Assess the effectiveness of section 459 of the Companies Act 1985 as a means of protecting shareholders from unfairly prejudicial conduct, and critically evaluate the proposals for its reform.

The quest for a regime which provides effective minority shareholder protection continues to clash with the sanctity accorded to the principle of majority rule. Finding the appropriate balance between these two opposing notions has proved elusive. Different reforms have been proposed by the Law Commission in its Consultation Paper No 142 and Final Report No 246 and by the Company Law Review Steering Committee in its reports, Developing the Structure and Completing the Structure. Yet sections 459 to 461 Companies Act 1985 on petitions for ‘unfair prejudice’ still remain some of the most litigated sections of the United Kingdom companies legislation over recent years. The current provision to which oppressed minority shareholders must look as a means of remedying oppressive conduct by the majority is section 459 of the Companies Act 1985 which provides:

Custom Company Law Essays Order

A member of a company may apply to the court by petition for an order under this Part on the ground that the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or some part of the members (including at least himself) or that any actual or proposed act or omission of the company (including any act or omission on its behalf) is or would be so prejudicial.

The precise remit of section 459 is not apparent from a literal reading of the provision. The principal doubt as to the scope of s 459 is in relation to the interpretation of the terms ‘unfair’ and ‘interests’. Conceptually, the phrase ‘unfair’ is almost impossible to define; its precise interpretation will vary from case to case. Any perception of unfairness must also depend upon the justice of the company’s decision to instigate the conduct in question. Thus, the effectiveness of section 459 as a means of affording effectual minority protection is dependent upon the creativity of the judges when confronted with the guiding concepts of section 459: unfairness and members’ interests or legitimate expectations. Consequently, through an analysis of these related concepts, I assess whether judges have managed to develop a framework that effectively protects minority shareholders.

Defining unfairly prejudicial conduct

The case law on section 459 affords a clear insight into the scope of the concepts of unfairness on the one hand, and prejudice on the other. The petitioner must establish that the conduct which forms the basis of the petition is ‘both prejudicial to the relevant interests and also unfairly so: conduct may be unfair without being prejudicial or prejudicial without being unfair and in neither case would the section be satisfied’ . While the section itself does not define the meaning of unfairly prejudicial conduct, it is clear from the cases that unfair prejudice is an objective concept. In Re Bovey Hotel Ventures Ltd, [FN28] Slade J formulated the test for determining the issue in the following terms:

Without prejudice to the generality of the wording of the section, which may cover many other situations, a member of a company will be able to bring himself within the section if he can show that the value of his shareholding in the company has been seriously jeopardised by reason of a course of conduct on the part of those persons who have had de facto control of the company, which has been unfair to the member concerned. The test of unfairness must, I think, be an objective, not a subjective, one ... the test, I think, is whether a reasonable bystander observing the consequences of their conduct would regard it as having unfairly prejudiced the petitioner’s interests.

Re RA Noble & Sons (Clothing) Ltd demonstrates the application of this test. In that case, the petitioner, a founder member of the business, alleged that he had been excluded from the running of the company. In fact, the respondent had not set out deliberately to oust him, but had simply proceeded to manage the company’s business in the belief, based on the petitioner’s conduct, that he was disinterested in its affairs. It was held, applying the objective test, that a reasonable man might well have thought that the conduct complained of was prejudicial but would not have regarded it as unfair, for the petitioner, by his lack of interest, had partly brought it upon himself.

However, the ostensible simplicity of the objective approach must be thoroughly questioned. Given the complexity of the relationships found within companies, this is a sensible approach as it is more in keeping with corporate relationships. Many of the petitions brought under section 459 and its predecessors involved a breakdown of relationships within families and one merely needs consider the complexity of family law proceedings to appreciate the intricacy of dispute within the corporate framework. Arden J’s judgment in Re Macro (Ipswich) Ltd affirms the need for an approach that is more in keeping with the nature of the corporate firm:

‘The question whether any action was or would be “unfairly prejudicial” to the interests of the members has to be judged on an objective basis. Accordingly it has to be determined, on an objective basis, first whether the action of which complaint is made is prejudicial to members’ interests and secondly whether it is unfairly so ... the jurisdiction under s 459 has an elastic quality which enables the courts to mould the concepts of unfair prejudice according to the circumstances of the case.’

Consequently, in Re Saul D Harrison , Lord Hoffman made took the opportunity to re-examine the objective concept of unfair prejudice. His Lordship stressed that fairness for the purposes of section 459 must be viewed in the context of a commercial relationship and that the articles of association are the contractual terms which govern the relationships of the shareholders with the company and each other. He observed:

‘Since keeping promises and honouring agreements is probably the most important element of commercial fairness, the starting point in any case under s 459 will be to ask whether the conduct of which the shareholder complains was in accordance with the articles of association.’

