10/23/23

1 A company’s constitution: Shareholder Rights

2 What is a share?
• Is it a form of property? If so, what kind of property is it?
• What does a share ownership mean in context of a company?
• Does having shares in a company give you true ‘ownership’ rights
in the company’s assets??
• What rights are attached to shares??
3 What is a Share?
• s.541 CA2006:
• ‘the shares or other interest of a member (shareholder) in a
company are personal property and are not in the nature of real
estate’.
• s.61 CA 2017
• Nature of shares or other securities.—The shares or other
securities of any member in a company shall be movable
property transferable in the manner provided by the articles of the
company.
•
4 Bligh v Brent (1837) 2 Y. & C.EX. 297
A will provided, that upon the death of one Mr Timothy Brent,
shareholder of the Chelsea WaterWorks Company ( whose main
assets was land) the following would be executed:
1.all realty (real estate) pass to one beneficiary, the Son of the SH;
2.all personalty ( personal Property) to another, the wife and
nephew of the SH
The main problem was that this was a Company whose main asset
was Real estate pe se.
Question arose as to whether the shares in Chelsea Waterworks
Co. realty or personalty?
Because if the shares were realty and had been transferred
without deed, then the transfer was not a valid transfer and must
revert back to the Estate of the deceased Shareholder;
However, if they were personalty, the transfer could be executed
by a simple gift or contract
•
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 •
5 Bligh v Brent (1837) 2 Y. & C.EX. 297
Held: ‘the subscribers contributed capital stock to the company.
Their shares were initially shares of this stock.
But they did not own this stock;
the stock was under the powers of the company and were its
‘instrument’ whereby the joint stock of money was made to
produce profit.
More correctly then the shares represented the divisible interest in
the profit so produced.
The members are distinct from the ‘metaphysical body called “the
corporation”.
The shares in the Chelsea Waterworks Company are personal
property, and will therefore pass by a will not executed according
to the provisions of the Statute of Frauds.—.’
•
6 Borland’s Trustee v Steel Bros & Co. Ltd [1901] 1 Ch 279 at
288.
• Per Farwell J:
• A share is the interest of a shareholder in the company measured
by a sum of money, for the purpose of liability in the first place,
and
• of interest in the second, but also consisting of a series of mutual
covenants entered into by all the shareholders inter se in
accordance with [s.33 CA2006].
• The contract contained in the articles of association is one of the
original incidents of the share.
• A share is not a sum of money…, but is an interest measured by
a sum of money and made up of various rights contained in the
contract, including the right to a sum of money of more or less
amount.
•
7 Blackwell v Revenue and Customs Commissioners [2017]
EWCA Civ 232
• Shares are a form of incorporeal or intangible property, properly
to be regarded as a bundle of Rights, including:
• rights to vote, rights to a share in distribution by way of dividend
or upon winding up and,
• because share are a form of property, carrying with them rights to
sell, lend or other wise deal with them, subject to restrictions( if

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 • because share are a form of property, carrying with them rights to
sell, lend or other wise deal with them, subject to restrictions( if
any) in the AOA of the Company concerned
8 Academic opinion on ‘Shares’
• According to Professor Worthington are three attributes of the
share:
• It is a fraction of the company’s capital, denoting what the
shareholder has risked in the company.
• It is signifier of the shareholder’s rights in the company e.g. to
receive profits (if any), vote etc.
• It is a species of property—a chose in action.
• All three can be explained by the ‘bundle of rights’ theory;
9 Chose in Action?

• Legal definition:
• The right to bring a lawsuit to recover chattels, money, or a debt.
• A chose in action is a comprehensive term used to describe a pro
perty right or the right to possession of something that can
only be obtained or enforced through legal action.
• It is used in contradistinction to chose in possession, which refers
to cases
where title to money or property is in one person but possession i
s held by another.
• Examples of a chose in action are
Øthe right of an heir to interest in the estate of his or her decedent;

Øthe right to sue for damages for an injury; and

Øthe right of an employee to unpaid wages or a shareholders
rights in the Company.
•
10 But didn’t shareholder’s invest
‘their’ capital? And shouldn’t they have ownership rights over
the company or the capital?

