Advice Legal
Topic
The object of the companies act is to protect legitimates the interest of the share holders by ensuring effective participation and control by them.
Introduction
A company provides leadership, rules and regulations, strategic guidance, objective judgment independent of management to the company and also provides exercises control over the company. The shareholders are always remaining accountable for the company. The board is not simply, it fulfills its legal requirements by measuring the object of the company more importantly. The board’s attitude and the manner it translates its awareness and understanding of its responsibilities. A successful corporate governance system is one, which allows the board to perform these double functions efficiently. The board of directors of a company thus directs and controls the management of a company and is accountable to the shareholders.
[1]Shareholders agreements are only likely to be effective in the case of companies with a small number of shareholders if an agreement about how members will vote is to be effective. It must usually be made by at least enough members of the company to ensure that a majority of the votes at any meeting will be cast in harmony with the agreement. If there are many members it will be difficult to get a large number of them to enter into a contract. Note further that the contract like any other contract is only enforceable by and against those who are parties to it (the privities of contract), thus the effectiveness of the agreement is much reduced if a large number of members are not party to it.
Board of Directors
[2]The board directs the company by formulating and reviewing company’s policies, strategies, major plans of action, risk policy, annual budgets and business plans, setting performance objectives, monitoring implementation and corporate performance, and overseeing major capital expenditures, acquisitions and divestitures, change in financial control and compliance with appropriate laws, taking into account the interests of stakeholders. It controls the company and its management by laying down the code of conduct, overseeing the process of confession and communications, ensuring that appropriate systems for financial control , reporting and monitoring risk are in place, evaluating the performance of management, chief executive, executive directors and providing checks and balances to reduce potential conflict between the precise interests of management and the wider interests of the company and shareholders. To include exploitation of corporate assets and abuse in related party transactions, shareholders and company both are responsible. It is accountable to the shareholders for creating, protecting and enhancing wealth and resources for the company, and reporting to them on the performance in a timely and transparent manner. On the other hand, it is not involved in day-to-day management of the company, which is the responsibility of the management.
Protecting shareholders from unfairly detrimental conduct
[3]A member of a company may apply to the court by appeal for an order under this part on the ground that the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or some part of the members (including at least himself) or that any actual or proposed act or omission of the company (including any act or omission on its behalf) is or would be so prejudicial.
The precise remit of section 459(companies act in 1985) is not apparent from a literal reading of the provision. The principal doubt as to the scope of s 459 is in relation to the analysis of the terms ‘unfair’ and ‘interests’. Conceptually, the phrase ‘unfair’ is almost impossible to define; its precise interpretation will vary from case to case. Any perception of unfairness must also depend upon the justice of the company’s decision to instigate the conduct in question. Thus, the effectiveness of section 459 as a means of affording effectual minority protection is dependent upon the creativity of the judges when confronted with the guiding concepts of section 459: unfairness and members’ interests or legitimate expectations. Consequently, through an analysis of these related concepts, I assess whether judges have managed to develop a framework that effectively protects minority shareholders.
Defining unfairly prejudicial conduct
The case law on section 459 affords a clear insight into the scope of the concepts of unfairness on the one hand, and prejudice on the other. The activist must establish that the conduct which forms the basis of the petition is “both prejudicial to the relevant interests and also unfairly. So the conduct may be unfair without being prejudicial or prejudicial without being unfair and in neither case would the section be satisfied”. While the section itself does not define the meaning of unfairly prejudicial conduct, it is clear from the cases that unfair prejudice is an objective concept. In Re Bovey Hotel Ventures Ltd, [FN28] Slade J formulated the test for determining the issue in the following terms:
[4]Without discrimination to the generality of the wording of the section, which may cover many other situations, a member of a company will be able to bring himself within the section if he can show that the value of his shareholding in the company. The company has been seriously jeopardized by reason of a course of conduct on the part of those persons who have had de facto control of the company, which has been unfair to the member concerned. The test of unfairness must be an objective, not a subjective. I think, the test is whether a reasonable onlooker observing the consequences of their conduct would regard it as having unfairly prejudiced the petitioner’s interests.
Demarcating members’ interests and legitimate expectations
[5]The wide powers of the court to preparation unfairly prejudicial conduct under section 459 of the Companies Act 1985 have been normally employed as an appliance to enforce the legitimate expectations or primary understandings of company members. The concept of dissatisfied shareholder expectations is limited in widely held companies, where the expectations of members do not generally extend beyond the hope of receiving a return on investment. By comparing disputes within the small private company, the concept has come to figure the scope of the legal condition. Where a petitioner’s legitimate expectation, for example, to participate in the management of the company, has been frustrated so as to amount to unfairly prejudicial conduct on the part of the majority, the court can intervene and provide a remedy. Section 459’s reference to member’s ‘interests’ is designed to be expansive in effect, thereby effectively avoiding the limitations which terminology based on the notion of ‘rights’ would impose on the scope of the provision.
