Minority Protection
THE RULE IN FOSS V HARBOTTLE
Scope
[Link] of Rule in Foss v
Harbottle
2. Exceptions
3. Minority protection under Unfairly
prejudicial rule
4. Minority Protection in various
parts of CAMA
5. Investigation by CAC
BASIS AND THE SCOPE OF THE RULE
.where an irregularity is made
in the course of a company's
affairs or If an actionable
wrong has been done to a
company whether arising from
statute, contract, tort or the
fiduciary position of the party
in breach, the company is the
proper person to seek a
remedy for the breach. Section
s. 341
BASIS AND THE SCOPE OF THE RULE
The questions are: –
(1) Who is the proper
plaintiff?
(2) Are there any sufficient
reasons for the court to
interfere with the way the
company is run?
BASIS AND THE SCOPE OF THE RULE
GOMBE V P.W. (NIGERIA) LIMITED
(1995) 7 SC 1
Foss v Harbottle: (1843) 2 Hare 461
Elufioye& Others v. Halilu & Others
[1993] 6 N.W.L.R (pt 301) 570 and
Abubakri& Ors v Smith & Ors
(1973] NSCC 451
ShellPetroleum v. Nwawka-( )
[2001] F.W.L.R. (pt. 48) 1363
Basis
The principle of corporate
sovereignty is such that the
courts will not interfere in
the internal affairs of a
company, because it should
be within the competence of
most of the shareholders to
determine their company's
course and direction.
Reasons for the rule are:
i. It is the logical
consequence of the fact that
a company is a separate legal
person. It is the company
that has suffered a wrong,
therefore it is the company
which seeks a remedy.
ii. It preserves the principle
of majority rule.
Reasons for the rule are:
[Link] prevents multiple and futile
actions. If each shareholder were
permitted to sue, the company
might be subjected to many
lawsuits started by numerous
plaintiffs.
If the wrong can be ratified by the
company in general meeting, it
would be futile to have litigation
about it
Exceptions
Illegal or Ultra Vires Acts : section
343(a) see also Section 44(4) –
Parke v. Daily News [1961]
1W.L.R. 493-
Note that its possible for any
member of the company, or
(b) the holder or trustee of any
debenture secured by a floating
charge may stop this illegal act
by an injunction under
Irregular procedure
s 343(b) a company purporting
to do by ordinary resolution any
act which by its articles or CAMA
requires to be done by special
resolution. Edwards v Halliwell
[1950] 2 All ER 1064-
Yalaju-Amaye v Associated
Registered Engineers Co Ltd
[Link] of Irregular procedure
ORDINARY RESOLUTION-Simple Majority
• SPECIAL RESOLUTION-3/4 or 75%
• CAMA REQUIRING SPECIAL RESOLUTION-
Change of Name – 30(3) alteration of
business or objects –s 51
Reduction of Capital; Voluntary & Compulsory
Winding Up; Re-registration of, Private Ltd
Company to PLC, Public Company as LTD &
Unlimited Company as Private Company
limited by Shares; Arrangement or
Reconstruction on sale of the assets of a
company, variation in class rights; rendering
the liability of a Director unlimited.
Infringement of personal rights s
343(c).
his right to receive notice of meetings
To attend and vote at meetings
To appoint a proxy
These rights are personal to a shareholder
Please
refer to our earlier discussion on
membership
Infringement of personal rights
Minority can bring a personal
or representative action.
Defendant is the company
section 343(c).Pender v
Lushington (1877) 6 Ch D
70, 46.
Infringement of personal rights
By s 344. an action under this
heading will entitle the aggrieved
shareholder to—
(a) damages for any loss incurred
on account of the breach of that
right; or
(b) declaration or injunction to
restrain the company or the
directors from doing a particular
act.
Infringement of personal rights
The Court may find the directors
personally liable in damages to
the aggrieved member
The Court may also award costs
to him personally whether or not
his action succeeds.
Or order that the member shall
give security for costs.
Examples: Fraud on the Minority
Committing fraud on either of the
company or the minority where the
directors fail to take appropriate
action to redress the wrong done
Parke v. Daily News [1961]
1W.L.R. 493 Omisade v Akande
Example; Misappropriation of the
company's property.
Cook v. Deeks [1916] 1 A.C. 554
Fraud on the MinoritySection
343(d).
