   

1. 
   ultra vires
   
2. 
   Infringement of personal rights
   
3. 
   Special majority or
   
4. 
   Fraud on the minority.
   

See the case of Scottish Co-operative Wholesale Society Ltd v. Meyer [1959] AC 324¹²⁴ where the court said to prove oppression, the conduct had to be harsh, burdensome and wrongful.