Minority Protection in the Corporate Sector
Author: O. M. Atoyebi S.A.N Contributor: Joy Ayara
Every company, apart from companies limited by guarantee, is registered with at least the minimum share capital required for that type of company. This share capital represents the interest and rights of a person or entity in that company, and it is distributed to its shareholders in proportion to their contribution to the capital funding in cash or kind, or any other sharing formula accepted by the shareholders.
There is no provision of law as it relates to the distribution of shares in a company amongst its members. Therefore, this sometimes creates an imbalance in the ownership structure of shares in a company, creating a class of majority and minority shareholders. The majority shareholders own more than half of the shares while the minority shareholders own less than half of the shares in the company.
This has invariably affected the decision-making in the company to tilt towards the needs and desires of the majority shareholders, as “the majority carries the vote” principle applies in the management of a company as provided by law. Also, only the company can rectify a wrong done against it by a simple majority vote of the members of the company. This begs the question of what happens if a wrong against the company is done by the majority of the shareholders themselves? Who will rectify the wrong if it is committed against the minority shareholders?
This article is aimed at discussing the options available to rectify a wrong against a company, and the remedies available to minority shareholders in a company, to enforce their rights and rectify the wrong done against the company.
THE GENERAL RULE
The general rule as provided by section 341 of the Companies and Allied Matters Act (CAMA) 2020, states that “where an irregularity is done in the course of a company’s affairs or any wrong is done to the company, only the company can sue to remedy that wrong and only the company can rectify their regular conduct”
This is supported by the judicial decision in the 1843 case of Foss v Harbottle[1] [1]. It was held that although there was a wrong, however, the wrong committed was not against the shareholders, but against the company. Therefore, only the company can bring an action to address it. The Court also stated that the company may decide to sue if it is decided by a majority of its shareholders. This rule has also been applied in the Nigerian case of SPDC Nig Ltd v Nwaka[2] [2]
This rule is justified on the grounds that:
- The company has a legal personality therefore, it is capable of instituting an action in Court.
- It prevents multiplicity of Suits over the same issue as only the majority vote of the shareholders can initiate a Suit.
- The members in the general meeting can rectify the wrong act of the directors in the general meeting. Therefore, the need to sue becomes unnecessary.
- It upholds the principle of democracy in the practices and activities of the company.
EXCEPTIONS TO THE GENERAL RULE
In every general rule, there is usually an exception. There are instances where the majority rule will not apply, and the minority shareholders in a company can sue to rectify the wrongdoing done against the company and themselves. The following are the exceptions as provided in CAMA 2020;
- Exceptions as specified in section 343 of CAMA 2020: On the application of a member of a company, the Court may grant an injunction prohibiting the company’s officials from engaging in certain conduct.
- Entering into any transaction which is illegal or ultra vires, that is acts that are in itself illegal and contrary to the memorandum and articles of the company.
- Purporting to do by ordinary resolution, any act which by its constitution or the act requires to be done by special resolution. An ordinary resolution is passed by 51/49%, while a special resolution is 75/25% of the vote.
- Any act or omission affecting the applicant’s individual rights as a member: A minority can bring an action in his name if his personal right was breached. Some of the personal rights are; failure to give him notice of meeting, failure to give dividend when declared, deny his right to vote either by himself or proxy, denial to appoint a proxy, etc. the aggrieved members or members may bring a personal action or representative action against the company, and join the directors if their decisions infringed on their rights.
- Committing fraud on either the company or the minority shareholders where the directors fail to take appropriate action to redress the wrong done: A minority shareholder can bring an action for acts of the company which amounts to fraud on the company or minority shareholders.
- 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: This has to do with a matter of urgency, where time is of the essence and if nothing is done, irreparable damage will be the resultant effect. In this circumstance, the minority shareholders can bring an action in Court. For example, where the directors have exceeded the borrowing limit of the company.
- Where the directors are likely to derive a profit or benefit or have profited or benefited from their negligence or their breach of duty: When this happens, the minority can sue.
- Any act or omission where the interest of justice so demands. In any of the circumstances mentioned above, the appropriate parties to sue are any member or shareholder, or those deriving title from a shareholder which includes; the personal representative of a deceased member or any person to whom shares have been transferred or transmitted by operation of law. Such person or persons can only get reliefs of injunction or declaration but not damages
2. Reliefs on grounds of unfairly prejudicial, oppressive, or discriminatory conduct: The law also allows for a petition to be brought against a company if the actions or omissions of the company are being conducted in an unfairly prejudicial manner, unfairly discriminatory manner, or in an oppressive manner against a member or members.[3] [1] A member of the company which includes the personal representative of a deceased member or any person to whom shares have been transferred or transmitted by operation of law,[4] [2] a director or officer, a former director or officer of the company, a creditor, Corporate Affairs Commission, and any other person who in the discretion of the Court as a proper person, may make an application under section.[5] [3]
If the Court is satisfied that a petition is founded, it may make any of the following reliefs; order the winding up of the company, order for the regulating of the conduct of the affairs of the company, order for the purchase of the shares of any members of the company, order for the purchase of the shares of any member by other member or by the company, order directing a company or member to institute, prosecute, defend or discontinues specific proceedings.[6] [4] Anyone who fails or contravenes to comply with an order made pursuant to section 355 of CAMA 2020, commits an offence and is liable to the penalty specified in the Corporate Affairs Commission Regulations 2012.[7] [5]
3. Investigation by Corporate Affairs Commission: The Commission may upon the application of members holding at least one-tenth of the class of shares issued in a company that has a share capital, or in a company not having a share capital, on the application of at least one-tenth of its members, or upon the application of the company, appoint one or more inspectors to investigate the affairs of a company and make a report of its findings.[8] [6]
For this application to be valid, it must be supported by evidence, showing that the applicant or applicants have a good reason for requiring the investigation.[9] [7] The Inspector has the responsibility to protect any member of a company who provides information concerning the affairs of the company being investigated.[10] [8] And when such employee or any other employee is relieved of his employment without just cost, other than the reason of disclosure of the company’s affairs, such employee is entitled to compensation which is to be calculated as though he had attained the maximum age of retirement, or had served the period of service in line with his condition of service or employment terms.[11] [9]
4. Winding up application made by a member/contributory: A winding up application may be made by a contributory where the number of members becomes below 2 or by a member for a default in holding a statutory meeting.
CONCLUSION
The principle of majority rule is to ensure that decisions in the administration of a company are made democratically, ensure ease in administration and promote efficiency in the management of a company. However, the downside to this is that some majority shareholders may run the company in an illegal and oppressive manner, which will be inconsistent with the interest of the company and minority shareholders. This has necessitated the minority protection rule, which is to ensure that a company’s affairs are not managed in a manner that is detrimental to its minority.
[1] (1843) 2 KB 461
[2] (1973) 6 S.C. 31
[3] Section 354 CAMA 2020
[4] Section 353 (2) CAMA 2020
[5] Section 353 (1) CAMA 2020
[6] Section 355 (2) CAMA 2020
[7] Section 356 CAMA 2020
[8] Section 357 (1 & 2) 2020
[9] Section 357 (3) CAMA 2020
[10] Section 357 (4) CAMA 2020
[11] Section 357 (5) CAMA 2020