Question

Engage in a comparison of the “derivative action” and the actionrelatingto“unfair prejudice to members’interests”. In what way are they similar or dissimilar? Provide a critical analysis.

Answer 1

derivatve action;

s important to note that as at the time the financial crisis started, it is the common law derivative action that was in place. As such, before considering the statutory derivative action, the common law derivative action will be briefly analysed as to whether it’s provision was sufficient to act as a check on directors or on the contrary part of the reason why directors where negligent in their duties. Furthermore, the extent to which director’s disqualification serves as a deterrent factor to encourage good performance of director’s duty will be considered.

The general rule is that a company is a legal personality and as such, only the company has the right to sue if there is a wrong perpetrated against the company. However this duty to sue is vested on the board of directors. In John Shaw & Sons (Salford) Ltd V Shaw, Greer LJ stated that: If powers of management are vested in the directors, they and they alone can exercise those powers.Thus, practical difficulties arise where the alleged wrong doers are themselves members of the board and are in a position to prevent action being taken by the company to obtain redress for their wrongdoing. However, if they are in breach of this duty, minority shareholders can bring an action on behalf of the company.

At common law a shareholder did not have the right to bring an action for a wrong against a company. This was established in Foss V. Habottle, where the court held that, a shareholder cannot bring an action on behalf of a company based on the principle of corporate personality and secondly if the wrong is one that can be ratified by the majority known as the majority rule. However, the rule in Foss has some exceptions established in the case of Edwards v Halliwel which are that a shareholder can sue where the act complained of is ultravires the company or illegal, where there has been a non-compliance with a special procedure, where the personal right of a member has been infringed, where there is fraud on the minority and the wrongdoers are in control.

Also, derivative action being an equitable remedy, the court in exercising its discretion would consider the conduct of the claimant, his motives in seeking to sue and the availability of other remedies. In Barrett v Duckett the court struck out the derivative action on grounds that the claimant was not motivated by the company’s interest and that other remedies were available.

With the common law rule it became almost impossible for minority shareholder to institute derivative action as the procedure for locus standi was cumbersome, and the exception to the rule was uncertain. It could be argued that these difficulties are part of the reasons why directors where not cautious in performing their duties as bringing a derivative action against them was very difficult. However these criticisms lead to the new statutory derivative action.

unfairprjudice to memeber's interests;

Section 994 stipulates that members may petition the court on grounds that the affairs of the company has been conducted in a manner unfairly prejudicial to the interest of members generally or of some part of its members (including at least himself)or any actual or proposed act or omission of the company(including an act or omission on his behalf) is or would be prejudicial. The provision includes present, past, and future. In Lloyds V Caseythe court allowed the petitioner to include acts that occurred before he became a member of the company.

However for unfair prejudice remedy to lie, the act complained of must be in the company’s affairs.

The petitioner must show that his interest qua member has been unfairly prejudiced.. Interest of a member can be ascertained by reference to the company’s constitution which includes Article of association, any resolution of the company and shareholder agreement. However it goes beyond this and includes legitimate expectations. In Ebrahimi V Westbourne Galleries, Lord Wiberforce held that “There are individuals with rights, expectations and obligations inter se which are not necessarily submerged in the company structure legal rights.

To succeed in an action for unfair prejudice, the action must be both unfair and harmful. Thus the concept of unfair prejudice has been interpreted broadly to include both unlawful conduct and lawful but inequitable conduct. This wide judicial discretion and broad interpretation of Section 994 aim to afford maximum justice to the aggrieved shareholders and to promote fairness in the conduct of a company’s affairs.

The court is given a wide discretion under Section 996(2) to grant remedies as it thinks fit such as, regulation of the companies affairs, order an injunction or a derivative action, or a purchase order. However, the relief mostly sought by shareholders in practice is an order for the purchase of their shares, whereby the court values the shares in a fair manner.

Given that unfair prejudice remedy seems to be a personal remedy, the question then is if it can be used to redress corporate wrong as to act as a check for breach of directors duties.