Companies are most times formed for the purpose of engaging in business and making profit. All investors in such companies will want to maximize returns in their investment by way of controlling the activities of the company and making profits. The common law courts guides the operation of business along the line of democracy. Common law courts were not willing to to interfere in domestic affairs nor did they review matters deemed to be purely commercial judgments or internal decisions of companies even if irregularities or wrongs were alleged to have been committed in the internal affairs of the company, the majority was left to decide the best thing to do.
The general principle of company sovereignty was laid down in the locus classicus of Foss v. Harbottle. In this case, two directors of a company
The exceptions to this rule is the
Majority rule and minority protection are two sides of the coin as far as corporate governance is concerned. The reason for allowing the majority as such to prevail over the minority was based on the fact that any one joining the a company would have been deemed to acquiesced to the facts that majority would always be deemed to prevail and that those that invested more will have more control of the company. “This will of the majority principle came to be tested in disputes often arising on the need to remedy corporate wrongs”.
The rule in Foss v. Harbottle (1843) 2HARE 4612. In this case, two members of the company sued as plaintiffs on behalf of themselves and the other shareholders. The defendants were five directors, a solicitor and an architect. Plaintiffs alleged that by concerted and illegal transactions the defendants caused the loss of company’s properties, that the directors defrauded the company in various ways particularly by purchasing their own properties at price fixed by them and using the company’s money to pay themselves sums greater than the real value of those properties. The court dismissed the action of the plaintiffs on the ground that only the company itself can institute and or maintain such an action if it thought fit and not the individual members of the company.
This famous laid down rule in Foss v. Harbottle was followed in many other cases. In the case of Mac Dougal v. Gardiner (1975) 1 Ch. D13, Mellish J. explained the practical implication of the rule as follows:
“If the thing complained of is a thing which is of 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 of the company are entitled to do legally, there can be no use in having litigation about it, the ultimate end of which is only that a meeting is called and ultimately the majority gets its wishes done.”
Merits of the Rule
The merits of the rule includes that:
- It aided the development and effectuality of the separate legal personality principle. If it is accepted that a company is different from its members in all things affecting the company including wrongs suffered by it. It will not be for an individual or minority to decide, if the company as a whole must decide then it is the majority shareholders or the bulk of the membership.
- It preserves democracy by keeping vexacious and multiplicity of court actions at bay, which could otherwise impede the smooth running of the company.
Limitations of the Rule
1. Majority rule prevents legitimate complaints of minority shareholders from being ventilated in this regards minority shareholders always suffer for ill motivated action of the majority concealed under the rule, therefore the rule wasn’t democratic as it claims
2. Democracy is no longer based on majority rules simpliciter. To be effective, it carries with it adequate protection of minority rights
In this context there is a distinction between individual membership rights and corporate membership rights. Individual/ personal membership rights have been defined as “the right to maintain himself in full membership with all the rights and privileges appertaining to that status” per Jenkins in Edwards v. Halliwell (1950) 2AER 1061
Examples of these rights include:
⦁ right to vote where the share carry voting rights
⦁ right to refuse to consent to increase in share capital
⦁ right to notice of meeting
It has been held by the court of Appeal that the right to have a proper notice of meeting and for a meeting to be held which prescribed quorum for valid decisions to be taken is the right of an individual member and not a corporate right Pan Atlantic and Forwarding Agency Ltd. v. Aleyi
Note that in such rights above nothing can stop an individual member from suing in his personal capacity. On the other hand, corporate membership rights are the rights exercisable by the corporation as a body. Such rights can only be exercised by a prescribed majority through the medium of resolutions. These rights include qualified minority rights. In corporate rights, every member, majority or minority is entitled to participate in decisions in accordance with the rights attached to their shares. In such corporate decisions, the minority cannot expect to have its way in proposition to majority or controlling shareholders.