[6]This is clear from Peter Gibson J’s judgment in Re Sam Weller & Son in which he observed that: “The word “interests” is wider than a term such as “rights”, and its presence as part of the test of section 459(1) to my mind suggests that Parliament recognized that members may have different interests, even if their rights as members are the same.” For example, in Re Saul D. Harrison, Hoffmann LJ following Ebrahimi observed that legitimate expectations are frequently derived from fundamental understandings, forming the basis of the association, which were not put into contractual form.
Thus, in protecting shareholder expectations under section 459, the courts adopt an approach analogous to that in Ibrahim in which the House of Lords recognized, in granting a just and equitable winding-up, that the company ‘is more than a mere judicial entity’ and that company law could have regard to the subsistence of rights, expectations and obligations existing between the parties, of a personal nature, which were not subject to express contractual provision. Lord Wilberforce, in an oft-cited passage, stated that the words ‘just and equitable’:
“are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. The “just and equitable” provision…does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.”
[7]Finally, we suggest that parties are better protected by shareholders agreement rather than the articles, the fact remains that, generally only these terms which relate to the membership rights of the shareholder or which affect the member or shareholder vide membership in the company can be enforced. Suffice it to say that participation in management is not one of those rights. Those rights are simply the rights of shareholding in a company and they include right to dividend, right to vote in a meetings, right to share in the remaining assets of the company in a winding-up after all the creditors have been paid etc. However, if the terms are included in a shareholders agreement, then any party to the agreement can enforce it in full. Furthermore a shareholders’ agreement can be enforced simply by means of an action by one shareholder against another. If a shareholder seeks to enforce a term in the articles he will normally have to sue in a representative capacity.
Duty at Common Law to Avoid Conflicts of Interest
[8]“ As a fiduciary, a duty of loyalty is imposed on a director vis-à-vis the company. As a result, a director is obliged not to place himself in a position where his duty to the company may conflict with his own interests” – see Chew Kong Huat v Ricwil (Singapore) Pte Ltd [2000] 1 SLR 385; Kumagai-Zenecon Construction Pte Ltd v Low Hua Kin [2000] 2 SLR 501. One particular application of this duty is that a director is not permitted, without the fully informed consent of the company, to make a profit in connection with the director’s position. Thus, if the director comes across a business opportunity while discharging his role as a director, he cannot personally take advantage of such an opportunity unless the company has, with full knowledge of the facts, permitted him to do so. This permission may be given by the rest of the board (assuming the other board members giving approval do not stand to benefit personally) or by the members in general meeting.
Duty at Common Law to Act for Proper Purposes
[9]The management of a company is generally vested in the board of directors and the board will often have other more specific powers such as the power to issue shares under section 161 of the Act, provided that the directors have obtained a specific or general mandate to do so. Such powers must be exercised for proper purposes. Even if directors have acted in good faith in what they believe is in the best interests of the company, they may have exercised certain powers in an improper manner.[10] “For example, it has been held that, where the power to issue shares was used to facilitate a takeover bid for a company, that was not a proper exercise of such a power even though the directors felt that they were acting in the company’s best interests” – see Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821.
Effect of Breach of Fiduciary Duty
[11]If a director places his own interests above those of the company, the director will be liable for any loss caused to the company. If the director has profited from his position without the informed consent of the company, the director may have to account for the profits to the company. Where the director has contracted with the company, e.g. the director has sold an asset to the company; the company may be able to avoid the contract if the contract with the company was entered into in breach of the director’s fiduciary obligations to the company. Where a third party has entered into a contract with the company knowing that the directors of the company have acted improperly, the company may also be able to avoid the contract vis-à-vis the third party.
Conclusion
[12]In addition to the ability to bring a common law or statutory derivative action to protect the legitimate interests of the company, there are two other important remedies open to shareholders who feel that their interests are being prejudiced. The first arises under section 216 of the Act. Section 216(1) provides that any member or holder of a debenture of the company, or the Minister of Finance in certain cases, may apply to the court for an order that the affairs of the company are being conducted in a manner oppressive to one or more of the members or holders of debentures, or in disregard of their interests as members, shareholders or holders of debentures of the company. A similar application may be made if an act of the company has been done or is threatened which unfairly discriminates against or is otherwise prejudicial to one or more of the members or holders of debentures. Section 216 is commonly referred to as the oppression remedy.
Where such an application is made, and the court after hearing the evidence is satisfied that the complaint is a valid one, the court may, with a view to bringing an end or remedying the matters complained of, make such order as it thinks fit. Such orders may include directing or prohibiting any act or canceling or varying any transaction or resolution; regulating the conduct of the affairs of the company in future; authorizing civil proceedings to be brought in the name of the company; providing for the purchase of the shares and debentures of the company by other members or holders of debentures or the company itself; or even winding up the company.