1.Irrelevant. They transferred their capital for value – a right to the

flux of profit.
2.So not ‘their’ capital any more.
3.Even if shareholders could have some ‘moral’ claim to initial
investment, subsequent share transfers provide no new capital to
the company
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12

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 investment, subsequent share transfers provide no new capital to
the company
11 Classes of shares and the protection of class rights from
variation

12 Classes of shares?
13 Types of shares
14 Typical ordinary share:

• à carrying one vote when a resolution is proposed

• à pari passu sharing of assets in the case of a winding up of the
company
• à pari passu participation in any dividend declared by the
company ( non cumulative dividends)
• Pari passu means "equal in right of payment"
•
15 Typical (cumulative) preference share:

• à Carrying no voting rights, unless the preferential dividend is in

arrears
• à Sharing of assets in a winding up pari passu with other
preference shares, but before any distribution is made to
holders of ordinary shares
• à Entitled to a fixed rate of annual dividend (e.g. 5%), which
accumulates, if on a given year no dividend is declared due to a
lack of available profits
16 Redeemable shares

• The terms of redeemable shares give the company the option to

buy them back in the future; occasionally, the shareholder may
(also) have the option to sell them back to the company, although
that’s much less common.
• The option may arise at or after a specific date, between two
dates or be effective at any time the shares are in issue.
• A company can only redeem shares out of profits or the proceeds
of a new share issue, which may restrict its ability to redeem
shares even if the directors would like to exercise the option.
•
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 •
17 Deferred shares
• In a sense the inverse of preference shares, deferred shares rank
junior to ordinary shares in some way, usually in that no profits
will be received until everyone else has received something.
• Deferred shareholders are usually given greater company
control.
18 Partly paid shares
• With partly paid shares, the company receives some
consideration for the shares but less than the nominal amount.
• So if, say, a share is being issued at 1£ nominal value and the
shareholder ( by agreement of the company) only pays 60p, the
shares would be called partly paid.
• The remaining 40p could be ‘called’ by the company at a later
date, meaning the shareholder would then have to pay it.
19 Management shares
• These are shares which grant a director-holder super voting
rights whenever a resolution is voted on that concerns that
director’s managerial position e.g. 4x voting rights in any
resolution to sack the director in question cf. Bushell v Faith
[1970] AC 1099
20 Non-voting shares
• Share lacking the right to attend and vote in general meetings.
• This is a common feature of several other types of senior equity.
• When appearing alone, the non-voting share usually indicates a
share issued under an ESOP ( employee stock ownership),
whereby employees are remunerated by shares but have no
control of the company.
21 Shareholder protection
Dr Sheharyar Hamid
22 Shareholder Protection: background!!
• After discussing the Shareholder rights/ duties under the AOA
and seeing how the law deals with Classes of shareholders
through law, we now need to identify what other avenues may be
available for shareholders, especially when their Interests and
rights have been infringed.
• We will also have to understand how the interests of the SH and
the Company may diverge, when looked at from the point of view
of the management/ BOD.
 the Company may diverge, when looked at from the point of view
of the management/ BOD.
• The protection of vulnerable shareholders ( usually minority
shareholders) is one of the main aims of the company law.
• This has an economic effect, it allows for future shareholders (
investors) to have confidence that their investment will not be
misapplied/ used without their consent.
• There fore for an efficient market and economy to thrive,
Shareholder( investor) protection is a major issue.
(https://www.secp.gov.pk/for-investors/ease-of-doing-business/ )
• This is done through some common law remedies ( including
some equitable principles) and some introduced Statutory
Remedies.
23 Shareholder protection

• Four main remedies available for any Minority shareholder:

• 1. Sec 33 CA 2006 ( sec 17 CA 2017), for any personal right in
the AOA
• 2. Wrong doer control remedy (Derivative claims sec 260-265 CA
2006 (for wrong being done to the Company) (in a limited form in
Pakistani law via the SECP)
• 3. Just and Equitable Winding up ( sec 122(1)[g]) of IA 1986 ( sec
268 CA 2017)
• 4. Unfair Prejudice Conduct ( sec 994-996 CA 2006) ( sec 286-
287 CA 2017)
•

24 The wrong doer in Control dilema

25 What is the mischief?

• ABC Ltd has two directors, A and B. The directors and persons
connected to them hold a majority of the shares and votes. They
have breached their fiduciary duties to the company (e.g.
fraudulently appropriated corporate funds).
• C owns a minority stake in ABC Ltd. And wants to take an action
against the Directors.
• Remember, Directors’ duties are owed to the company.
• What is the problem here?
26 The Wrongdoer in Control dilemma!!!
• Foss v Harbottle (1843)
• The proper claimant principle
26
• Foss v Harbottle (1843)
• The proper claimant principle
• If a wrong is done to a company, who can sue?
• The company!!!
• Who acts on behalf of the Company?
• The Directors/ majority shareholder through a vote (51% or
more)???
• What if they are the ones committing the wrong? Who can sue
now???
• Also If the same act is rectifiable by a simple majority of
members?
• No cause of action lies when it has been rectified, because it is
no longer a wrong
27 The proper claimant principle

