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



Download 288.43 Kb.
Page7/7
Date02.02.2018
Size288.43 Kb.
#38937
1   2   3   4   5   6   7
Share Holders Rights

Shareholders rights are protected by: -

  1. Common law

  2. Statute

  3. Contract


Contract: Variation of Rights Clause

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.


In the decision of Cumbrian Newspapers Group Ltd. v. Cumberland & Westmoreland Herald Newspaper & Printing Co. Ltd. [1986] 2 All ER 816105 Scott J commented on the variation of rights clause and he contends that it provides only a limited protection to the shareholders. See the decision of Greenhalgh v. Arderne Cinemas [1951] Ch. 286106 where Vaisey J stated that: -

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.

The rights of the plaintiff under the articles 5, 7,9 & 12 fall, in my judgment, into this category. (“This category” being category three.)”

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


What Amounts To a Variation or Abrogation 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.


In the case of Greenhalgh v. Arderne Cinemas [1951] Ch. 286109 a subdivision of one class of shares was held not to amount to a variation of rights, despite the fact that the variations altered to company’s voting equilibrium.
In the case of White v. Bristol Aeroplane Co. Ltd. [1953] Ch. 65110 the Court of Appeal held the proposed issue of new capital did not affect the rights and privileges of existing preference shareholders. The courts have drawn a distinction between the rights and the value or the enjoyment of those rights. See the cases of White v. Bristol Aeroplane Co. Ltd. [1953] Ch. 65111 and Greenhalgh v. Arderne Cinemas [1951] Ch. 286112. Evershed MR said in the case of White v. Bristol Aeroplane Co. Ltd. that: -

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 5th, 2003.
Alteration of The Articles of Association…

Forms of Corporate Action

There are three forms of corporate action: -



  1. Personal

  2. Representative

  3. Derivative


Personal Action

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.



Representative Action

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)


Derivative Action

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.


Exceptions to The Rule In Foss v. Harbottle

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.



4. Fraud on the Minority: - Where the activity amounts to fraud on the minority and the wrongdoers are in control of the company, the rule in Foss v. Harbottle116in favour of the aggrieved minority who are entitled to bring a minority shareholders action on behalf of themselves and others. This is the most popular exception, and most commentators argue, the only true exception. Note, the procedure is derivative and in order for the plaintiff or applicant to succeed he must first furnish prima facie proof that: -

  1. There was fraud on the minority, and

  2. The perpetrators were in a position of control of the company.


Categories of Fraud

1. Appropriation of Corporate Property:  Cook v. Deeks [1916] 1 AC 554117 and contrast with the decision of Regal (Hastings) Ltd. v. Gulliver (1942)[1967] 2 AC 134118. The case of Cook v. Deeks [1916] 1 AC 554119 involved an un-ratifiable misappropriation of corporate assets, while Regal (Hastings) Ltd. v. Gulliver (1942)[1967] 2 AC 134120 involved ratifiable profit making. Note that where majority shareholders compromise litigation commenced by the company, this will amount to an appropriation of corporate property. Menier v Hooper’s Telegraph Works (1874) 9 Ch. App. 350121.

2. Negligence:  Mere negligence is insufficient, see for example the case of Pavlides v. Jensen [1956] Ch. 565122 which involved a gross undervalue of a corporate asset by some £800, 000.oo, nevertheless, the action was held to be ratifiable. However, if the negligence is self-serving, the action is not ratifiable as shown by the case of Daniels v. Daniels [1978] Ch. 406123.

3. Abuse of Power:  Where directors act for an improper purpose, that is in mala fides that cannot be ratified, Cook v. Deeks. Note however, that a bona fide exercise of power for a collateral purpose is ratifiable as shown by Hogg v. Cramphorn Ltd. [1969] 1 All ER 977.
At common law there were problems of procedure as it was often unclear whether it was a personal, derivative or representative action. If the party gets past this hurdle, the claimant then has to determine whether the action is brought under: -

  1. ultra vires

  2. Infringement of personal rights

  3. Special majority or

  4. Fraud on the minority.

The matter could still be thrown out at this stage, but if the claimant succeeds what was available was an equitable action for winding up. A claimant whose rights were infringed, may not want the company wound up, he could simply want the infraction rectified. The Jamaica Companies Act S. 196 relaxed the rule which required a just and equitable winding up, however, S. 196 was read along with S.203 and as a result there was very little flexibility in applying S. 196.


