Unfairly Prejudicial And Oppressive Conduct: Protecting Majority Shareholders By Aaron Olajide & Sieneofori Ubani

In this article, we considered whether an application for
relief on the ground that the affairs of a company are being
conducted in an illegal or oppressive manner may be made to the
court by a majority shareholder under s. 311 of the Companies and
Allied Matters Act.

1. BACKGROUND
2. You would agree with us that the more usual situation is where
   a minority shareholder(s) of a company makes allegations that the
   affairs of the company are being conducted in an illegal or
   oppressive manner under s.311 of the Companies and Allied
   Matters Act (“the Act”), (–Ijale Properties Ltd. v
   Omololu – Mulele (2000) FWLR (Pt.5) 709–). It thus
   constitutes a unique situation, where such allegation is made by a
   majority shareholder(s) of the Company (–Re Legal Costs
   Negotiators Ltd (1999) 2 BCLC 171–). The question is,
   are there any options available to the Majority Shareholder under
   s.311 of the Act?
3. By virtue of s.310 of the Companies and Allied Matters
   Act (“the Act”), the following persons:

• 1 A member of the company;
• 2 A director or officer or former director or officer of the
  company;
• 3 A creditor;
• 4 The Corporate Affairs Commission; or
• 5 Any other person who, in the
  discretion of the court, is the proper person to make an
  application under section 311 of the Act,

can make an application to the Court by petition for an order
for relief on the ground that the affairs of the company are being
conducted in an illegal or oppressive manner under the section, in
relation to a company.

1. For our current issue, the relevant persons are: (x) a member
   of the company, and (y) any other person who, in the discretion of
   the court, is the proper person to make an application under
   section 311 of the Act.
2. BY A MEMBER OF THE COMPANY
3. Under s.311(2)(a) of the Act, an application for relief on the
   ground that the affairs of a company are being conducted in an
   illegal or oppressive manner may be made to the court by petition,
   by a member of the company who alleges that:

• 1 “the affairs of the company are being conducted in a manner
  that is oppressive or unfairly pre-judicial to, or unfairly
  discriminatory against, a member or members, or in a manner that is
  in disregard of the interests of a member or the members as a
  whole, or
• 2 an act or omission or a proposed act or omission, by or on
  behalf of the company or a resolution, or a proposed resolution, of
  a class of members, was or would be oppressive or unfairly
  prejudicial to, or unfairly discriminatory against, a member or
  members or was or would be in a manner which is in disregard of the
  interests of a member or the members as a whole”

1. Now, while “Part X” of the Act, under which the relevant
   provisions are, is headed “Protection of Minority
   against Illegal and Oppressive Conduct,” the
   provisions of s.310 of the Act does not appear to specifically
   limit “the member,” qualified to bring an action under s.311 of the
   Act, to “a minority member”. We resort to s.79 of the Act to
   determine who a “member” of a Company is under the Act. A member of
   a company includes: (x) a subscriber of the memorandum of a
   company, and (y) a person who agrees in writing to become a member
   of a company, and whose name is entered in the Company’s register
   of members. In the case of a company having share capital, each
   member shall be a shareholder of the company of the company and
   shall hold at least one share. To this end, “the
   member” under s. 310 of the Act is not limited to minority
   shareholder(s), but also includes majority shareholder(s).
2. Consequently, a combined reading of s.7 & s.310 [(2) (a)] – 313
   of the Act, would show, that the emphasis of the provisions are on
   whether the affairs of the company are being conducted in an
   illegal or unfairly oppressive or prejudicial manner. It is not on
   whether the person instituting the action, being a member of the
   Company, is minority shareholder or a majority shareholder.
3. In effect, majority shareholders can petition under s.311 of
   the Act, where the affairs of the company are being conducted in an
   illegal or unfairly oppressive or prejudicial manner. Would it make
   a difference if the petitioner can easily ratify the prejudice? We
   answer in the affirmative. The prejudice will not be “unfair” to
   the petitioner’s interest where the petitioner can ratify the
   prejudicial state of affairs himself. In that instance, the action
   of the petitioner under s. 311 of the Act is liable to fail,
   subject to any supervening circumstance. (–Re Baltic
   Real Estate Ltd (No 2) [1992] BCC 629; Re
   Stewarts (Brixton) Ltd, (1985) BCLC 4–).
4. BY ANY OTHER PERSON WHO, IN THE DISCRETION OF THE
   COURT, IS THE PROPER PERSON TO MAKE AN APPLICATION UNDER SECTION
   311 OF THE ACT
5. There is an alternative to our preceding submission. We see
   this alternative, not as a contrast, but an added asset. To rely on
   the provisions set in s.310 (1) (e) & s.311 (2) (b) of the Act. The
   combined reading of the provisions, is to the effect that, an
   application for relief on the grounds that the affairs of a company
   are being conducted in an illegal or oppressive manner may be made
   to the court by petition, by any other person who, in the
   discretion of the court, is the proper person to make an
   application under section 311 of the Act who alleges:

• 1 That the affairs of the company are being conducted in a
  manner oppressive or unfairly pre-judicial to or discriminatory
  against or in a manner in disregard of the interests of that
  person;
• 2 That an act or omission, or a proposed act or omission was or
  would be oppressive or unfairly prejudicial to, or unfairly
  discriminatory against, or which is in a manner in disregard of the
  interests of that person.