This approach mirrors that adopted by other judges in Commonwealth jurisdictions where provisions similar to section 459 exist. For example, in Thomas v HW Thomas Ltd Richardson J adopted an expansive approach to the concept of unfairness under section 209 of the Companies Act 1955 of New Zealand. The learned judge recognised that the process of determining unfairness inevitably entails a wide-ranging exercise involving the balancing of many factors. He stated that:

‘Fairness cannot be assessed in a vacuum or simply from one member’s point of view. It will often depend on weighing conflicting interests of different groups within the company. It is a matter of balancing all the interests involved in terms of the policies underlying the companies legislation in general and s 209 in particular...s 209 is a remedial provision designed to allow the Court to intervene where there is a visible departure from the standards of fair dealing; and in the light of the history and structure of the particular company and the reasonable expectations of the members to determine whether the detriment occasioned to the complaining member’s interests arising from the acts or conduct of the company in that way is justifiable.’

It is clear from the cases that, while fairness continues to be determined objectively, a wider investigation has to be made focusing on the circumstances surrounding the relationships of those who make up the particular company’s membership. This approach not only serves to protect the minority shareholders’ interests in the company by allowing the courts to intervene when necessary but also pays adequate regard to the principle of freedom of contract and the pre-eminence of business agreements. More importantly, it allows for an expansive scope in the application of section 459 thereby capturing a wide array of unfairly prejudicial conduct. Thus, although the principle of unfairness was initially criticised as being vague, the courts have actively worked to prescribe its ambit.

However, it is also important to recognise that conduct in accordance with the corporate contract would not necessarily be fair where understandings upon which the shareholders were associated were not subject to express contractual provision. Hoffmann L.J. thus recognised the existence of contractual incompleteness in the corporate contract and that this gap would not be resolved by reference to the contract. Consequently, the definition of members’ interests and their legitimate expectations is crucial to affording protection to minority shareholders.

Demarcating members’ interests and legitimate expectations

The wide powers of the court to remedy unfairly prejudicial conduct under section 459 of the Companies Act 1985 have been frequently employed as a device to enforce the legitimate expectations or ‘fundamental understandings’ of company members. The concept of thwarted shareholder expectations is limited in widely held companies, where the expectations of members do not generally extend beyond the hope of receiving a return on investment. By contrast, in disputes within the small private company, the concept has come to shape the scope of the statutory provision. Where a petitioner’s legitimate expectation, for example, to participate in the management of the company, has been frustrated so as to amount to unfairly prejudicial conduct on the part of the majority, the court can intervene and provide a remedy.

Section 459’s reference to member’s ‘interests’ is designed to be expansive in effect, thereby effectively avoiding the limitations which terminology based on the notion of ‘rights’ would impose on the scope of the provision. This is clear from Peter Gibson J’s judgment in Re Sam Weller & Son in which he observed that:

‘The word "interests" is wider than a term such as "rights", and its presence as part of the test of section 459(1) to my mind suggests that Parliament recognised that members may have different interests, even if their rights as members are the same.’

Although 459 does not define the meaning of ‘interests’, the approach adopted by Lord Wilberforce in Ebrahimi v. Westbourne Galleries in dealing with the principle of ‘just and equitable’ continues to influence judicial reasoning. For example, in Re Saul D. Harrison, Hoffmann LJ following Ebrahimi observed that legitimate expectations are frequently derived from fundamental understandings, forming the basis of the association, which were not put into contractual form.

Thus, in protecting shareholder expectations under section 459, the courts adopt an approach analogous to that in Ebrahimi in which the House of Lords recognised, in granting a just and equitable winding-up, that the company ‘is more than a mere judicial entity’ and that company law could have regard to the subsistence of rights, expectations and obligations existing between the parties, of a personal nature, which were not subject to express contractual provision. Lord Wilberforce, in an oft-cited passage, stated that the words ‘just and equitable’:

‘are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. The "just and equitable" provision...does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.’

His Lordship recognised that in most companies, irrespective of size, a member’s rights under the articles of association and the Companies Act could be viewed as an exhaustive statement of his or her interests as a shareholder. However, he went on to list three situations in which equitable considerations could be ‘superimposed’, namely, where there is a personal relationship between shareholders which involves mutual confidence, or an agreement that some or all should participate in the management, or where there are restrictions on the transfer of shares which would prevent a member from realising his or her investment. In examining the scope of shareholders’ obligations therefore, the courts will look beyond the articles of the particular company. For example, in the absence of a specific undertaking that the petitioner will participate in management, the court may imply or infer such an obligation from the conduct of the parties.

