“What are the major corporate governance problems that arise in small private companies and how effectively does the Companies Act 2006 address these problems?”
Various scholars have proposed various definitions of corporate governance. Aguilera et al.[1] define corporate governance as “relationships within the firm and between the firm and its environment.” Elsewhere, Dowdney defines corporate governance as “the systems and processes established by corporate entities for ensuring proper accountability, probity and openness.”[2] Firms generally encounter two forms of governance problems: the issue of governance between shareholders and managers; and governance problem between minority and majority shareholders[3]. Even though both governance problems exist in large and small corporations, practitioners and scholars opine that the key governance issue facing small firms is attempts by majority shareholders to squeeze out minority shareholders. This involves the right enjoyed by a majority shareholder over a minority shareholder. Consequently, minority shareholder is forced to offload his shares to the majority shareholder at a suitable price.
Majority shareholders could be motivated to squeeze out minority shareholders for various reasons. To begin with, the majority shareholders incur a disproportionally high cost because minority shareholders enjoy continued protection of their rights. For instance, the major shareholder incurs the cost of organising shareholder meetings and sending them regular reports[4]. Secondly, majority shareholders could be motivated to execute the squeeze-out policy on account of the need to divulge information regarding the firm's activities to minority shareholders despite their lack of influence on firm's decisions owing to their small shareholding. Finally, majority shareholders could use squeeze-out as a means of dealing with the free rider problem. In other words, this is intended to prevent minority shareholders from extorting unwarranted concession on majority shareholders by exercising their rights. As a means to sufficiently protecting the rights of minority shareholders from being oppressed by majority shareholders through their actions that contravene the Company's Articles, various protection and remedies are available to minority shareholders and the Companies Act 2006 has codified these remedies.
Most disputes involves minority shareholders who are seeking legal redress seeing as majority shareholders on account of their superior voting power can easily seek redress without the need to involve the court. However, prior to bringing an action again the majority shareholders, minority shareholders ought to exercise elements of good faith since in case it is important to first control the powers to bring a claim; otherwise, firm stakeholders stand to face various forms of oppressions owing to frivolous law suits. For example, Lord Hoffman, while making his ruling in Re a Company[5], indicated the need to carefully apply the provision of s 75 CA to avoid it becoming a “means of oppression”. This remedy is crucial in that it empowers minority shareholders of a firm to petition the Court to bring an action against majority shareholders. S 994 of the Companies Act 2006[6] has adequately addressed this remedy. In this case, an aggrieved minority shareholder could petition the court in the event that the affairs of a firm are deemed to be conducted in an unfairly prejudicial manner to part of or all members of the firm.
It is important to note that the court often adopts a wide discretion in terms of applying the terms “unfair prejudice” and “affairs of the company”. However, the court has found unfair prejudice to have occurred where company assets or business have been misappropriated, where a firm has failed to pay reasonable dividends, or where rights issues and allotments of shares has been done improperly. Nonetheless, the court gives equal weighting to the two terms. Accordingly, a prejudicial action must also unfair in order that a complainant may have a remedy.
Following petition by the minority shareholder in line with s 994 and after the court has upheld it the minority shareholder will often get a fair value for their shares. It is important however, to note that this remedy usually hinges on the Court's discretion and as such, the majority shareholder may be compelled by the court to make a fair offer for the shares of the minority shareholder, based on how serious the breach may have been. Nonetheless, prior to seeking the court's intervention, the minority shareholder ought to be aware of the nature of offers that the major shareholder has made[7]. In the event that the offer made by the major shareholder to the minority shareholders is deemed by the courts as being fair thereby entitling the majority shareholders to rights available to him under s 994 and the minority shareholder rejects such an offer, the minority shareholder risks having his petition struck off by the court.
In line with s996 of the 2006 Companies Act, the Court can make specific types of orders should it establish that unfair prejudice has occurred. Nonetheless, under s996(1) the Court enjoys a general discretion to make any order that it deems suitable[8]. Under s996 (2), the Court enjoys the powers to regulate the manner in which the firm conducts its affairs in future; requirement that the firm refrains from doing or do a given act (for example, disposing of property), and issue a ruling that authorizes the sale of shares of company members or demand that the company reduce its capital accordingly, among others.
