Law on the Remedies of the Minority Shareholders - Essay Example

? Legal Writing Paper Legal Issue The legal issue in this study will entail; what are the Minority Shareholders’ remedies where the company is being run oppressively? The current business world is engulfed with sophistication, business persons are inclined to form corporate body to run their business units. This is being seen as panacea to escape the risky concept of individual liability that is in a business where there is no distinct legal entity between the individuals and their businesses. However, the doctrine of incorporation is not without its challenges. A problem usually arises where promoters of a limited liability with different financial muscles and capabilities are unable to agree on corporate affairs. Majority shareholders may think of excluding the minority shareholders and they begin carrying out the activities of the corporate as their individual business but under the veil of incorporation. The minority shareholders are such that if they hold less than 50% of the share of the company and they do not have controlling shares. Also they could also have majority shares but without a voting right. It is at this juncture that the minority shareholders may feel that there is unfair treatment and by the majority shareholders (Joffe, 2011). The minority shareholders are likely to seek various remedies available to them under the law. Minority shareholders may be oppressed in various ways which include but not limited to the; denial of involvement in management of the company, denial of fringe benefits such as scholarships by the company, denial of business with the company even where they don’t participate in the procurement and tendering process. The majority shareholder may also misapply the funds and capital of the company for their own benefit to the detriment of the company and minority shareholders. Even when the actions of the directors are ultra vies to the memorandum of association; the majority shareholders may proceed and ratify such a decision despite its prejudicial effect to the minority shareholders. Be that as it may, the minority shareholders are not without a remedy (Joffe, 2011). Analysis on the current law on the remedies of the minority shareholders These remedies include: Derivative Suit, buying of the minority shareholders stake in a company, Direct action by the shareholders and Winding up order (Joffe, 2011). The first remedy may involve a derivative Suit. This is as general rule where a company should sue and be sued in its own name. The company should protect its own rights from third parties and even from individual officers and majority shareholders. Institution of suit, more often than not will require a resolution of the shareholders or by the directors. However it must be appreciated that a company can only act through its agents to wit directors. However whenever the majority shareholders or directors unreasonably refuses to institute legal proceedings against a party so as to protect the interests of the company, the minority shareholders are allowed to institute a suit so as to protect the rights of the company. Such a suit is known as derivative action. There are a number of reasons why the directors are refusing to initiate proceeding such as the suit would be adverse to one of the directors, or an officer of the company. This suit may also be instituted where the directors are in breach of fiduciary relationship (Hughes, Pendleton and Toren, n.d). The shareholder(s) instituting these proceedings must show that their intention is to protect the interests of the company and the suit is not being used to blackmail the company to either do or omit to a thing. The shareholder(s) must also show that the company stands to suffer prejudice if the derivative suit is not instituted. It is important to note that this suit is usually brought under the name of the company at the instance of shareholders against the interest of the majority shareholders and the directors. This suit can also be brought against a director or an officer. Any proceeds that may emanate from the suit are to the benefit of the company and the shareholder does not retain any personal benefit. As such, the derivative suit will only protect the rights of the company (Hughes, Pendleton and Toren, n.d). The second remedy mat entail, buying of the minority shareholders stake in a company: The majority shareholders perpetrating oppressive activity may be ordered to buy the stake of the minority shareholders stake in the company. The price of the shares is usually the market price of the. This is usually through an order of court. This procedure requires a lot of good faith. There are some instances where the minority shareholders after detecting a looming problem and or crisis within a company will file proceedings in court to have the majority shareholders compelled to buy shares from the minority at the market price. If it is proved that the minority are acting in bad faith, then the court will more often than not refuse to grant the prayers. Also the shareholder will always pray in the alternative that, if the majority shareholders are unable to buy his stake, then they be ordered to sell their stake to them. This