In addition to Re Saul D Harrison, there is a strong line of authorities that confirms the applicability of the Ebrahimi concept of interests and legitimate expectations to section 459 cases, and its force pervades the body of jurisprudence which has grown up around the provision. For example, in Re a Company (No 00477 of 1986), Hoffmann J, considered that the language of s 459 facilitated the exercise by the court of its residual equitable jurisdiction. He observed that the interests of a member are not necessarily limited to the strict legal rights conferred by the constitution of a company. Accordingly, a member’s ‘interests’ can encompass the legitimate expectation that he or she will continue to participate in management. Similarly in, in Re a Company (No 003160 of 1986), Hoffmann J, examining the nature of the court’s jurisdiction under s 459, said it:

[E]nables the court to protect not only the rights of members under the constitution of the company but also the "rights, expectations and obligations" of the individual shareholders inter se. In the typical case of the corporate quasi-partnership, these will include the expectations that the member will be able to participate in the management of the company.’

The adoption of the Ebrahimi approach under section 459 has enabled the protection of wider, membership-related interests and expectations, such as those arising qua director but nevertheless inextricably linked to the shareholder’s involvement in the corporate venture. In a nutshell, the Ebrahimi approach has enabled the courts to protect membership interests wider than those legal rights arising under the corporate contract alone and therefore protect a large swathe of minority interests in their different permutations.

The effect of a purposive approach to the definition of fairness and interests, has therefore served to position section 459 as a potent tool in the protection of minority shareholders. However, this has not prevented the provision from critique and suggestion for reform. In the following section, I address some of the concerns raised.

Evaluating section 459

It has been claimed by some that by relying on the parameters of ‘fairness’ and ‘interests’, section 459 opens itself to imprecision. It has, therefore, been suggested that these terms be delimited within the statute in order to cure the ambiguity. However, it is the very elasticity of these concepts that have made section 459 such a potent tool in defending minority shareholders’ interests. Removing them would result in a restrictive approach which prevailed under the provision which section 459 was intended to replace.

Furthermore and in view of the manner in which the judiciary has subscribed to the Ebrahimi concept of legitimate expectations which was developed under the framework of the concept of ‘just and equitable’, it has been averred that that section 459 should be available whenever it is ‘just and equitable’ so to do as is the case with the winding-up provision under s 122(1)(g) of the Insolvency Act 1986; and that the words ‘unfairly prejudicial’ should be dropped from the provision. Such a solution would at first sight appear an attractive one, but in order to determine whether any given case came within just and equitable principles would it not still be necessary to consider whether or not the conduct was unfair? The phrase ‘unfairly prejudicial’ is in effect synonymous with the idiom ‘just and equitable’. As such, it is submitted that the solution of a just and equitable determination of corporate conduct would be a solution without a difference.

Concluding remarks

Section 459 is without doubt a complex provision. However, in the hands of the judiciary, it has proved a potent and effective tool in the protection of minority shareholders. The flexibility of its terminology has not resulted in imprecision as some feared rather, it has effected a more grounded approach to the consideration of minority shareholder’s interests whilst at the same time upholding the efficacy of the corporate contract.

Bibliography
Statutes

Companies Act 1985, 1989
Insolvency Act 1986

Case law

Ebrahimi v. Westbourne Galleries [1973] AC 360
JE Cade & Son Ltd [1991] BCC 360.
Re a Company (No 003160 of 1986) [1986] BCLC 391
Re a Company (No 003160 of 1986) [1986] BCLC 391.
Re a Company (No 00477 of 1986) [1986] BCLC 376.
Re a Company, ex p Schwarcz (No 2) [1989] BCLC 427
Re Macro (Ipswich) Ltd [1994] 2 BCLC 354.
Re RA Noble & Sons (Clothing) Ltd [1983] BCLC 273
Re Ringtower Holding plc [1989] BCLC 427.
Re Sam Weller & Son (1989) 5 BCC 810.
Re Saul D Harrison [1995] 1 BCLC 14.
Tay Bok Choon v Tohanson Sdn Bhd [1987] 1 WLR 413
Thomas v HW Thomas Ltd [1984] 1 NZLR 686.

Books and articles

Alcock, A (2002) ‘Do we really need sections 459-461 Journal of Business Law 567.
Bouchier, D ‘The Companies Act 1989 - yet another attempt to remedy unfair prejudice’ [1991] JBL 132.
Goddard, R (1999) ‘Enforcing the hypothetical bargain-sections 459-461 of the Companies Act’ 20(3) Company Lawyer 66.
Griffin, S (1992) ‘The statutory protection of minority shareholders-section 459 of the Companies Act’ 13(5) Company Lawyer 83

order a law essay

Related company law essays

Please note: The above essays and dissertations were written by students and then submitted to us to display and help others. Thanks to all the students who have submitted their work to us.

Back to Free Law Essays


order