Prove:
what was taken belonged to the
company;
it passed to those against whom
the claim is made or their
protégé
those who appropriated the
company's property are in
control of the company.
Fraud on the MinoritySection
343(d).
Prove:
They acted fraudulently
Not enough to allege series of
facts
If only negligence can be proved
proceed under s. 343(f)
Fraud on the MinoritySection 343(d).
Anor e.g.
Expulsion of minority. This will
amount to fraud unless it is done
bona fide and for the benefit of the
company.
Brown v British Abrasive Wheel Co
[1919] I Ch 290
Directors deriving profit or benefiting
from their negligence
Section 343(f)
Danielsv Daniels: [1978] Ch 406, -
see facts in notes
Linkthis to the duties of the
directors
Directors deriving profit or benefiting
from their negligence Section 343(f)
In Alexander v. Automatic Telephone Co.
(1900) 2 Ch. 56
Here, all charges of fraud against the directors
which were originally contained in the
pleadings were dropped. The company had
issued partly paid shares and the directors
made calls on all the shares except those held
by themselves and those held by persons
whom they were associated with. Held the
directors were in breach of duty by obtaining
money from the other shareholders and paying
nothing themselves:
Calling of company meeting
Section 343(e)
allows a minority action 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;
Omnibus Section 343(g)
any other act or omission, where
the interest of justice so demands.
Personal, derivative and
representative actions
Anaggrieved minority can bring one
action or combine three types of
actions i.e. Personal, representative
derivative andactions:
Who can sue
Section 345
members (s. 105) and those
deriving title by operation of law
e.g. Personal rep of member and
buyer of shares yet to perfect his
puchase can sue under ss343-344
Personal and representative
action: s 344
Bys 344. an action under this
heading will entitle the aggrieved
shareholder to—
(a) damages for any loss incurred
on account of the breach of that
right; or
(b) declaration or injunction to
restrain the company or the
directors from doing a particular
act.
Personal and representative
action: s 344
TheCourt may find the directors
personally liable in damages to the
aggrieved member- S 344(2)
The Court may also award costs to
him personally whether or not his
action succeeds- S 344(3)
Ororder that the member shall give
security for costs- S 344(4)
Derivative action s 346
Here the plaintiff's right of
action derives from that of the
company.
Any benefit obtained will
accrue to the company:
section 344(3)
No gain no damages only
injunction or relief
AGIP (NIGERIA) LTD V AGIP PETROLEUM
INTERNATIONAL [2010] 5 NWLR (PT.
1187) 348
Commencing derivative action
An applicant applies to FHC for leave
to bring derivative action in the
name of the company, or to
intervene in an action or defend or
discontinuing the action on behalf of
the company.: s 346
Commencing derivative action
WILLIAMS V WILLIAMS [2005] 1
FHCLR 489 Company must be joined
• UNIPETROL NIGERIA PLC V. AGIP
NIGERIA PLC (2002) 14 NWLR
(PT. ) 312
Cause of action 346(2)
In seeking leave, show
Cause of action has arisen against a director or former director
involving negligence, default, breach of duty
directors (wrongdoers) are in control,
they will not take any action;
the applicant has notified the directors of his intention to apply
to the court
He is acting in good faith; and
it appears to be in the best interest of the company for leave to
be granted
THESE FACTS MUST BE CONTAINED IN YOUR Originating
Summons
Orders the Court can make in
Derivative Action- S 347
authorising the applicant or any other person to control
the conduct of the action;
giving directions for the conduct of the action;
directing that any amount adjudged payable by a
defendant in theaction is paid, in whole or in part, directly
to former and present security
holders of the company instead of to the company; and
requiring the company to pay reasonable legal fees
incurred by the applicant in connection with the
proceedings
Interim costs- S 351
approval of shareholders S.348
COURT DRIVES DERIVATIVE PROCESS E.G.
Once started, A derivative action
cannot be stayed or dismissed just
because the breach that gave rise to
the action was eventually approved by
the shareholders, however such
evidence of approval may be taken
into account by the court in making an
order under s 347
Discontinuance of a Derivative
action- S 349
Court’s approval is required
No security for cost- S 350
Interim costs. S 351 the court can
order the company to pay to the
applicant interim costs before the
final disposition of the application or
action.