is a classical case of a takeover by the minority when they note that the majority are experiencing hardships in the management of the company. Normally, the minority shareholders who are seeking this remedy for ulterior motives will make unreasonable demands and quote astronomical share prices. In cases where the minority demand is genuine but the there is a standoff on the price of shares, the minority may refer the matter to an arbitrator though this is a matter of practice rather that legal requirements. However the company court is reserved with powers to call for expert witness to enable it determine the correct price of the share (Joffe, 2011). The third remedy entails direct action by the shareholders. This takes the typical form of a suit. The company is usually the defendant in the strict meaning of the word. The plaintiff is usually the shareholder and seeks a relief against the company. Unlike in the derivative action where the fruits of litigation are in favour of the company, in direct action, the suing shareholder retains any fruits emanating therefrom. This action is usually brought by a shareholder where there are personal injuries sustained by the plaintiff. Such personal injuries include; denial of right to vote where he is entitled, retention of his dividends by the company without any justification or a fraud perpetrated by the company against the shareholders (Goo, 1994). The forth remedy may involve winding up order. Whenever circumstance arises that may necessitate company to be wound up, the company will be wound up following the laid down procedure. Whenever minority shareholders feel aggrieved by the way a company is been run, they can invoke this as a remedy. Be that as it may, this is a remedy of last resort (Boros, 1995). It can only be invoked when the company the company is in such a condition that its existence id totally untenable. The winding up will also be made when it is just and equitable to do so. Winding up order is usually made by a court. In the case where the shareholder have presented the petition the court will determine whether it is just to order that the company be wound up. However, winding up at the instance of the minority will not as general rule be granted unless there is no alternative remedy available to such shareholders. Further, the court must be satisfied that it is just to wind up the company (Joffe, 2011). Analysis of the remedies The legal remedies available to oppressed minority shareholders are not without setbacks and limitations. Derivative action for instance is very restrictive and the standards required to sustain it are substantially high. Further to this the derivative suit may be frustrated where the company decides to ratify by a resolution the wrong doing on which the course of action is founded. In addition, there are no personal gains are retained by a shareholder who institutes this suit as the proceeds of a success litigation are retained by the company. In connection to this, there shareholder does not get any compensation for the time he or she will spent during the litigation. The only reprieve is that he/she is refunded the cost incurred. The above reasons therefore, discourage shareholders exercising the right to institute a derivative suit. The remedy of buying minority shareholders stake may be inappropriate in various respects: first, the majority shareholders may use this remedy oppressively and push out the minority share holder out of the company. Secondly, considering that the minority shareholder has a lower bargaining power, the price of their shares may be undervalued leading to loss on the part of minority shareholders (Stecher, 1997). The remedy on the direct action, minority shareholders must bear the cost of litigation, the situation become worse when they fail to get favourable orders and they condemned to pay cost incurred by the company in defending the suit. Further, shareholders who institute this case may leave in fear of victimization by the majority shareholders (Joffe, 2011). The remedy of winding up is hard to get due to the highest standards required before the court of law can grant it. The majority shareholders may take advantage of the high standards required to manage the company oppressively and force the minority shareholders to sell their shares to them (Boros, 1995). Conclusion Based on the forgoing analysis, it can observe that the minority shareholders are well protected within the legal framework that governs company law. For instance, the law has provided various remedies such as; derivative suit, direct action, buying of minority shareholders stake in the company and winding up orders. References Boros, E. J. (1995). Minority shareholders' remedies. Oxford: Clarendon Press. Goo, S. H. (1994). Minority shareholders' protection: A study of section 459 of the Companies Act 1985. London: Cavendish Hughes.D.J, Pendleton.D.G and Toren.J. (n.d).Shareholder Derivative Litigation. A Primer for Insurance Coverage Counsel. Retrieved: on 12th November 2013. Joffe, V. (2011). Minority shareholders: Law, practice and procedure. Oxford: Oxford University Press. Stecher, M. W. (1997). Protection of minority shareholders. London [u.a.: Kluwer Law Internat. [u.a. Read More