Procedural Problems Which Arose Under the Common Law


STAGE I





STAGE II





STAGE III
















1. Personal




1. Ultra Vires




1. Just and equitable winding up






















2. Personal Action







2. Derivative








2. Oppression had to be shown







3. Special Majority





















3. Representative




4. Fraud on the Minority





































(If the action is improperly brought under any of the actions at Stage 1 then the courts throw it out at this stage.)






(If the action is improperly classified under any of the actions at Stage 2 then the courts could throw it out at this stage.)





(Altered by statute Jam. S. 196)



Thrown Out




Thrown Out






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.


The difficulty in showing oppression is shown by the case of Windoors v. Bryan where a director bought a house, an apartment and a racehorse with corporate funds, and held no meetings with shareholders. The court found that there was no oppression.
New law jurisdiction for instance in Barbados, the Companies Act S. 225- 228 removed the restrictive requirement of “shareholders”, and replaced it with “complainant”, and created a wide range of actions see S. 228. Oppression was relaxed and anything that is 1. “unfairly prejudicial” or 2. “unfairly disregards your interest” and 3. oppression is still included.
The Companies Acts also indemnify the shareholder as to the cost of bringing the proceedings. Barbados S. 230 and Trinidad and Tobago S. 242. (Trinidad and Tobago S.240 ???)


1 Black’s Law Dictionary: 1. A debt secured only by the debtor’s earning power, not by a lien on any specific asset. 2. An instrument acknowledging such a debt. 3. A bond that is backed only by the general credit and financial reputation of the corporate issuer, not by lien on corporate assets. 4. English Law. A company’s security for a monetary loan  The security usually creates a charge on company stock or property.

2 These Securities Acts are the first of their kind in the Commonwealth Caribbean.

3 Ms. Walcott did however point out in class that this is not always the case.

4 New Law Jurisdictions with more modern Companies Acts are: Barbados 1982, Guyana 1991, Trinidad & Tobago 1995 and Dominica, Grenada & St. Lucia who got their companies Acts between 1995-1996, they are all also based on the Barbados statute.

5 Jamaica and Belize are considered to b old law jurisdictions.

6 The Bahamas is considered to be a hybrid jurisdiction in terms of its Companies Act. In this regard, it remains with the old law jurisdictions.

7 My addition from prior notes.

8 New Law Jurisdictions such as: Barbados 1982, Guyana 1991, Trinidad & Tobago 1995 and Dominica, Grenada & St. Lucia who got their companies Acts between 1995-1996.

9 In Jamaica and Belize, being the two old law jurisdictions, partially paid shares exist.

10 This is because as explained by Ms. Walcott, corporations are usually charged at a fixed rate of tax, which may be lower than that which would be paid for an un-incorporated company with the same earnings.

11 Barbados for instance recently raised their corporate tax rate to 40%.

12 [1976] AC 16

13 [1897] AC 22

14 [1897] AC 22

15 [1928] AC 619

16 Privy Council decision.

17 This is usually or especially for tax statutes.

18 [1933] Ch. 935

19 [1962] 1 WLR 832

20 [1939] 4 All ER 116

21 [1998] 2 BCLC 447

22 This may create problems in term of Fair Trading. Jamaica for instance has extensive Fair Trading legislation, which is strictly enforced. (1993)**********

