Illegal acts

The majority have never been able to affirm an act which is ultra vires the company. The exception relates to other illegal acts such as financial assistance.

Decisions requiring qualified majority.

A majority cannot confirm a resolution by simple majority where the constitution of the company requires a qualified majority: in Edwards v. Halliwell [1950], a trade union's rules provided that members' subscriptions could only be increased by a special resolution of the delegates. The court allowed a minority action where the union purported to increase subscriptions by an ordinary resolution.

Personal rights of a shareholder 

The minority shareholder can always enforce his personal rights as a shareholder: Fender v. Lushington (1877).

Where there is a fraud on the minority.

The concept of fraud on the minority involves an abuse of its power by the majority. This abuse can be directed at the minority shareholders where there is an attempt by the majority to compulsorily acquire the shares of the minority; alternatively the abuse can be directed against the company itself, as where the majority attempts to expropriate a corporate opportunity for itself. In both cases the minority can sue (i) to block an abusive use of majority power, Clemens v. Clemens Bros Ltd [1976], or (ii) to recover the company's expropriated property: Cook v. Deeks [1916].

The form of the minority action.

Depending on the nature of the exception, the minority action may take a different form. The following actions exist: a personal action; a representative action and a derivative action. The personal action is for infringements of the shareholder's personal rights as a member. The representative action is where there is an infringement of the rights of a minority of the shareholders including the member bringing the action; the action will be in the form of a direct representative action (or class action), where the shareholder will initiate the action for the benefit of the affected class. The derivative action is in respect of wrongs against the company itself where the shareholder acts as a champion for the company as a whole. In order to bring a derivative action the minority shareholder must establish as a preliminary issue the following points: (i) that there has been a wrong in the nature of a 'fraud' committed against the company; and (ii) that the wrongdoers are in control of the company. 

Fraud against the company.

The term ‘fraud’ includes abuses of power both in the capacity of director and shareholder.

The wrongdoers are in control.

'Control' means actual voting control of the company. It is not sufficient to show de facto control merely through combined dominance of shareholding and management position, but the court does take into consideration control through nominees.

The court may order the company to indemnify the minority shareholder where it was reasonable and prudent for him to bring the action and if it was brought in good faith.

Statutory exceptions to Foss v. Harbottle

The most important statutory exception is the right to petition against unfair prejudice.

Petition against unfair prejudice.

Any member of a company may apply to the court by petition on the ground that the affairs of the company are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or some part of its members.

The court can make any order on the petition.

It is important to identify what is meant by unfair prejudicial conduct and the nature of the interests of the members capable of unfair prejudice.

The nature of the members' interests The first reported decision on [1983] limited the right to petition to cases where the unfair prejudice affected a person in his capacity as a shareholder. In Re a Company [1986], Hoffman j said: 'In the case of a small private company in which two or three members have ventured their capital... on the footing that each will earn his living by working for the company as a director . . . [the] member's interests . . . may include a legitimate expectation that he will continue to be employed as a director and his dismissal from that office and exclusion from the management of the company may therefore be unfairly prejudicial to his interests as a member.' Relief has been obtained where the petitioner complained of removal from office amongst other things.

Successful actions have been brought in respect of breaches of fiduciary duties including conflict of interests, excessive remuneration and a rights issue regarded as an attempt to dilute the interest of a shareholder.

Just and equitable winding up

The court has a wide discretionary power to wind up a company on a petition presented by a member. The categories of complaint are unclear and Lord Wilberforce in the leading case of Ebrahimi v. Westbourne Galleries Ltd [1973] stressed that in his view the general words should not be reduced to the sum of particular instances.

In this case, the plaintiff had been in a partnership with N and they later formed a company to take over the business and became the only directors and shareholders, each holding 500 shares. When N's son joined the business, E and N transferred 100 shares to him and he became a director. Ebrahimi was removed from the board and petitioned for the just and equitable winding up. The House of Lords held that Ebrahimi and N had formed the company to perpetuate their previous partnership, and that E's exclusion was unjust.

Lord Wilberforce suggested that the remedy applied to a small private company where one or more of the following factors was present: (i) it should be an association formed or continued on the basis of a personal relationship, involving mutual confidence; (ii) there should be an agreement that all or some of the shareholders shall participate in the management of the business; and (iii) there should be restrictions on the transfer of the members' shares.

The equitable principles of Ebrahimi have been applied outside the framework of a winding up petition. Thus in Clemens v. Clemens Bros. Ltd [1976], the court set aside an issue of additional shares aimed at diluting the plaintiff’s holding.

Department of Trade investigations.

The Department of Trade and Industry (DTI) may appoint inspectors on the application of 200 members or members holding not less than one-tenth of the issued shares; or where there are circumstances suggesting fraud, illegality, unfair prejudice to members, misfeasance or other misconduct of the company's officers or the wrongful withholding of information from members. This is more useful since there is no minimum of members required. The Secretary of State must also appoint inspectors where the court so orders.

Inspectors may question directors and other officers and requisition documents, whereas it is frequently difficult for a minority shareholder to establish his allegations against the controllers. Where the inspection produces sufficient evidence, the Secretary of State can proceed to petition for the winding up of the company or petition against unfair prejudice in the same way as a member. The report furnished by the inspectorate may also lead to the disqualification of directors. Investigations tend to be used for corporate insolvency investigations and minority shareholders are unlikely to obtain relief.