MAJORITY RULE AND MINORITY PROTECTION.pptx

Majority rule and Minority protection

1. MAJORITY RULE AND MINORITY PROTECTION

2. Introduction Upon incorporation, the company becomes a legal person of its own with a personality separate from that of its members. The personality of the company is however run by its human organs, namely the members in general meeting and the board of directors. Only these two organs can act or authorize an act to be done for the company .

3. Introduction Where a wrong is done to the company, only the company can sue to redress the wrong being that the company upon incorporation is a legal person capable of suing and being sued. The decision to sue to redress a wrong against the company is a management decision for the Board of directors to decide on, being the company organ responsible for management of the company. S. 341CAMA 2020.

4. The principle in FOSS v. Harbottle Where the Board fails to discharge this responsibility, the members in a general meeting may institute legal proceedings in the name of the company . Where the company through its Board of Directors or General meeting does not institute legal proceedings to seek redress for wrong done to the company, no individual could do so. It means the wrong will go unredressed . The is the rule in FOSS v. Harbottle (1843(2H. 416 (also reported as 67 E.R. 189.

5. The principle in FOSS v. Harbottle In this case, The plaintiffs, Foss and Turton were shareholders of the Victoria Park Company which bought land for use as Pleasure Park. Harbottle and others were directors and shareholders in the company. Some of the directors had sold their own lands to the company at inflated prices. The plaintiffs sued to have the directors refund the excess price for exploiting their position to defraud the company. The court held that the wrong was done against the company and not to the plaintiff in their individual capacity. So they could not sue on behalf of the company without its authorization.

6. The principle in FOSS v. Harbottle The rule in Foss v. Harbattle was again clarified in MacDougall v. Gardiner (1875)1 Ch.D 13 where Mollish L.J. stated at P. 25 of the Law report as follows:

7. The principle in FOSS v. Harbottle If the thing complained of is a thing which in substance the majority of the company are entitled to do, or if something has been done irregularly which the majority of the company are entitled to do regularly, or if something has been done illegally which the majority are entitled to do legally, there can be no use having litigation about it. The ultimate end of which is only that a meeting has to be called and then ultimately the majority gets its wishes.

8. The principle in FOSS v. Harbottle The rule in Foss v. Harbottle is also called the majority rule or the proper plaintiff principle. This rule avoids multiplicity of suits by the minority on a matter the majority is willing to overlook. In Nigeria, the rule in Foss v. Harbottle , was first adopted by the Supreme Court in the case of Abubakar v. Smith (1973)6 EC 31. Today the rule has been codified by chapter 13 of the CAMA 2020.

9. The principle in FOSS v. Harbottle The problem with the majority rule is that it allows the majority to get away with several irregularities against the company which directly or indirectly affect the minority but they cannot do any thing about it. The CAMA has however provided some relief which acts as checks and balances against the excesses of the majority which over the years had increased, resulting in fraud, oppression of the minority and breach of duties by the directors who are usually also in control as majority share holders.

10. The principle in FOSS v. Harbottle In order therefore to enforce such likely breaches of director’s duties and to protect the minority shareholders, the law has provided remedies. These will be discussed in this class.

11. The proper plaintiff rule “where irregularity has been committed in the course of the Company’s affairs or any wrong has been done to the company, only the company can sue to remedy that wrong and only the company can ratify the irregular conduct” This was the principle laid down in Foss v. Harbottle in 1843. Only the company could sue to redress wrongs to it. The majority comprising the majority shareholders and the Board appointed by them sometimes abuse their office and would not expectedly take any action against themselves.

12. The proper plaintiff rule Under the common however before the CAMA was enacted, the courts has taken cognizance of the hardships of the rule in Foss v. Harbottle on the minorities. The courts had started introducing some measure of relief under their equitable and inherent powers to reduce the hardship of the rule in Foss v. Harbottle . These exceptions have now been codified in the CAMA. They are as follows:

13. Members Direct Action (Section 343 of CAMA 2020). Members of the company have the right to go to court to ask for an injunction or a declaration against the company in the following situations: (a) entering into any transaction which is illegal or ultra vires ; ( b) purporting to do by ordinary resolution any act which by its articles or the law required to be done by special resolution ; ( c) any act or omission affecting the applicant’s individual rights as a member

14. Members Direct Action (Section 343 of CAMA 2020). (d) committing fraud on either the company or the minority shareholders where the directors fail to take appropriate action to redress the wrong done ( e) where a company meeting cannot be called in time to be of practical use in redressing a wrong done to the company or to minority shareholders ; ( f ) where the directors are likely to derive a profit or benefit, or have profited or benefited from their negligence or from their breach of duty ; and ( g) any other act or omission, where the interest of justice so demands.