Who can bring a Derivative
Action- Section 352
a registered holder or a beneficial owner and a
former registered holder or beneficial owner of
a security of a company;
a director or an officer or a former director or
officer of a company;
the Commission; or
any other person who in the discretion of the
Court, is a proper person to make an
application under section 346
Title of Court Process in
Derivative Action
The Company/Applicant as the
Plaintiff/Applicants
The Directors,third party, wrong
doer as the defendant/Respondent
Mode of Commencing
Derivative Action
Rule 2 Companies Procedure Rules
Originating Summons –supported by a
verifying affidavit seeking leave to bring an
action in the name or on behalf of the
company File the written address as well
Agip v Agip
Distinguishing features between
Personal action and Derivative Action
No Leave/Leave
Security for Cost/No security for
Cost
Shareholder(s) – Claimant(s) in
Personal while Company and
shareholder are claimant in
Derivative action
OTHER STATUTORY MINORITY
PROTECTION:
There are a number of other sections in
CAMA which enable a number of
shareholders to defy the majority
STATUTORY PROTECTION AGAINST
UNFAIR PREJUDICE: s. 353
A member may petition the
court on the grounds
thatthe affairs of the
company are being,
conducted in an oppressive
unfairly prejudicial to or
unfairly discriminatory
against his interests
Who can Petition- S353
a member of the company;
a director or officer, former
director or officer of the
company;
a creditor;
the Commission; or
any other person who, in the
discretion of the Court, is the
proper person to make an
application under section 354
STATUTORY PROTECTION
AGAINST UNFAIR PREJUDICE: s.
353(2)
A member includes personal
representative or those who
acquired shares/membership by
operation of law
Orders the Court may make-
S355
that the company be wound up ;
Order for regulating the conduct of the
affairs of the company in future ;
Order for the purchase of the shares of any
member by other members ofthe company;
Order for the purchase of the shares of any
member by the company and for the
reduction accordingly of the company’s
capital;
Orders the Court may make-
S355
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;
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;
Orders the Court may make-
S355
directing an investigation to be made
by the Commission;
appointing a receiver or a receiver and
manager of property of the company;
restraining a person from engaging in
specific conduct or from doing a
specific act or thing ; or
requiring a person to do a specific act
or thing
STATUTORY PROTECTION AGAINST
UNFAIR PREJUDICE
OMOLOLU-MULELE Vs. IJALE
PROPERTIES CO. LTD [2003]
27 WRN 43
ReH R Harmer Ltd [1958] 3 All
ER 689
Major asset transaction:
s342
Innovation of new CAMA, a
company cannot, without the
approval of its shareholders, sell
or buy assets having a value of
more than 50% of its total
assets
Major asset transactions must be
approved by a special resolution,
unless the company's articles
permit the company to approve
such transactions by an ordinary
resolution.
Major asset transaction
thedirectors will recommend
the proposed major asset
transaction for approval of
members in a general
meeting. Notice of the
transaction, including a
summary of the transaction
and the recommendation of
the board of directors, shall be
given to all members entitled
to the notice of meeting and to
vote. – (special Resolution)
Major asset transaction
Theapproval of major
assets transactions by
small companies can be
done via circular written
resolutions signed by all
members
Major Share transaction s
22(2)(c) CAMA
Private- Also, a shareholder
or a group of shareholders,
acting in concert, cannot
agree to sell more than 50%
of the shares of the company
to a non-shareholder without
such non-shareholder
agreeing to buy the shares of
the other existing
shareholders on the same
terms.