1. Here, “any person” includes “majority shareholder(s)” (and
   stakeholders), provided that, such majority shareholder(s), in the
   discretion of the court, is a “proper person” to make the
   application under s.311 of the Act.
2. SYNOPSIS OF CASES RELIED UPON
3. Re Baltic Real Estate Ltd (No 2) [1992] BCC 629,
   decided on s.459 of Companies Act 1985(UK), now s.994 of Companies
   Act 2006 (UK) which is in pari materia with the provisions
   of s.311 of the Act.
4. An unfair prejudice petition was brought by a 51% shareholder
   against the minority shareholders who collectively held 49% of the
   issued share capital of the company. In deciding an interlocutory
   application (whether leave should have been granted to serve the
   unfair prejudice petition out of jurisdiction on the minority
   shareholders), it was held that as the petitioner had already taken
   control of the board and removed the minority shareholders from the
   board at the material time, the unfair prejudice remedy would not
   be available. The court clearly emphasised the residual nature of
   the remedy:

Even the wider phrase ‘unfair prejudice’, however, in my
judgment is not apt to encompass prejudice from which the person
whose interests are said to be prejudiced can readily rid himself.
The prejudice relied upon by the petitioner is based solely upon
the activities of the second and third respondents as directors of
the company [ie, the minority shareholders], a status which they
only enjoyed until the majority shareholders removed them. That the
second and third respondents were in breach of their obligations
under the shareholders’ agreement, which I assume in the
petitioner’s favour, does not in my view establish the proposition
that the petitioner’s prejudice was unfair within the meaning of s
459 [the unfair prejudice provision of the UK Companies Act 1985].
[This is] because on that hypothesis, the petitioner had an
available method of [ending that prejudicial state of affairs] and
indeed did so… the section was, I believe, enacted to enable help
to be given to those who needed it and it seems to me to be
improbable that the petitioner could show it fell into such a
category.

1. Re Legal Costs Negotiators Ltd
   (1999) 2 BCLC 171. The majority (75%) shareholders
   presented an unfair prejudice petition against the minority (25%)
   shareholder (H) after having dismissed H from employment, on the
   basis that H failed to carry out specific responsibilities relating
   to the company’s accounting function, and that he had been
   aggressive and domineering in conduct, for example at board
   meetings. The Court of Appeal agreed with counsel for the minority
   shareholder’s submission that:

[T]here is academic and judicial consensus as to the meaning
of the [unfair prejudice] section and as to the mischief… it was
intended to cure… _the abuse of power to the prejudice of
shareholders who lack the power to stop that abuse. […] in the
ordinary case where the shares carry equal voting rights, a
majority shareholder will generally have the power to stop unfairly
prejudicial conduct of the company’s affairs or any unfairly
prejudicial act or omission of the company

1. On the facts of the case, H had been dismissed, and had
   thereafter resigned his directorship under threat of removal. The
   majority shareholders sought to argue that their legitimate
   expectation that the minority shareholder would contribute to
   management was defeated by his misconduct, necessitating his
   dismissal (thus giving grounds for an unfair prejudice petition).
   The Court of Appeal, nonetheless, held that the majority
   shareholders had chosen to dismiss the minority shareholder, rather
   than allowing their legitimate expectation be fulfilled by letting
   him continue to contribute to the management of the company. By
   choosing the former, the majority shareholders had put an end both
   to their legitimate expectation and to the prejudicial conduct of
   the affairs of the company by H. In such circumstances, there would
   be no access to the statutory unfair prejudice remedy.
2. CONCLUSION
3. In conclusion, we submit that, an application for relief on the
   ground that the affairs of a company are being conducted in an
   illegal or oppressive manner under s. 311 of the Act, may be made
   to the court by a majority shareholder, either by virtue of (x)
   s.310(1)(a) & s.311(2)(a) of the Act as a member of the company
   regardless of being a majority shareholder as the sections did not
   discriminate in the degree of shareholding, or (y) s.310(1)(e) &
   s.311(2)(b) of the Act, provided that in the discretion of the
   court, the majority shareholder is a “proper person” to make the
   application under s.311 of the Act.
4. In effect, in those rare cases where there is minority
   shareholder control, and the affairs of the company are being
   conducted in an illegal or oppressive manner then the majority
   shareholder could petition for a relief under s.311 of the Act
   (–Re Ravenheart Service (Holdings) Ltd (2004) 2
   BCLC 376; Re Stewarts (Brixton) Ltd,
   (1985) BCLC 4–). However, the court is not likely to grant
   a majority shareholder a remedy under s.311 where the prejudice can
   be avoided by the exercise of his rights as majority shareholder
   (–Re Legal Costs Negotiators Ltd
   (1999) 2 BCLC 171; Re Baltic Real
   Estate Ltd (No 2) [1992] BCC 629–)
5. LIST OF AUTHORITIES

Ijale Properties Ltd. v  Omololu – Mulele (2000)
FWLR (Pt.5) 709

Re Baltic Real Estate Ltd (No 2) [1992] BCC 629

Re Legal Costs Negotiators Ltd (1999) 2 BCLC 171

Re Ravenheart Service (Holdings) Ltd (2004) 2 BCLC
376

Re Stewarts (Brixton) Ltd, (1985) BCLC 4