MAJORITY RULE & MINORITY PROTECTION

What is meant by majority rule in company law? The whole point of the separate legal personality of the company and the fact of being the member of the company is that in terms of implementing decisions of the company, the majority will always prevail. It stands to reason that whoever owns the majority shares will always carry the day in terms of decision making. But there are also minority people in the company who might be unhappy with the way the decisions are carried out by the majority. In such a situation, the minority shareholders are at liberty to sell their shares, leave the company and move on to another company.
But company law doesn’t end there. Since CL also recognizes that in the exercise of the majority power, there might be instances in which the majority is committing a fraud on the minority. So this is not just a case of ordinary decision making that is carried by the majority. There might be instances in which the majority in the process of decision-making might be expropriating corporate property to themselves or committing substantial fraud against the company
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In such a situation, company law draws a line. In these limited instances where either the actions of the majority constitute a fraud on the minority or the particular wrongdoing in question enables a minority shareholder to bring a personal action in his own right, then CL deals with this scenario differently. Having talked about this general principle of the majority rule and the fact that generally speaking, the majority always carries the day, a minority can’t stop the majority from decision making otherwise it would amount to constituting the minority into the majority. It is only in an instance where a particular act or transaction is such that it can be said that a wrong has been done to the company or a fraud has been committed that the minority can challenge the majority in terms of that act or transaction and CL gives the minority shareholder a number of options in terms of enforcing what we call shareholders’ remedies. For example, where the Directors are also the majority shareholders and are in breach of their fiduciary duties to the company, they are certainly not going to sue themselves for the breach of their duties to the company and they can’t continue to perpetuate the wrong against the company without some kind of remedy that CL recognizes.
If you read both English and Nigerian papers on CL, you’d come across what is known as the rule in Foss v Harbottle. In Foss v Harbottle (1842), two shareholders commenced legal action against the promoters and directors of the company alleging that they had misapplied the company assets and had improperly mortgaged the company property.  The Court rejected the two shareholders' claim and held that a breach of duty by the directors of the company was a wrong done to the company for which it alone could sue.  In other words, the proper plaintiff in that case was the company and not the two individual shareholders. This rule is derived from two general legal principles of company law.  Firstly, a company is a legal entity separate from its shareholders.  Secondly, the Court will not interfere with the internal management of companies acting within their powers.  Where an ordinary majority of members can ratify the act, the Court will not interfere.  This simply means, if the majority can ratify an act, the minority cannot sue.
The above rule is actually not a substantial principle of law but more of a procedural device to enable the courts to determine who has the right to institute an action for the alleged cause of action brought to the court. Essentially, we are talking about locus standi, that is, for the alleged cause of action brought to court, do you have right to seek the audience of the court to ventilate that dispute or are you a busybody or an interloper such that the court would say you do not have locus standi to institute such action. It is evident from the case that there are two main elements to the rule in this case which we would also see shortly inside CAMA. The first pillar is a logical one which is essentially that where a wrong has been done to a company, the proper plaintiff to institute an action is the company who has been wronged. The second pillar which essentially restates the majority rule is that where the wrong is in the nature of a mere irregularity that can be regularized by the majority (there is also the general rule that the courts will not engage in internal management of companies), then again the court would not bother itself in engaging whether or not the minority shareholder can bring an action when all that would be required is for the majority to ratify such wrong or irregularity by a simple majority.
We are also likely to find some of these textbooks dealing with the exceptions to the rule in Foss v Harbottle so that the rule in this case is not an absolute rule but one with exceptions. In actual fact, this writer prefers to say that there are instances where the rule doesn’t apply rather than say there are exceptions to the rule. Because when you look at those instances as stated under Common Law and as codified under CAMA, they simply provide instances where the rule will not apply to prevent a shareholder from instituting an action. For example, if the alleged wrong even though done against the company is also a wrong that entitles a shareholder to also bring a personal action or entitles shareholders to bring a representative action in their personal right, then the rule will not stop a shareholder from instituting an action.
Instances where the rule will not apply include:
Ultra vires and Illegality
The directors of a company, or a shareholding majority may not use their control of the company to paper over actions which would be ultra vires the company, or illegal. See Smith v Croft, Cockburn v. Newbridge Sanitary Steam Laundry Co.
Actions requiring a special majority
If some special voting procedure would be necessary under the company's constitution or under the Companies Act, it would defeat both if that could be sidestepped by ordinary resolutions of a simple majority, and no redress for aggrieved minorities to be allowed.See Edwards v Halliwell.
Invasion of individual rights (Pender v Lushington)
"Frauds on the minority" (See Atwool v Merryweather, Gambotto v WCP Limited, Daniels v daniels).
It is important to make one crucial distinction at this juncture. To the extent that the rule has been codified in S. 299 CAMA, it is imperative as Nigerian practitioners that our starting point must always be S. 299 CAMA rather than say it is about the rule in Foss v Harbottle since the latter is a common law principle which has been codified into our laws thereby making our laws the primary starting point. We can use the cases that have evolved after Foss v Harbottle to apply the relevant statutory provisions in CAMA but the starting point must always be S. 299 CAMA.