The ability to sanction civil proceedings based on the Court's directives is a very valuable remedy as the Company, as opposed to the Petitioner, bears majority of the costs of such an action. In practice, however, the Court usually rules that the shareholder responsible for the unfair prejudice purchases the shares of the Petitioner. Nonetheless, there is need to also assess the effectiveness of derivative claim under s. 260 (3), which provide grounds under which the minority shareholder may bring derivative action. In this case, derivative action can only be brought with regard to an action due to a proposed or actual omission or act involving default, negligence, breach of trust or breach of duty by the company’s director.
The Court relies on s263 in deciding on whether to reject or grant permission. The Court could refuse or grant permission as it deems fit. It may also issue an adjournment thereby allowing the firm to sanction the breach. While exercising the weighting voting clause might prove effective for minority shareholders in that it permits them to have the final say on certain matters that the board may have put up for voting, there is the risk that the company could be put in deadlock.
Bibliography
Books
Guido Ferrarini, Klaus J. Hopt, Jaap Winter and Eddy Wymeersch, Reforming Company And
Takeover Law In Europe (Oxford University Press 2004) 635
Venky Nagar, Kathy Petroni and Daniel Wolfenzon ,’ Governance Problems in Close
Corporations’ (2009) < http://web-docs.stern.nyu.edu/clb/docs/Events/msci-compress.pdf>
accessed 07 January 2017
Journal articles
Adam Dowdey,’Corporate Governance in the UK and U.S. Comparion’ (2005). < http://www.metrocorpcounsel.com/articles/6173/corporate-governance-uk-and-us-comparison> accessed 06 January 2017
Anthony J Boyle, Minority Shareholders’ Remedies (Cambridge University Press 2002)
Brian Clark, ‘Unfairly Prejudicial Conduct: A Pathway Through the Maze’ [2001] Company
Lawyer 170.
Paul J Sykes, ‘The Continuing Paradox: A Critique of Minority Shareholder and Derivative
Claims under the Companies Act 2006’ (2010) 29 CJQ 205.
Anthony Boyle , ‘Personal and Derivative Actions’ (1999) 20 Company Lawyer 58
Ruth Aguilera, Igor Filatotchev, Howard Gospel and Gregory Jackson G,’ An organizational approach to comparative corporate governance: Costs, contingencies, and complementarities’ (2008) 19 OS 475
Venky Nagar, Kathy Petroni and Daniel Wolfenzon,’ Governance problems in close corporations’ (2011) 46 JFQA 943
Cases
Re a Company(1985)[1985] BCLC 333
[1] Ruth Aguilera, Igor Filatotchev, Howard Gospel and Gregory Jackson G,’ An organizational approach to comparative corporate governance: Costs, contingencies, and complementarities’ (2008) 19 OS 475
[2] Adam Dowdey,’Corporate Governance in the UK and U.S. Comparion’ (2005). < http://www.metrocorpcounsel.com/articles/6173/corporate-governance-uk-and-us-comparison> accessed 06 January 2017
[3] Venky Nagar, Kathy Petroni and Daniel Wolfenzon ,’ Governance Problems in Close
Corporations’ (2009) < http://web-docs.stern.nyu.edu/clb/docs/Events/msci-compress.pdf>
accessed 07 January 2017
[4] Anthony J Boyle, Minority Shareholders’ Remedies (Cambridge University Press 2002)
[5] Re a Company(1985)[1985] BCLC 333
[6] Paul J Sykes, ‘The Continuing Paradox: A Critique of Minority Shareholder and Derivative
Claims under the Companies Act 2006’ (2010) 29 CJQ 205.
[7] Guido Ferrarini, Klaus J. Hopt, Jaap Winter and Eddy Wymeersch, Reforming Company And
Takeover Law In Europe (Oxford University Press 2004) 635
[8] Anthony J Boyle, Minority Shareholders’ Remedies (Cambridge University Press 2002)
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