• The company is the proper claimant of enforce its rights

• The legal rights of a company belong to the company as a
separate person and not to its members.
• Whether a company sues should normally be decided by
directors (Breakland Group Holdings Ltd V London And Suffuok
Properties Ltd [1989])
• And if the Directors ( or majority SH) refuse to sue?
28 Foss v. Harbottle (1843) 2 Hare 461

• Action by two shareholders in a company incorporated by Act of

Parliament: Victoria Park Company , on behalf of themselves and
all the other shareholders against the five directors, charging
defendants with concerting and effecting various fraudulent and
illegal transactions, whereby the property of the company was
misapplied, aliened, and wasted
• That in such circumstances the SH had no power to take the
property out of the hands of defendants( the Directors),;
• praying that defendants might be decreed to make good to the
company the losses and expenses occasioned by the acts
complained of.
• Held. No cause of action because ; in such circumstances there
was nothing to prevent the company from obtaining redress in its
corporate character in respect of the matters complained of;
• So the company was the proper claimant for the wrongs done to
the company
29

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 the company
29 Just and Equitable Winding up
The equitable jurisdiction of the Court

Sec 122( 1)[g]of the Insolvency Act 1986

30 Just and Equitable Winding up
• Insolvency Act 1986: 122. Circumstances in which company may
be wound up by the court.
• (1) A company may be wound up by the court if— […]
• (g) the court is of the opinion that it is just and equitable that the
company should be wound up.

31 CA 2017
• 268. Application for winding up of company or an order under
section 286.
• If any company or other body corporate the affairs of which have
been investigated by inspectors is liable to be wound up under
this Act, and it appears to the Commission from any report made
under section 262 that it is expedient so to do by reason of any
such circumstances as are referred to in sub-clause (i) or sub-
clause (ii) or sub-clause (iii) or sub-clause (iv) or sub-clause (vii)
of clause (b) of sub-section (1) of section 257, the Commission
may, unless the company or other body corporate is already
being wound up by the Court cause to be presented to the Court
by the registrar or any person authorised by the Commission in
this behalf—
• (a) a petition for the winding up of the company or body
corporate, on the ground that it is just and equitable that it should
be wound up;
• (b) an application for an order under section 286; or
• (c) both a petition and an application as aforesaid.
•
•
32 Re Westbourne Galleries Ltd [1973] A.C. 360
• Mr E and Mr N, started a partnership in 1948
• In 1959, they set up a company, with a 1000 shares, became
50% SH each and Dir
• The profits were shared in the shape of Dir Salary and no
dividends were ever paid
32

• The profits were shared in the shape of Dir Salary and no

dividends were ever paid
• Later Mr N’s son joined the Business, and both E and N,
transferred 100 shares each to N’s son ( so now he had 200
shares) and also made him Dir
• Later E and N had a falling out; N and his son removed E from
Dir.
• What could E do? He couldn’t get any remuneration, had only
40% shares so no major voting rights.
• So E petitioned the Court to have the Company Wound up on
Equitable ground ( sec 122(1) g)
33 Re Westbourne Galleries Ltd [1973] A.C. 360
• The superimposition of equitable considerations requires
something more, which typically may include one, or probably
more, of the following elements:
• (i) an association formed or continued on the basis of a personal
relationship, involving mutual confidence – this element will often
be found where a pre-existing partnership has been converted
into a limited company;
• (ii) an agreement, or understanding, that all, or some (for there
may be " sleeping " members), of the shareholders shall
participate in the conduct of the business;
• (iii) restriction upon the transfer of the members' interest in the
company – so that if confidence is lost, or one member is
removed from management, he cannot take out his stake and go
elsewhere.’’
• This criteria can be used to identify ‘a Quasi partnership
company’
34 Re Westbourne Galleries Ltd [1973] A.C. 360
• ‘‘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 (
AOA)
• The 'just and equitable' provision does not, as the respondents
[the company] suggest, entitle one party to disregard the
obligation he assumes by entering a company, nor the court to
dispense him from it.
• It does, as equity always does, enable the court to subject the

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 dispense him from it.
• It 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.
35 Just and Equitable Winding up
• Three main types of situations:
• One of the shareholders is excluded from management.
• There is a deadlock that paralyses the company.
• The company has achieved its object, or its purpose has failed.
36 Unfairly prejudicial conduct of the company’s affairs
s994-999 CA2006