The instances stated under sections 299 and 300 CAMA above are the so called exceptions to the rule or the instances where the rule does not apply. All these instances have various cases in terms of the application and the reasoning behind the so called exceptions. Please note that the section provides that “…by injunction or declaration….” So where a shareholder can actually go round the section 299 impediment as a matter of locus standi to try and bring an action in respect of those instances mentioned in S. 300 CAMA, he can only be seeking injunctive relief or declaration; he cannot be seeking damages even where he has suffered damage. The law is very clear in this regard.
S. 301 CAMA talks about different kinds of actions to enforce these so called rights against the majority. They can bring a personal action which is one founded on some personal wrong that’s been done as a result of the act done by the majority on the minority. The members can institute a representative action on behalf of themselves and other minority shareholders in the company. The third form of action is the more controversial one and it has always been a controversial one especially at common law. This is the derivative action. Essentially, a derivative action is a situation where clearly a wrong has been done to the company and the so called wrongdoers are in control of the company and as one can imagine, a wrongdoer wouldn’t want to pass a resolution of the company that the latter should sue him for his wrongdoing. It is illogical. Thus, we can find a situation where the majority shareholders continue to perpetuate the wrong against the company and these wrongs would not be remedied as a result of the fact that the wrongdoers are in control of the company. The derivative action is a device that allows the minority shareholder to institute an action against the wrongdoers for the wrong that has been done to the company. So the minority shareholder would actually be the plaintiff, the wrongdoer majority would be the defendants and the company itself would also be a nominal defendant (the essence of having a nominal defendant is so that the decision of the court would also bind such a person).
S. 303 CAMA deals with how to commence derivative actions. As you can imagine, this derivative action is an important tool in the arsenal of the minority shareholders in fighting corporate maladministration. Because there are instances which won’t fall within those mentioned in S. 300 to be able to bring a personal action such that the derivative action is one of last resort. Thus, the law must be interpreted in such a way that it is relatively easy for the minority shareholder(s) to trigger the provisions that relate to derivative actions. S. 303 CAMA contains a general blanket provision to the effect that “……an applicant may apply to the court for leave to bring an action in the name or on behalf of a company, or to intervene in an action to which the company is a party, for the purpose of prosecuting, defending or discontinuing the action on behalf of the company”. See also S. 309 CAMA which tells us who an applicant is.
(a) a registered holder or a beneficial owner and a former registered holder or beneficial owner, of a security of a company;
(b) a director or an officer or a former director or officer of a company;
(c) the Commission; or
(d) any other person who in the discretion of the court, is a proper person to make an application under section 303 of this Act.
S. 303 (2) CAMA talks about what must be established before a minority shareholder can institute an action. It provides:
“No action may be brought and no intervention may be made under subsection (1) of this section, unless the court is satisfied that‐
(a) the wrongdoers are the directors who are in control, and will not take necessary action;
(b) the applicant has given reasonable notice to the directors of the company of his intention to apply to the court under subsection (1) of this section if the directors of the company do not bring, diligently prosecute or defend or discontinue the action;
(c) the applicant is acting in good faith; and
(d) it appears to be in the best interest of the company that the action be brought, prosecuted, defended or discontinued.”
The above elements must be proved to the satisfaction of the court before the court would give the applicant leave to institute the derivative action. It is tempting to think that in such a situation where the applicant goes before the court to seek leave, at that initial point in time, it is how the applicant is able to persuade the court without reference to those wrongdoers that would determine whether or not the court would grant leave to institute the action. So the gravity of the action should be important here. Once the applicant is able to convince the court to grant leave, the wrongdoers may be called to defend the action. But this is not the case. In Agip Nigeria v Petroli International BV, the Supreme Court outlined the procedure for seeking leave of court. The court relying on the Companies Proceedings Rules 1992 held that even at that early stage where one is trying to obtain the leave of the court to bring a derivative action the wrongdoers must be put on notice. What is the effect of the provision of the CPR? This is giving the wrongdoers the opportunity to frustrate the action since they are going to oppose the application to seek leave. It is the submission of this writer that the decision in this case has killed derivative actions in Nigeria. But thankfully there are other avenues by which shareholders can enforce or bring wrongdoers to book.
