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 general rule in company law is that the majority rules. Voting rights are determined according to the number of votes a shareholder owns. If one shareholder owns a sufficient proportion of shares, his decision can override the wishes of all the other shareholders. Clearly this could lead to very unfair results from the perspective of a minority shareholder, and the law has developed various safeguards to protect their position.

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Section 459 of the Companies Act 1985 (s459) is one of the key tools in the minority shareholder’s arsenal against the hijacking of a company by majority shareholders. It enables minority shareholders to challenge the actions of the majority shareholder in a court of law, in circumstances where they might previously have been left without recourse. Nevertheless, the regime under s459 has been subject to criticism, and various reforms have been posited in recent years with the aim of ironing out the perceived difficulties.

This paper will consider the efficacy of s459 as a means of protecting shareholders from unfairly prejudicial conduct and discuss the potential utility of the proposed reforms.

The Application of s459
A number of provisions exist to ensure that minority shareholders are not left entirely at the mercy of the whims of the majority shareholders. One of the most commonly used is s459. The section provides that a member of a company (or a former member whose shares have been transferred or transmitted by operation of law) who considers that the affairs of the company are being carried on in a manner "unfairly prejudicial" to all of the company's members or a group of its members of which the petitioner is part or that an actual or proposed act by or on behalf of the company would be prejudicial in this way.
Section 461 of the Companies Act 1985 further provides that the court has discretion to apply the remedy it thinks fit when considering a case under s459. Possible remedies might include an order that the majority shareholders purchase the shares of the minority at fair value. While a clean break might be considered preferable in the event of a breakdown in relations amongst a company’s shareholders, the court has complete discretion and may even order that the business of the company is conducted in a different way or that the minority shareholders purchase the shares of the majority.

It should be noted that majority shareholders cannot utilise s459 since they already possess sufficient power by means of their majority position. So, for example, a majority shareholder could not use s459 to force a minority shareholder to sell his shares.

On its face, s459 appears to provide minority shareholders with an incredibly broad scope for challenging the actions of majority shareholders in court. Indeed, a large number of cases have been filed under s459 since its enactment. In 1999, however, the House of Lords considered the application of s459 for the first time in O'Neill v Phillips. They laid down a restrictive interpretation of the kind of conduct that can be said to fall under s459. The court held that a member will not ordinarily be permitted to complain of unfairness unless there has been a breach of the terms on which it has been agreed that the terms of the business will be conducted. "Equitable" considerations, however, will also be taken into account where these terms are being applied in an "unconscionable" way, for example amounting to a breach of good faith. In other words, courts should not simply rely upon an everyday understanding of what is unfair.
The House of Lords provided much-needed clarification in their ruling. Even so, their Lordships have been criticised by some commentators for adopting an excessively restrictive analysis. Indeed, instances in which the conduct of a company's affairs would appear to amount to unfair prejudice on a common sense analysis may be excluded from seeking redress under s459. For example, unfair changes to class rights, or unfair failure to register a transfer of shares may no longer be actionable under s459.

Conversely, it has been argued that s459 acts as a "tool of oppression" that excessively favours the minority shareholder while stifling the efforts of the majority to run a company efficiently. The onus, of course, will be on the court to ensure that such oppression does not take place.
A further criticism of s459 litigation, as posited by Clark, is that, because of the need to thoroughly investigate the history of a company's affairs, it can drag on at great length and become incredibly costly for all concerned. This remains a problem and there does appear to be strong argument for a streamlining of the s459 regime.

Proposed Reforms
In 1997, the Law Commission of England and Wales, in consultation with the Scottish Law Commission, published a report on shareholders remedies. The report contained various reforms aimed at rendering the regime under s459 more efficient and less expensive. Of course, this report pre-dated the analysis applied in O'Neill v Phillips but the recommendations remain pertinent.
Broadly speaking, the Commission proposes active case management by the Courts. Suggested measures to enable this include providing the courts with greater power to dismiss cases (or parts of cases) that are unlikely to be successful and to make cost orders to control expenditure. The proposals also include the introduction of a time limit within which petitions may be brought under s459 and the inclusion in the Table A articles of a dispute resolution article that would enable shareholders to avoid the courts unless absolutely necessary. Another proposal is the implementation of a rebuttable presumption that the removal of a director who has a shareholding of more than 10% is unfairly prejudicial.
These proposals may well go a long way towards improving the time and cost efficiency of s459 litigation, however they will require to be brought into effect by parliamentary enactment and there does not appear to be any imminent plan to introduce any such legislation.

Conclusion
The application of s459 certainly suffers from certain problems. While O’Neill v Phillips provided clarification as to the correct interpretation of unfair prejudice, it failed to provide a solution to the labyrinthine nature of s459 litigation, with its incumbent costs and expenditure of court time. Nevertheless, s459 plays an important role in balancing the rights of the minority shareholder against those of the majority. Without it, minority shareholders would find their investments protected only by the magnanimity of the majority. The Law Commission’s proposals seem likely to offer a valuable resolution.

Bibliography

Textbooks
B. Hannigan Company Law (LexisNexis UK: London) 2003
D. Keenan and J. Bisacre Smith and Keenan’s Company Law (Pearson Longman: London) 2005
J. Dine Company Law (Palgrave Macmillan: London) 2005
Journal Articles
A.J. Boyle Unfair Prejudice in the House of Lords 21(8) Comp. Law (2000) 253
B. Clark Unfairly Prejudicial Conduct: A Pathway Through the Maze 22(6) Comp. Law (2001) 170
R. Goddard Corporate Governance Principles on Trial 19(9) Comp. Law (1998) 277
J. Lowry The Pursuit of Effective Minority Shareholder Protection: s459 of the Companies Act 1985 17(3) Comp. Law (1996) 67
J. Mukwiri Using s.459 as an Instrument of Oppression 25(9) Comp. Law (2004) 282
L.J. Moran Missing Links and Missed Opportunities 18(8) Comp. Law (1997) 264
D.D. Prentice and J. Payne Section 459 of the Companies Act 1985 The House of Lords’ View 115 (OCT) L.Q.R. (1999) 587
C.L. Ryan and K. Reece-Thomas Section 459, Public Policy and Freedom of Contract 22(6) Comp. Law. (2001) 177
D. Sugarman Reconceptualising Company Law: Reflections on the Law Commission’s Consultation Paper on Shareholder Remedies: Part 1 18(8) Comp. Law (1997) 226
Law Commission Report
Shareholder Remedies (Law Com No 246 1997)
Case Law
O’Neill v Phillips [1999] 2 All ER 961
Legislation
Companies Act 1985 (c.6) s459 and s461

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