Corporate decisions are taken in accordance with personal interest and advantages of controlling of majority shareholders taken subject to their equitable consideration. North Western Transportation company v. Beaty (1887) 12 AC 589. Greenhalgh v. Ardele Cinemas (1946)1 AER 512
Finally, if democracy is the acclaimed basis of decision making in company affairs, due process must reflect the correct notion of present concept pf democracy. Democracy as dictatorship of majority is now anachronistic. It has been held to be in line with the meaning of true democracy to always provide for limitations on the rights and powers of the majority to ensure that in having their way, majority will not imperil minority rights. United Mizrai Bank Ltd. v. Midgal Cooperative Village etc. (1995) 49 Canadian Supreme Court cases 221
PROVISIONS OF CAMA ON MAJORITY RULE
The rule in Foss v. Harbottle was equally developing as part pf Nigerian law as under common law before the enactment of CAMA. In Nigeria, the rule had been held to be applicable not only to incorporated bodies, but also unincorporated associations like trade unions. See Mbele v. Ofili (1968) NCLR. In the case of Abubakri v. Smith (1973) 5 SC 31. The rule was held to be applicable to a body called the Jamatul Muslim of lagos on the ground that, it was a body possessing a constitution or a set of rules entitling it to sue and be sued. Nigerian courts were prepared to exclude the harsh effects of the rule in the interest of justice. Edokpolo v. Sem Edo Wires Industry Limited (1984) 7SC 119
INSTANCES WHEN THE RULE IN FOSS V. HARBOTTLE MAY NOT BE APPLICABLE
CAMA has provided for the rules and their exceptions. Section 299 rule in Foss v. Harbottle
Section 300 (a-f) codified the exceptions to the rule
The rule in Foss v. Harbottle will not apply to prevent a member from applying to the court for an injunction or a declarative relief restraining the company from:
a. Engaging in a transaction which is illegal or ultra vires Parke V. Daily New Ltd (1962) Ch. 927, Hogg V. Crampton (1967) Ch. 254, Powell v. Kempton Race –Course Company (1877) 2QB 242,. In Smith v. Croft (No. 2) (1988) Ch. 114, the act complained of relates to giving the financial assistance to facilitate the acquisition of shares in the company, contrary to the Company’s Act 1981. The court held that the act was illegal, the individual shareholder may maintain an action. Therefore, where directors or controlling shareholders gave out company properties without good cause, the rule will not apply. Where the majority abuse or misuse their powers, the rule will not apply Estmanco Kilner House Ltd V. Greater London Council (1982)1 AER 407 Also, where through negligence, directors confer benefits on themselves at the expense of the company , the rule will not apply Daniels V. Daniels (1978) 2wlr 73
Prudential V. Newman (No 2) (1980) 2 AER 841
b. Purporting to do by ordinary resolution any act which its constitution or the Act purports to be done by special resolution Edwards v. Halliwell (supra), Atwood v. Meryweather (1967) LR 5 Sq. 264. In Cotter v. National Council of Seamen (1915)1 Ch. 503. The court held that an individual shareholder has locus standi to maintain an action to prevent majority from breaking the constitution of the company and the action is recognized because it is an act that cannot be ratified by the majority.
c. Doing or omitting to do an act infringing on the applicant’s individual right Pendler v. Lushington
d. Commiting fraud on either the company or minority shareholders where directors had failed to take appropriate actions to redress the wrong Cooks v. Deeks (1916)1 AC 554. Under this heading a minority may sue to redress wrongful expropriation of company’s properties Wellersteiner v. Moir ( No 2) (1975) 2 WLR 389. Also where the directors divert to themselves a contract which ougt to have come to the company and later purportedly ratifies same at a general meeting , minority can apply to stop it.
e. Where a company meeting could not be convened promptly to redress a wrong done to the company or to the minority shareholders then the minority can sue
f. Where the directors had benefitted or were likely to benefit from their breach of duty or negligence Prudential v. Newman (supra) Where a member institute a personal action or sue in representative capacity to enforce any right due to him or them, he or they shall not be entitled to any damages but only to a declaration or injunction to restrain the company directors from doing a particular act.
OTHER Remedies open to Minorities
1. Derivative Action
A minority member has a derivative power to institute an action not on behalf of himself rather shareholders, but on behalf of the company itself Section 303 CAMA. The applicant shall first seek the leave of the court to sue in the name or on behalf pf the company or to intervene in an action to which the company is a party in order to prosecute, defend, or discontinue the action on behalf of the company.
When an application for leave is made to the court, the court will expect to be satisfied of the following facts:
a. That the alleged wrongdoers are the directors who control the company and have refused to take any action
b. That the applicant gave reasonable notice to the directors of his intention to apply to the court if they (directors ) do not bring, prosecute or defend the particular action
c. That the applicant was inly acting in good faith
d. That it appears to be in the best interest of the company that the said actions be brought, prosecuted, defended or discontinued
ORDERS THAT MAY BE MADE IN A DERIVATIVE ACTION
The court may make any order that it deems fit in respect of action commenced under section 303 CAMA. Court may make the following orders-
1. Court may order or authorize the applicant or any other person to control the conduct of the action
2. The court may give an order directing how the action should be conducted
3. Court may order that any amount adjudged payable by the defendant in the action be paid in whole or in part directly to the former or present security holders of the company instead of the company
4. Court may order the company to pay reasonable legal fees incurred by the applicant in connection with the action Section 304. Note that the court may not stay the action or dismiss it simply because the alleged breach has been or will be approved by the company in a general meeting, neither will such action be stayed, discontinued, settled or dismissed for want of prosecution without the approval of the court. Section 305 and 306
WHO MAY APPLY THROUGH A DERIVATIVE ACTION?