The only other available remedy to a minority shareholder was the remedy of winding up of a company under the just and equitable ground. But this one has always been a provision in the companies’ legislation. As it connotes, it means the life of the company is being brought to an end on a ground because it is just and equitable to do so. Sometimes, this remedy may be one that is using a sledge-hammer to kill a fly because sometimes winding up might not be an appropriate remedy but the courts simply do not have any discretion. In other words, where a person institutes an action for the winding up of a company, provided he has met the legal requirements, the court would be forced to grant such an order. We find a typical example in the case of Ebrahimi v Westbourne Galleries Ltd which is a classic example of why the winding up of a company under the just and equitable ground may sometimes turn out to be an unreasonable remedy but the court would be left with no choice than to grant such an order. In this case, Mr Ebrahimi and Mr Nazar were partners. They decided to incorporate as the business was highly successful, buying and selling expensive rugs. Their store was originally in Nottingham, and then moved to London at 220 Westbourne Grove. Mr Ebrahimi and Mr Nazar were the sole shareholders in the company and took a director's salary rather than dividends for tax reasons. A few years later, when Mr Nazar's son came of age, he was appointed to the board of directors and Mr Ebrahimi and Mr Nazar both transferred shares to him on the understanding that the three would run the affairs of the company together. After a falling out between the directors Mr Nazar and son called a company meeting, at which they passed an ordinary resolution to have Mr Ebrahimi removed as a director (a valid exercise of corporate power; there was no question as to it since they had a right to remove him. But remember that there was an agreement though not in writing among the three that they would run the affairs of the company together). Mr Ebrahimi, clearly unhappy at this, applied to the court for a remedy to have the company wound up on the just and equitable ground. Note that he could not institute a personal action or a derivative action since his removal was legitimate and lawful. The House of Lords noted that there are certain situations under Company Law where equitable considerations would override any legitimate exercise of corporate power and to the extent that when the company was set up, all the three promoters had an understanding that all of them would run the business, the legitimate exercise of removing Mr. Ebrahimi even though in accordance with the law would not be allowed to stand because Mr Ebrahimi had a legitimate expectation to continue in the running of the affairs of the company. The House of Lords in effect wound up the company. The principle though was recognized by law, the result was a disproportionate one. Perhaps if the law had recognized other remedies that the law could apply equitably in the circumstances, the court wouldn’t have been left with the only option to wind up the company. For example, the court would have preferred to reinstate the appellant or make an order for payment of premium to the wronged party had such option been available under the law.
As a result of the above, English company law came up with the concept of unfairly prejudicial conduct in the affairs of the company. This is what we have in sections 310-312 CAMA. S. 310 CAMA tells us the category of persons that can apply to the court for a petition on the ground of unfairly prejudicial conduct. S. 311 CAMA states the grounds upon which an application may be made. S. 312 CAMA deals with powers of the court as regards winding up a company under the unfairly prejudicial conduct.
This is a new remedy that allows in particular minority shareholders to still be able to bring a petition in court and to seek any remedy that is just and equitable in the circumstances for the court to grant. The difference between the winding up under just and equitable grant and unfairly prejudicial conduct petition is that under the latter, winding up is one of the many remedies the court would grant in such a circumstance, that is, the court is not bound to grant winding up. The court would look at the circumstance and grant another remedy where the wrong is not so grievous as to warrant a winding up. All these instances are listed in S. 312 CAMA. The advantage of this remedy is that it gives the minority shareholder a direct avenue to the court without having to contend with the difficulties in the rule in Foss v Harbottle. This is because much of the wrongs to the company that would have been caught by S. 299 and the rule in Foss v Harbottle, one can avoid by bringing an action under unfairly prejudicial conduct petition. So one is saying the way and manner in which the affairs of the company is being run (which may or may not be a wrong done to the company) is prejudicial, discriminatory or oppressive to one’s interest as a shareholder. Unlike England where we have just ‘prejudicial’, in Nigeria, we may have prejudicial, discriminatory or oppressing manner in running the affairs of a company. It is submitted that oppression has proven to be difficult to prove in practice while the scope of discriminatory conduct is not known since a discriminatory act isn’t necessarily prejudicial. But the Nigerian courts haven’t really been able to interpret this.
The persons that can bring an action on the ground of unfairly prejudicial conduct are listed in S. 310. By virtue of S. 312 CAMA, the court has a wide discretion in terms of the order(s) it may give in respect of the petition. Thus, the court is not bound by the reliefs that one seeks when a petition is brought. In essence, the court may give another remedy where it is convinced that winding up the company isn’t the best in such a scenario. The other remedies or orders which the court may grant or made are contained in the aforesaid section of CAMA. If at the time, Ebrahimi’s case was brought before the court, there was a similar provision in the companies’ legislation, perhaps one of Ebrahimi’s lawyers would have advised him to bring an action under unfairly prejudicial conduct rather than a petition for winding up.
There however remains one pertinent issue left to be discussed. This we can find in S. 408 (e) CAMA which deals with circumstances in which companies may be wound up by the court. It provides that a company may be wound up by the court if the court is of the opinion that it is just and equitable that the company should be wound up. Thus, the section still allows an applicant to bring an action for the winding up of a company under the just and equitable rule. What is the implication of this section? Let us presume that we have an Ebrahimi scenario in Nigeria today, and Ebrahimi comes to you for a piece of advice. He is extremely bitter and all that he desires is to have the company wound up. Technically speaking, even though one has the option of going under S. 310 and S. 311 CAMA seeking a relief of winding up under that section, you know you stand a risk of the court saying NO instead opting for another remedy which the court considers suitable. It is the submission of this writer that if the action is brought under S. 408(e) and the court finds that the applicant is justified in the sense that he has been wronged, the court would have no option than to grant the order of winding up just like the Ebrahimi’s situation. This is because the petition was not brought under S. 310-312 CAMA that gives the court the discretion they would have had in giving another remedy. Would you advise that the provision of S. 408 (e) CAMA be struck out?



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