23 See the article “Storm in a Teacup; The Crisis In Jamaica” *********

24 [1897] AC 22

25 [1938] Ch. 258

26 [1976] 1 WLR 852

27 [1996] 2 All ER

28 [1990] 2 WLR 657

29 (1995) 49 WIR 49

30 [1879] 4 CP D

31 [1877] 2 CP.D

32 [1877] 6 Ch. D 371

33 [1877] 2 CP.D

34 [1877] 6 Ch. D 371

35 [1902] 2 Ch. 809

36 [1877] 2 CP.D

37 [1880] 5 QBD 109

38 [1900] AC 240

39 [1878] 3 App.Cas 1218

40 [1877] 2 CP.D

41 [1878] 3 AC 1218

42 [1878] 3 AC 1218

43 [1900] AC 240

44 [1880] 5 QBD 109

45 [1900] AC 240

46 [1902] 2 Ch 809

47 [1906] 2 Ch435

48 [1908] 2 Ch 515

49 (1860) LR 2 CP 174

50 [1954] 1 QB 45; [1953] 2 WLR 596

51 (1860) LR 2 CP 174

52 [1954] 1 QB 45; [1953] 2 WLR 596

53 (1860) LR 2 CP 174

54 (1860) LR 2 CP 174

55 [1966] ALR 744

56 (1860) LR 2 CP 174

57 (1860) LR 2 CP 174

58 [1966] ALR 744

59 [1981] 3 All ER 182

60 [1954] 1 QB 45; [1953] 2 WLR 596

61 [1954] 1 QB 45; [1953] 2 WLR 596

62 (1860) LR 2 CP 174

63 [1902] 1 Ch

64 (1886) 33 Ch D 16

65 (1888) 38 Ch D 156

66 Hadlinston Construction co. Ltd Casilla Development Ltd. & Harold Massop v. Casilla Development Ltd. Goldson Barrett Jo9hnson (a firm) & Earl A. Arichards (1985) 22 JLR 495

67 (1843) 2 Hare 461

68 Jamaica Court of Appeal Civil Appeal No. 25 of 1988 (Rowe, Pres. Wright and Forte JJ.A March, 1989.

69 (1875) LR HL 653

70 (1880) 20 Ch.D. 169 (CA)

71 [1966] 1 QB 207

72 [1918] AC 514 HL

73 [1918] AC 514 HL

74 [1968] 2 All ER 1221

75 Rolled Steel Products (Holdings) Ltd v. British Steel Corporation [1982] Ch. 478

76 [1992] 1 WLR 588

77 [1982] Ch. 478, [1982] 3 All ER 1057

78 [1982] Ch. 478, [1982] 3 All ER 1057

79 [1968] 2 All ER 1221

80 [1987] 3 BCC 535, [1988] BCLL 21

81 [1883] 23 Ch. D. 654

82 [1967] 1 All ER 427

83 [1982] Ch. 442

84 [1970] Ch. 62

85 (1882) 20 |Ch. D. 169 C.A.

86 Section 18 in the St. Kitts Companies Act abolishes the doctrine of ultra vires.

87 [1915] 1 Ch. 881

88 [1968] 1 QB 549

89 [1964] 2 QB 480

90 [1857] 6 H.L. Case 401

91 [1875] LR 7 HL 869

92 [1986] Ch. 246

93 [1906] AC 439

94 [1946] 1 All ER 586

95 [1888] 38 Ch. D. 156

96 Barbados S 58 OECS S. 58

97 Trinidad and Tobago S 15, Bahamas S 85-6, Barbados S. 95, Trinidad and Tobago S. 99

98 [1967] 2 AC 134 (see work sheet 5)

99 S. 26(2)

100 [1914] AC 11

101 [1949] AC 512

102 [1980] 3 All ER 295

103 [1964] NSWR 261

104 [1965] NSWR 240

105 [1987] Ch. 1, [1986] 3 WLR26, [1986] BCLC 286

106 [1950] 2 All ER 1120

107 [1987] Ch. 1, [1986] 3 WLR26, [1986] BCLC 286

108 (1876) 1 EX D 88

109 [1950] 2 All ER 1120

110 [1953] 1 All ER 40, [1953] 2 WLR 144

111 [1953] 1 All ER 40, [1953] 2 WLR 144

112 [1950] 2 All ER 1120

113 [1980] 2 All ER 841, [1980] 3 WLR 543, [1982]Ch. 204

114 (1843) 2 Hare 461

115 See Work Sheet 7 p. 5

116 (1843) 2 Hare 461

117 [1916-17] All ER Rep.285

118 [1942] 1 All ER 378

119 [1916-17] All ER Rep.285

120 [1942] 1 All ER 378

121 [1874-80] All ER Rep Ext 2032

122 [1956] 2 All ER 518, [1956] 3 WLR 224

123 [1978] 2 All ER 89, [1978] 2 WLR 73

124 [1958] 3 All ER 66, [1958] 3 WLR 404.


Download 288.43 Kb.

Share with your friends:
1   2   3   4   5   6   7




The database is protected by copyright ©ininet.org 2024
send message

    Main page