15. Derivative Action (S . 346 CAMA 2020). A member may apply to the court for an order permitting him to commence a court action in the name of the company or on its behalf or to intervene in an action where the company is already a party for the purpose of taking over the prosecution or defence of the case depending on which side the company is. The grounds for obtaining this kind of relief are as follows:

16. Derivative Action (a) a cause of action has arisen from an actual or proposed act or omission involving negligence, default, breach of duty or trust by a director or a former director of the company ; ( b) the applicant has given reasonable notice to the directors of the company of his intention to apply to the Court under subsection ; ( c) the directors of the company do not, diligently prosecute, defend or discontinue the action ; ( d) the notice contains a factual basis for the claim and the actual or potential damage caused to the company ;

17. Derivative Action (e) the applicant is acting in good faith ; and ( f ) it appears to be in the best interest of the company that the action be brought, prosecuted, defended or discontinued . In Derivative actions, the company bears the cost since the action in its name or on its behalf, unlike in members direct action where the action is commenced in the applicant’s name and not on behalf of the company.

18. Relief from Unfairly Prejudicial and Oppressive Conduct. A member may bring an action in court to seek relief where the he alleges that the affairs of the company are being run in a manner that is unfairly prejudicial and oppressive to his interest as a minority in the company . S.353 CAMA 2020 The set of reliefs that could be granted are outlined in the new CAMA and includes an order for the winding up of the company, an order setting aside the act constituting the oppression or unfair prejudice e.t.c .

19. Relief from Unfairly Prejudicial and Oppressive Conduct. An application to the Court by petition for an order under section 354 in relation to a company may be made by— ( a) a member of the company ; ( b) a director or officer, former director or officer of the company ; ( c) a creditor ; ( d) the Commission ; or ( e) any other person who, in the discretion of the Court, is the proper person to make an application under section 354.

20. Grounds upon which an application may be made. An application for relief on the ground that the affairs of a company are being or have been conducted in an illegal or oppressive manner may be made to the Court by petition . S. 354 (1) CAMA 2020 An application to the Court by petition for an order under this section in relation to a company may be made by— (a) a member of the company who alleges that— ( i ) the affairs of the company are being or have been conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members, or in a manner that is or has been in disregard of the interests of a member or the members as a whole, or

21. Grounds upon which an application may be made (ii) an act or omission or a proposed act or omission, by or on behalf of the company or a resolution, or a proposed resolution, of a class of members, was, is or would be oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members or was, is or would be in a manner which is in disregard of the interests of a member or the members as a whole.

22. Grounds upon which an application may be made (b) any of the persons mentioned under section 353 (1) (b), (c) and (e) who alleges that— ( i ) the affairs of the company have been or are being conducted in a manner oppressive or unfairly prejudicial to or discriminatory against or in a manner in disregard of the interests of that person, or (ii) an act or omission, or a proposed act or omission was, is or would be oppressive or unfairly prejudicial to, or unfairly discriminatory against, or was or is in disregard of the interests of that person .

23. Grounds upon which an application may be made (c) the Commission in a case where it appears to it in the exercise of its powers under the provisions of this Act or any other enactment that— ( i ) the affairs of the company were or are being conducted in a manner that was or is oppressive or unfairly prejudicial to, or unfairly discriminatory against a member or members, or was or is in disregard of the public interest, or

24. Grounds upon which an application may be made (ii) any actual or proposed act or omission of the company, including an act or omission on its behalf which was, is or would be oppressive, or unfairly prejudicial to, or unfairly discriminatory against a member or members in a manner which was or is in disregard of the public interest.

25. Powers of Court to make orders If the Court is satisfied that a petition under sections 353 and 354 is well founded, it may make such order or orders as it deems fit for giving relief in respect of the matter complained of . S. 355 (1) CAMA 2020.

26. Powers of Court to make orders The Court can make the following orders: ( a) that the company be wound up ; ( b) for regulating the conduct of the affairs of the company in future ; ( c) for the purchase of the shares of any member by other members of the company ; ( d) for the purchase of the shares of any member by the company and for the reduction accordingly of the company’s capital ;

27. Powers of Court to make orders (e) directing the company to institute, prosecute, defend or discontinue specific proceedings, or authorising a member or the company to institute, prosecute, defend or discontinue specific proceedings in the name or on behalf of the company ; (f ) varying or setting aside a transaction or contract to which the company is a party and compensating the company or any other party to the transaction or contract ;

28. Powers of Court to make orders (g) directing an investigation to be made by the Commission ; ( h) appointing a receiver or a receiver and manager of property of the company ; ( i ) restraining a person from engaging in specific conduct or from doing a specific act or thing ; or ( j) requiring a person to do a specific act or thing.

29. Conclusion The CAMA has made out adequate measures to ensure the protection of minorities. Members of the company are therefore empowered to approach the courts for redress. The legal mechanisms for minorities to seek redress are also potent to redress the breach of duties by the Directors. These legal mechanisms operate as legal exceptions to the proper plaintiff rule and operate as a limit to majority rule in the company.