Sec 286 CA 2017, Oppression remedy

37 Sec 994 of the CA 2006
• 994 Petition by company member
• (1)A member of a company may apply to the court by petition for
an order under this Part on the ground—
• (a)that the company's affairs are being or have been conducted
in a manner that is unfairly prejudicial to the interests of members
generally or of some part of its members (including at least
himself), or
• (b)that an actual or proposed act or omission of the company
(including an act or omission on its behalf) is or would be so
prejudicial.
• (2)The provisions of this Part apply to a person who is not a
member of a company but to whom shares in the company have
been transferred or transmitted by operation of law as they apply
to a member of a company.
38 CA 2017
• 286. Application to Court.—(1) If any member or members
holding not less than ten percent of the issued share capital of a
company, or a creditor or creditors having interest equivalent in
amount to not less than ten percent of the paid up capital of the
company, complains, or complain, or the Commission or registrar
is of the opinion,
• that the affairs of the company are being conducted, or are likely
to be conducted, in an unlawful or fraudulent manner, or in a
 • that the affairs of the company are being conducted, or are likely
to be conducted, in an unlawful or fraudulent manner, or in a
manner not provided for in its memorandum, or
• in a manner oppressive to the members or any of the members
or the creditors or any of the creditors or are being conducted in a
manner that is unfairly prejudicial to the public interest, such
member or members or, the creditor or creditors, as the case
may be, the Commission or registrar may make an application to
the Court by petition for an order under this section.

•
39 Sec 286
2) If, on any such petition, the Court is of opinion—
• that the company’s affairs are being conducted, or are likely to be
conducted, as aforesaid; and
• that to wind-up the company will unfairly prejudice the members
or creditors;

the Court may, with a view to bringing to an end the matters

complained of, make such order as it thinks fit,
• whether for regulating the conduct of the company’s affairs in
future, or
• for the purchase of the shares of any members of the company
by other members of the company or
• by the company and, in the case of purchase by the company,
for, the reduction accordingly of the company’s capital, or
otherwise.
40 The capacity in which prejudice is suffered:
Re a company (No. 00477 of 1986)
• Per Hoffmann J: ‘‘In the case of a small private company in which
two or three members have invested their capital by subscribing
for shares on the footing that dividends are unlikely but that each
will earn his living by working for the company as a director, the
distinction [of interests] may be more elusive.
• The member's interests as a member […] may include a
legitimate expectation that he will continue to be employed as a
director and his dismissal from that office and exclusion from
management may be unfairly prejudicial to his interests as a
member.’’
41
 member.’’
41 Re Unisoft Group Ltd [1994])

• ‘Interest of members’
• The interests of members claimed to be unfairly prejudiced in a
petition under s994 need not necessarily be interests in their
capacity as members, though they must sufficiently connected
with membership.
• Disputes among members of a company are not normally seen
as involving unfairly prejudicial conduct of the company’s affairs
42 Re Saul D Harrison and Sons plc [1995]

• Unfairly prejudicial
• Neill LJ in ‘the words ‘unfair prejudicial are general words and
they should be applied flexibly to meet the circumstances of the
particular case… the conduct must be both prejudicial and also
unfairly so:
• conduct may be unfair without being prejudicial or prejudicial
without being unfair, and it is not sufficient if the conduct satisfies
only one of these tests.’
43 O’Neill v Phillips [1999] 1WLR 1092
• Mr Philips: founder and holder of 100% of shares of his
company, O’Neil initially an employee.
• Later O’Neil was allotted 25% of the shares.
• Later, Philips retired, and O’Neil became the managing
director and shared some profits.
• After that, O’Neil guaranteed the company’s debts and started
negotiations with Philips with a view to be allotted further shares
(to reach 50%) and an equal distribution of Profits
• Then the business suffered. Philips reassumed control. He
stopped equal profit sharing and refused to allot O’Neil any more
shares but did not exclude him from management
44 O’Nell v Phillips [1999] Lord Hoffmann

• ‘members of a company will not ordinarily be entitled to complain

of unfairness unless there has been some breach of the terms on
which he agreed that the affairs of the company should be
conducted …’
• but ‘there will be cases in which equitable considerations make it
unfair for those conducing the affairs of the company to rely upon