There are four categories of applicants
1. A registered holder or beneficial owner or a former registered holder or beneficial owner of the security of a company.
2. A director or officer or former director or officer of a company
3. The Corporate Affairs Commission
4. Any other person who in the discretion of the court is a proper person to make the application Section 309 CAMA
Note that the shareholder whose conduct disqualifies him from bringing the action e.g if he was party to the wrong doing cannot sue under Section 303, Towers v. African Tour (1904) 1 Ch. 58, Prudential Assurance v. Newman (supra)
Note also that the applicant or the intervener must apply or intervene on his behalf or other members of the company except the defendants complained against, this is to avoid multiplicity of actions and to enable the company to be bound once and for all by the court verdict.
COST OF THE ACTION
An applicant shall not be required to give security for cost in any application or action or intervention under section 303. This is an improvement over a similar provision under the 1968 Act. The court may at any time in the course of the action order the company to pay daily cost to the applicant before the final judgment. Court may also order the payment of reasonable legal fees incurred by the applicant in taking out the action
REMEDY AGAINST OPRRESSION OR UNFAIRLY PREJUDICIAL CONDUCT
In the past the only remedy available to a minority shareholder who claim to be a victim of the majority’s oppression was to take up the company either on the ground that it is just and equitable to do so or that the company had lost its substratum or was deadlocked section 408 (e)
Where the court is still empowered to wind up the company on a just and equitable ground. It has been rightly observed that the remedy of winding up on the ground of oppression seem to be drastic therefore, it was not a protection for the minority. What the minority desired was protection from oppression and not the dissolution or winding up which was not in the interest of anyone even the minority. Section 311 introduced a relief which is an alternative to the drastic step of winding up.
This remedy is incorporated for the first time into the Nigerian law particularly Part X, section 310 CAMA
The following person may apply under section 310 against:
a. A member of the company
b. A director/ officer or former director/ officer of the company
c. Director of the company
d. The CAC
e. Any other person who in the discretion of the court is a proper person
A member for the purposes of the section include personal representatives of deceased members to whom shares have been transmitted by operation of the law. Note that the discretion of the court to allow any other person under section 311 was a deliberate extension of persons who may take up the provision for the remedy against oppression.
THE Grounds OF Application Under S 311
A member may bring petition for relief against oppression on the following grounds-
a. That the affairs of the company are been conducted in a manner that is oppressive, unfairly prejudicial, or unfairly discriminatory against a member or members in a manner that is in disregard of the interest of a member or members as a whole.
b. That an act or omission or proposed act of omission by a company or a resolution, a proposed resolution by a class of members was or would be oppressive or unfairly prejudicial or unfairly discriminatory against a member as a whole
Note that the CAC or any other person mentioned under section 310 can equally take action. Under section 311(2) (c) the commission may suo motu, if appears that the affairs of a particular company was being conducted in an unfairly prejudicial manner apply for remedy.
