Minority Shareholder Protection: Derivative Claims and Legal Challenges

Traditional Doctrine and Challenges

A minority shareholder can raise a claim if they believe they have been mistreated by the majority shareholders. Traditionally, the company would bring a claim on behalf of the minority shareholder if the allegations involved a corporate wrong, such as fraud or control by the wrongdoer. However, this approach presented challenges:

• Difficult to establish proof beyond a reasonable doubt.
• Obtaining testimony from company employees against the majority shareholder was impractical.

Statutory Derivative Claims under the Companies Act 2006

Due to the limitations of the traditional doctrine, the Companies Act 2006 introduced statutory derivative claims under sections 260 and 263. Section 260 defines a derivative claim, while section 263 outlines the conditions for obtaining leave to pursue such a claim. These conditions include:

• Good faith
• Compliance with section 172 (duty to promote the success of the company)
• Rectification of the course of action (before or after the transaction)
• Likelihood of rectification by the company
• Alternative ongoing legal proceedings
• Suitability of the claim for pursuit by the member in their own right

Case law examples include Mission Capital v Sinclair, Kiani v Cooper, and Frontbar Holdings v Patel.

Challenges with Derivative Claims

Despite the statutory framework, derivative claims remain challenging due to the broad nature of some leave conditions, such as good faith and rectification. The requirement for majority agreement for rectification can also pose difficulties.

Alternative Options

In situations involving quasi-partnerships, section 122(1)(g) of the Insolvency Act, which allows for winding up, may be an option, as seen in the case of Ebrahimi v Westbourne Gallery.

Conclusion

While the law provides avenues for minority shareholder protection, challenges remain in effectively pursuing derivative claims. The broad nature of certain legal requirements and the potential for majority influence highlight the complexities of safeguarding minority shareholder rights.