[13]Section 216 of the Act is intended to provide relief to members or holders of debentures where those in control of the company exhibit conduct that is equivalent to abuse or wrongdoing. The courts are not concerned whether a company is well managed. Business decisions are for the board to make and the courts will not generally second guess business decisions. Nor are the courts concerned that a member or some members are frequently outvoted. It is part and parcel of corporate administration that decisions are taken by the majority. What the courts are concerned with is whether the affairs of the company are being run by those in control in such a way that there is a visible departure from the standards of fair dealing and a violation of the conditions of fair play which a shareholder is entitled to expect – copied from Re Kong Thai Sawmill (Miri) Sdn Bhd [1978] 2 MLJ 227. This may arise where key shareholders are excluded from management; where shareholders are deprived of information about the company; where the dominant members clearly prefer their own interests. On the other side the patriarch of a family company behaves in an autocratic manner.
Reference:
- Protecting shareholders From Unfairly Prejudicial Conduct, from the web sides.
- Shareholder and agreement the legitimate expectation. See the provisions of section 29[2] of the Bahamas Companies Act 1992.
- Assess the effectiveness of section 459 of the Companies Act 1985.
- The affairs of the company are being run by those in control by Re Kong Thai Sawmill (Miri) Sdn Bhd [1978] 2 MLJ 227
- 459 define the meaning of ‘interests’, the approach adopted by Lord Wilberforce in Ebrahimi v. Westbourne Galleries in dealing with the principle of ‘just and equitable’ continues to influence judicial reasoning.
- Legitimate expectations are frequently derived from fundamental understandings by Re Saul D. Harrison, Hoffmann LJ.
- Shareholders Agreement and the Legitimate Expectation of a … section 29[2] of the Bahamas Companies Act 1992
[1] Section 459’s reference to member’s ‘interests’ is designed to be expansive in effect, thereby effectively avoiding the limitations which terminology based on the notion of ‘rights’ would impose on the scope of the provision. This is clear from Peter Gibson J’s judgment in Re Sam Weller & Son.
[2] Assess the effectiveness of section 459 of the Companies Act 1985 as a means of protecting shareholders from unfairly prejudicial conduct, and critically evaluate the proposals for its reform.
[3] Assess the effectiveness of section 459 of the Companies Act 1985 as a means of protecting shareholders from unfairly prejudicial conduct, and critically evaluate the proposals for its reform.
[4] (Protecting Shareholders From Unfairly Prejudicial Conduct | Law …
Assess the effectiveness of section 459 of the Companies Act 1985 as a means of … However, the ostensible simplicity of the objective approach must be … not only serves to protect the minority shareholders‘ interests in the company by … Consequently, the definition of members’ interests and their legitimate
[5] . In Re Bovey Hotel Ventures Ltd, [FN28] Slade J formulated the test for determining the issue .
[6] Although 459 does not define the meaning of ‘interests’, the approach adopted by Lord Wilberforce in Ebrahimi v. Westbourne Galleries in dealing with the principle of ‘just and equitable’ continues to influence judicial reasoning. For example, in Re Saul D. Harrison, Hoffmann LJ following Ebrahimi observed that legitimate expectations are frequently derived from fundamental understandings, forming the basis of the association, which were not put into contractual form.
7 In Re Saul D. Harrison, Hoffmann LJ following Ebrahimi observed that legitimate expectations are frequently derived from fundamental understandings, forming the basis of the association, which were not put into contractual form.
[8] Chew Kong Huat v Ricwil (Singapore) Pte Ltd [2000] 1 SLR 385; Kumagai-Zenecon Construction Pte Ltd v Low Hua Kin [2000] 2 SLR 501
[9] Shareholders Agreement and the Legitimate Expectation of a …
See the provisions of section 29[2] of the Bahamas Companies Act 1992. … Secondly, a shareholders‘ agreement can protect the interests of some of … by the House of Lords that the object of Section 303
[10] “For example, it has been held that, where the power to issue shares was used to facilitate a takeover bid for a company, that was not a proper exercise of such a power even though the directors felt that they were acting in the company’s best interests” – see Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821.
[11] 21 Oct 2010… contributions to trade associations and non-profit interest groups. … It is not too late to act to protect shareholders. … If many oil companies support a certain candidate(s), … Why would a shareholder object to creating an atmosphere that would allow the company they invest in to thrive?
[12] see Re Kong Thai Sawmill (Miri) Sdn Bhd [1978] 2 MLJ 227. This may arise where key shareholders are excluded from management; where shareholders are deprived of information about the company; where the dominant members are clearly preferring their own interests; and where the patriarch of a family company behaves in an autocratic manner, just to give some common examples.
[13] What the courts are concerned with is whether the affairs of the company are being run by those in control in such a way that there is a visible departure from the standards of fair dealing and a violation of the conditions of fair play which a shareholder is entitled to expect – copied from Re Kong Thai Sawmill (Miri) Sdn Bhd [1978] 2 MLJ 227.
Correspondence
For: The Lawyers & Jurists
M.L.Hotel Tower Ltd,208,Shahid Syed Nazrul Islam Sarani,
Bijoy Nagar, Dhaka-1000.
Email-admin@lawyersnjurists.com/nomaer@hotmail.com
www.lawyersnjurists.com
Country code+ Ph No.
Ph:0088-02-9571389; 0088-02-9513408,
0088-02-9564329, 0088-02-9564398
Direct cell with country code:
Local Code :
a)0088-01733689444
b)0088-01674647033
C)0088-01552632768