May 6, 2016

Remedies available to Minority Shareholders for wrong done By the Majority/Controlling Shareholders

Written by Oluyemisi Dansu
Managing Partner at Argyle & Clover Attorneys at Law

It is rather easy for the rights of minority shareholders to be infringed upon however minority shareholders are afforded some protection under the Companies and Allied Matters Act (CAMA) to protect their rights/interests.
While it is trite in line with the provisions of Section 299 of CAMA[1], that where a wrong has been done in the course of a company's affairs to the company (by the majority or the alter ego of the company), only the company can sue to remedy the wrong. This is commonly known as the rule in Foss .v. Harbottle. There are some exceptions to this general principle provided for under Section 300 of CAMA. These exceptional instances are discussed hereafter.

•Entering into any transaction which is illegal or ultra vires2:
In the case of Yalaju-Amaye v Associated Registered Engineering Co Ltd (AREC)[2], a minority shareholder was allowed to sue where the purported appointment of new directors by the board was held ultra vires the board as there was no such power granted in the articles of association.

•Purporting to do by ordinary resolution any act which by the Company’s Articles or the CAMA is required to be done by special resolution[3]:
The law guards against the risk of majority/controlling shareholders ratifying an act which is in itself wrong, by a wrong procedure. For minority shareholders to effectively bring an action under this exception, it must be clearly established that irregular and illegitimate procedures were adopted by the majority and this requires a good knowledge of the provisions of the company’s articles as well as the provisions of CAMA.

•Any act or omission affecting the Minority Shareholders’ individual rights as members of the Company:
This occurs where the shareholders membership rights are the facts in issue, for instance where minority shareholders are systematically denied the right to vote at general meetings, or consistently denied the right to receive notice of general meetings of a company. In the case of Edokpolo & Company Ltd v Sam-Edo Wire Industries Ltd[4], a minority shareholder holding 40% of the company’s shares, alleged collusion between the company’s Chairman and Solicitor, the result of which was the allotment of shares to other parties out of the 40% belonging to the minority shareholder.
The Supreme Court held that the minority shareholder was entitled to sue in its personal capacity to protect its personal right to the shares held by it. In the words of Aniagolu, J.S.C; “it appears to one that this is a clear case in which a minority shareholder should, in the interest of justice, be allowed to sue as one of the exceptions to the rule in Foss v. Harbottle”.

•Committing fraud on either the company or the minority shareholders where the directors fail to take appropriate action to redress the wrong done[5]:
Examples of this is where there is expropriation of the company’s property by majority shareholders or where majority shareholders have obtained certain unfair advantages by dealing with the company’s property, or an attempt to release the directors’ from liability arising from breach of the duty of good faith owed to the company. In the case of Yalaju-Amaye v AREC[6], the minority shareholders were allowed to sue where the directors of the company went on a withdrawal spree from the bank account of the company, falsified minutes of meetings to cover up a non-existence board resolution to change the signatories to the company account on the ground that a fraud had been committed against the company. A broader definition of fraud was given by the Supreme Court in this case as “Any act which may amount to an infraction of fair dealing, or abuse of confidence or unconscionable conduct, or abuse of power as between a trustee and his shareholders in the management of a company.”
In light of the above definition, “fraud’’ is used in a loose, wider and equitable sense thus an abuse or misuse of power and indeed breach of duty on the part of the majority shareholders or controlling directors opens the way for minority shareholders to sue to correct the wrong done to the Company.
What may be imputed as fraud on the company or on the minority shareholders varies from case to case, and the entire circumstances surrounding a particular case would usually be examined to determine whether or not it meets the requirements. In the case of Omisade v Akande[7], the parties involved in the suit were both directors and shareholders and had shares in equal proportions in the company.
In a contract entered into between the company and a US-based airline, it was agreed that in consideration for patronage of the flight services of the airline by Muslim pilgrims through facilitation by the company, the airline would pay a certain amount of money as commission to the company. Omisade alleged that Akande falsely represented to the US-based airline, with which the company had a contract; that the company was being wound up, in order to divert the commission due to the company to another establishment in which Akande was the majority shareholder.
It was held that Akande had clearly committed a breach of his fiduciary duty as a director of the company by making false representations about the company in order to divert profit from it, and that this amounted to a fraud on the company for which a minority shareholder, or any other interested shareholder could bring an action on behalf of the company.
•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[8]:
This situation may arise where an irreversible wrong is about to be done and the facilities for convening a proper meeting of shareholders or the board are not available, or where urgent action is required to abate the wrong. It will be unreasonable to wait for a formal meeting requiring notice to be convened to address the wrong thus the law allows a shareholder in this instance to apply to court to abort or nip the wrong in the bud.

