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.

3. 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.
4. BY A MEMBER OF THE COMPANY
5. 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”

5. 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).
6. 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.
7. 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–).
8. 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
9. 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.

9. 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.
10. SYNOPSIS OF CASES RELIED UPON
11. 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.
12. 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.

12. 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

13. 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.
14. CONCLUSION
15. 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.
16. 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–)
17. 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