What is the meaning of unfairly prejudicial action and discriminatory action
Unfair prejudice may cover the following instances:
1. Where directors vote themselves excessive emolument thus depriving members of any reasonable document
2. Where board of directors purporting to act under the articles refuse to register personal representatives of deceased members thus, disenfranchising them and consequently making them sell their shares at low price Re Smith v. Fawcett (1942) Ch. 304. Re A Company 1983 3 AEL 36
3. Where shares are issued to directors on generous terms
4. Where directors refuse to commence payment of non cumulative preference dividends on the shares of the minority. Generally the exact scope or meaning of what is unfairly prejudicial, oppressive or discriminatory conduct is not easy to be determined. The Act did not define such conduct. In the case of Re Germaine Street v. Turkish Paths Ltd. (1971) 1 WLR1042
An oppressive conduct was defined as when shareholders having a dominant position in a company exercises their powers to procure that something is done or not done in the conduct of the affairs of the company or to procure in by express or implicit threat of exercising that the power that something is not done in the conduct of the companies affairs or when such conduct is unfair or burdensome, harsh and rough to other members of the company or some of them. Ogunade v. Mobile Films West Africa ltd. (1976) 2 FRCR 10, Re Ranoble & Sons Clothing Company Ltd (1983) BCLC 273. Re Kenny Swansea Ltd (1987) BCLC 514
Some Nigerian writers have argued this phrase needs be taken individually believe the terms “unfairly prejudicial conduct” “oppressive conduct” “discriminatory conduct” are not coterminous therefore that a complaint may come under any if the headings. However, the court of appeal of new Zealand interpreted an analogus/ similar provision in their company Act in the case of Thomas v. N.W Thomas Ltd. (1984) 1NZLR pt 5 @686
“these expressions overlap, each in a sense help to explain the other and rate together to reflect the underlying concern of the subsection that a conduct which is unjustly detrimental to any member of the company, whatever form it takes and whether it adversely affects tall members alike or discriminate against some only is a legitimate foundation for complaint under the section”
Form of Application under the Section
The application to court is made by way of petition under the 1991 companies procedure rules. All shareholders should be made party to the petition. The petition need not be advertised unless it obviously boils down to winding up the company Impresso Angelo Farsure Spa V. Ag Federation Suit No Fsc/L
Powers of the court under section 311
If the court satisfies itself that the petition under section 311 CAMA is properly made, he may make such orders at it may deem just in respect of matters complained of section 312
The court may make the following orders
- An order that the company be wound up- of the court decides to wind up the company, all the provisions of CAMA governing winding up shall apply with necessary adaptations.
- Court may make an order for regulating the conduct of the affairs of the company in future.
- An order for the purchase of the shares of any member by other members of the company
- An order for the purchase of the shares of any member by the company and any consequent reduction of the share capital of the company accordingly
- An order directing the company to institute , prosecute, defend and discontinue specific proceedings or authorizing a member(s) of the company to do any specific act in the name of the company
- An order directing that an investigation be carried out by the CAC
- An order varying or setting aside the transaction or contract to which the company is a party and compensating the company or any other party to the transaction or contract.
- An order appointing a receiver and manager of the company’s property
- An order restraining a person from engaging in a specific conduct or act or thing for which the court can grant an injunction against the parties where there is an internal dispute jeopardizing the interest of the company.
- The court may order a person to do a specific act or thing. The court may make an order staying the petition until the institution of a compromise agreed by the parties, this is called the TOMLIN order. Re A company 1951. These sort of order cannot be made where the petitioner seeks to wind up the company compulsorily
Sometimes it may be necessary to subject the affairs of the company to investigation. This is an administrative remedy which an aggrieved minority may take advantage of, where majority shareholders/directors are conducting the affairs of the company beyond the control of other shareholders. Norwest Holst v. Secretary of State for Trade (1978) 3 AER, 280. Otong v. Mogal Nigeria ltd. (1978) FRCR 80
It was alleged that many years after its incorporation, the defendant company filed no annual returns , paid no taxes, never held AGM, kept no minutes of meeting, and book of accounts. Court ordered a “thorough investigation into the affairs of the company” . Under section 314 (1) of CAMA, the CAC may appoint one or more competent inspectors to investigate the affairs of the company and report to it the in such manner as it may direct. The appointment may be made on the application of the company itself or its members or on the orders of the court or suo motu (on his own discretion) section 314 & 315
On the application of members of the company holding not less than 1/4 of the class of shares issued (for a company with share capital). The CAC shall appoint inspectors. For a company not having share capital, on the application of not less than 1/4 in number of persons in company’s register of members, the CAC shall appoint inspectors Section 314 CAMA
Section 314 An application made under the section shall be supported by such evidence as may satisfy the commission that the applicants have genuine reasons for calling for an investigation . if a court of competent jurisdiction by order declares that the company affairs ought to be investigated, the commission shall appoint one or more inspectors for that purpose. Counsel may make such an application in a pending suit and the court has discretion to grant the application if the counsel can adduce sufficient evidence showing that the affairs of the company are being illegally conducted section 315(1) Otong v. Mogal (supra)
The CAC may suo motu appoint inspectors to investigate a company, if it appears to it that the circumstances exist:
That the company’s affairs are being conducted with the intent to defraud its creditors or the creditors or any person or in a manner unfairly prejudicial to some parts of its members
That any act or proposed act or omission of the company is or would be so prejudicial or that the company was formed for fraudulent purposes.
That the persons concerned with the formation of the company or its management were in such connections guilty of fraud, misfeasance or other misconducts towards it or its members
That the members of the company were not given all the relevant information with respect to its affairs as might be reasonably expected.
The powers of the commission under the foregoing subsections are without prejudice to its powers under section 322 and the power to investigate may still be exercised even when the company is undergoing the process of voluntary winding up section 315(2)
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