Variation of class rights
With the consent in writing of
the holders of three-fourths of
the issued shares of that class
(i.e. without a formal meeting);
or
• With the sanction of a special
resolution passed at a separate
meeting of the holders of the
class Section 166
Application to cancel variation S
167 where the class rights are being
varied, fifteen per cent of the
issued shares of that class may
apply to FHC within 21 days of
the consent or the passing of
the resolution to cancel,
• The court can either approve
the variation as made or cancel
it as “unfairly prejudicial”, such
a decision is final
Variation of class rights
(5) The company must
forward a copy of the Court
order to CAC, within 15 days
after the making of the order
default fees will be imposed in
case of default
Schemes of reconstruction and
amalgamation:
If a company’s assets are to be sold,
then ¾ of members must agree that
the company should go into
members’ voluntary winding up and
a liquidator is appointed: Section
714
ARRANGEMENT ON SALE S 714
Here2 companies one is buoyant (Company A
transferee) and the other is sinking (Company
B transferor)
The members Coy B in general meeting will
pass a special resolution for the voluntary
winding up of Company B and to appoint a
liquidator
ARRANGEMENT ON SALE S 714
the
liquidator will sell the assets to Company A or a new
company consideration may be cash, or shares,
debentures in the second company
Being
VWU Directors of the weaker of transferor
company must make a declaration of solvency
ARRANGEMENT ON SALE S 714
Underthis procedure, an application need not be
made to court unless:
a member obtains an order under sections 353-
355 within one year of the special resolution
So this is the power given to the member who
did not vote in favour of the arrangement with
buoyant company to petition the court that the
conduct of the majority was prejudicial unfair
hostile unfair end result is the court order to set
aside the scheme or stop the scheme from
proceeding
Requisition of a meeting:
Holders of not less than 1/10 of a
company’s paid up capital can
requisition a meeting: section 239
Winding up on the "just and
equitable" ground:
Any member may present a petition
for the compulsory winding up of
the company on the "just and
equitable" ground: section 571
Re-registration of a public company as
private limited company
Members holding a minimum of 5 per cent of
the issued share capital may apply to the
court to cancel the change: section 64
if the company is ltd by guarantee at
least 5% of its members; or
(c) by at least 50 members of the
company excluding those who voted in
favour of the resolution.
Application to be made within 28 days
after the passing of the resolution
Re-registration of a public company as
private limited company
On the hearing of the application, the Court
either cancel or confirm the resolution.
(4) The Court may make consequential order
like compel the company to purchase the
shares of the dissenting shareholders and
compel the company to reduce its share
capital reduce its share capital to reflect the
number of shareholders in favour of the re-
reg
See s. 64
Alteration of objects
• Holders of 15% of the company's issued
share capital or 15% of members or
• Debenture holders
• may petition FHC within 28 days of the
resolution to have the alteration set aside :
Section 51(2)(a). See rule 4 COMPANIES
PROCEEDINGS RULES 1992
CAC 's investigations: s 357
The CAC can appoint competent
inspectors to investigate the affairs
of a company and to report on them
Who can apply for Investigation S
357(2)
by CAC on the application of the
company
by members holding not less
than 1/10 of the class of shares
issued; or
in the case of a company ltd. by
guarantee by 1/10 of the
company's members; or
If the court so orders S 358(1)
CAC suo motu S 358(2)
Circumstances that may warrant CAC to
investigate suo motu- S 358(2)
ifit appears that there are
circumstances suggesting that-
a. The company's affairs are being
or have been conducted with intent
to defraud its creditors or unfairly
prejudicial to members
b. or that the company was formed
for any fraudulent or unlawful
purpose or;
CAC 's investigations
c: persons in charge have been guilty of fraud,
misfeasance or other misconduct towards it or
towards its members ; or
(d) the company's members have not been
given all the information with respect to its
affairs which they might reasonably expect.
member, includes—
(a) any of the personal representatives of a
deceased member ; and
(b) any person to whom shares have been
transferred or transmitted by
operation of law.
CAC 's investigations: s 357
Employees of the investigated
company are protected from
discrimination and should he be
sacked because he co-operates with
the CAC to make records of coy
available to CAC or sacked for no
just cause he must be paid his full
pension as though his sack day is
his retirement date
Powers of the Inspectors
Can
investigate the subsidiary
company or Holding company- S359
Demandthe production of any
document or information –S360
Call
for directors bank account –
S361
Investigation of Ownership of
a Company – Section 369
Investigator can lift the veil of
incorporation to know the identities
of the real owners of the company
under investigation
CAC 's investigations
If Anyone who obstructs the investigator
or does not co-operate the inspector may
certify the refusal in writing and apply to
the Court for contempt proceedings against
the person.
(4) The Court may thereupon enquire into
the case, and after hearing the Court may
punish the offender in like manner as if he
had been guilty of contempt of the Court.
- S 362
Inspector’s Reports- Section
363
Interim Report
Final Report at the conclusion of the
investigation
CAC may direct the report to be
forwarded to the registered office of
the Company
Interested persons can apply on the
payment of the prescribed fee for a
copy of the report
CAC 's investigations
CAC can institute civil proceedings
against the company based on the
inspector’s report s. section 364
If crime is committed then CAC to
inform A.G. Federation to
prosecute:Section 365