•Where the directors are likely to derive a profit or benefit, or have profited or benefited from their negligence or from their breach of duty[9]:
In this circumstance, a shareholder/member[10] of the company may apply to court for redress. The rationale behind this is that the directors are the wrongdoers and are also the ones in charge of the day to day running of the company, it is to be expected that they would not take any action against themselves for breach of their duty.

•Where the interest of justice demands:
In its effort to apply equitable principles to corporate relationship for the purpose of minority shareholders protection, the Nigerian Supreme Court, in Edokpolor & Co Ltd v Sam-Edo Wire Industries Ltd recognised a further exception to the rule in Foss v Harbottle now known as the “interest of justice” exception. This principle is to the effect that where, considering all the circumstances of a case, it is in the interest of justice that the application of the rule in Foss v Harbottle be suspended, the court has a duty to suspend application of the rule even where the circumstances of the case do not fall under any of the preceding six categories of exceptions.

Types of Action that can be commenced by Minority Shareholders
In line with the exceptions to the rule in Foss .v. Harbottle, there are 3 types of actions that Minority shareholder(s) can bring:

•Personal Action
A personal action may be commenced by a member to enforce a right due to him personally where such rights have been abused by an act deemed to be the act of the company[11] See Section 301 of CAMA. An example of personal action is where a shareholder commences an action to enforce the term of a contractual obligation with the company.

1.Representative Action
A representative action is commenced where an individual member’s right has been infringed, and the infringement affects other members in the company, the appropriate action will be a representative action i.e. a member will be suing the company on behalf of himself and other aggrieved members. See Section 301 (2) of CAMA.

1.Derivative Action
A derivative action is when minority members/shareholders bring an action in the name of the company to correct the wrong done to a company by majority/controlling shareholders. There are however various impediments to the minority shareholder’s ability to enforce company’s rights as the minority shareholder(s) has to satisfy the provision of Section 303 of CAMA, which provides that:

•“Subject to the provisions of subsection (2) of this section, 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 presenting, defending or discontinuing the action on behalf of the company.

•No action may be brought and no intervention may be made under subsection (1) of this section unless the court is satisfied that:
 •The wrongdoers are the directors who are in control and will not take necessary action.

1.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.
In light of the foregoing provision, minority shareholders before they can validly commence a derivative action must first apply to the Court for leave to commence the action and where they are unable to establish factually and based on the provision of CAMA that the conditions for a derivative action has been met, the court will refuse leave.

[1] CAP C20 LFN 2004
[2] (1986) 3 NWLR (pt. 31) 653
[3] S. 300(b) CAMA
[4] (1989) 4 NWLR (Pt. 116) 473
[5] S 300(d) CAMA
[6] Supra
[7] (1987) 2 NWLR (pt. 55) at 158; (1987) 18 NSCC 486
[8] S 300(e) CAMA
[9] S 300 (f) CAMA
[10] According to S. 302 CAMA, “member” includes the personal representative of a deceased member and any person to whom shares have been transferred or transmitted by operation of law.
[11] S. 301 CAMA

Ed's Note: - This article was originally posted by the author on 29th June, 2016 at (Last Accessed on May 6, 2016)