45
 • but ‘there will be cases in which equitable considerations make it
unfair for those conducing the affairs of the company to rely upon
their strict legal powers.
• Thus unfairness may consist in a breach of the rules or in using
the rules in a manner which equity would regard as contrary to
good faith.’
45 O’Nell v Phillips [1999]
• ‘‘But the unfairness does not lie in the exclusion alone but in
exclusion without a reasonable offer. If the respondent to a
petition has plainly made a reasonable offer, then the exclusion
as such will not be unfairly prejudicial and he will be entitled to
have the petition struck out. It is therefore very important that
participants in such companies should be able to know what
counts as a reasonable offer”
• Held: the conduct was not Unfairly prejudicial.
46 O’Nell v Phillips [1999]
• In a quasi-partnership company, the interests and Rights of SH
will usually be found in the understandings between the members
at the time they entered into association.
• But there may be later promises, by words or conduct, which it
would be unfair to allow a member to ignore. Nor is it necessary
that such promises should be independently enforceable as a
matter of contract.
• A promise may be binding as a matter of justice and equity
although for one reason or another (for example, because in
favour of a third party) it would not be enforceable in law
•
47 ‘Unfairness’
Re Guidezone lTD [2000]

• Jonathan Parker J said

• ‘unfairness for the purpose of s 994 is not to be judged by
reference to subjective notions of fairness, but rather by testing
whether, applying established equitable principles, the majority
has acted, or is proposing to act, in a manner which equity would
regard as contrary to good faith’
• An infringement of a member’s rights under the articles may not
in itself be unfairly prejudicial. (Re Carrington Viyella plc (1983))
• The prejudice must be ‘harm in a commercial sense, not in a
merely emotional sense’(Re Unisoft Group Ltd [1994])
•

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 merely emotional sense’(Re Unisoft Group Ltd [1994])
•
•
48 Where petition may be grounded?

•
• Majority taking financial benefits from minority
• Mismanagement
• Share value / prevent from selling at the best price
• Criminality
• Oppressive conduct under former law / s210 CA1948( relevant
from the Pakistani persopective)
• Affairs of company and affairs of members
• Conduct past, future, continuing
• Improper removal of auditor
49 Examples of Unfair prejudicial Conduct
• Majority taking financial benefits from minority
• Re London School of Electronics Ltd [1986]
• Re Cumana Ltd [1986]
• Re Little Olympian Each Ways Ltd [1995]
• Mismanagement
• Re Elgindata [1991]
• Normally managerial decisions do not amount to unfairly
prejudicial conduct
• Re Marco [1994]
• Mismanagement was so bad the court had to order the
directors to buy out minority shareholders
•
50 Majority taking financial benefits from minority
• Re London School of Electronics Ltd [1986]
• 75% shares owned by another institution City Tutorial College
• The LSE was in financial trouble. The CTC decided to transfer
the assets/ students of the LSE to their own College.
• A Minority SH brought a claim under the Unfair Prejudicial
Conduct.
• Held:
• amounted to Unfair Prejudicial conduct. Asked the CTC to pay
the market value of the shares to the Minority SH.
51
 the market value of the shares to the Minority SH.
51 Majority taking financial benefits from minority
• Re Cumana Ltd [1986]
• 2/3 of shares held by a Majority SH
• Divert some of the company’s business to another company
where he also had Shareholding
• Make a large rights issues of shares to new shareholders.
• Excessive bonus and pension fund to himself
• Held?
52 Majority taking financial benefits from minority
• Re a Company [1997]
• Paying excessive remuneration to directors
• Not distributing profits and dividends
• Held?
• Re McCathy Surfacing ltd[2008]
• Directors paid in other ways
• Fail to consider if dividends should be distributed
• Held: ??
•
53 Mismanagement
• Elgindata Ltd [1991]
• Numerous allegation of mismanagement
• Warner J said although serious mismanagement of constitute
unfairly prejudicial conduct, the court would normally be very
reluctant to accept that managerial decisions can amount to
unfairly prejudicial conduct. It is not unfair for a member to
suffer from poor management as it is one of the normal risks of
investing in a company.
• However,
• In this case, the directors used company assets to profit him
self and family and friends. This was clearly unfairly prejudicial
conduct. But the courts did not hold it as such
•
54 Re Marco [1994]

• Mismanagement ranged for over 40 years of the company’s

history
• Mismanagement was so serious that the court had decided it
amount to unfair prejudicial conduct and ordered buy out.
54

• Mismanagement was so serious that the court had decided it

amount to unfair prejudicial conduct and ordered buy out.
• Hence,
• The difference between Elgindata Ltd [1991] and Re Marco [1994]
• is difficult to characterize and shows difficulties in advising similar
matters for legal uncertainty, but the duration of mismanagement
can be a determining factor for concluding whether there was
Unfair Prejudicial conduct or not!!
•
55 Criminality
• Complain that company’s affairs are being conducted in a way
what is in breach of criminal law
•
56 Affairs of company and affairs of members
• A petition can only be complaint of directors conduct of the
company’s affairs, not of their own affairs which happen to affect
the company
• Re a Company [1987]
• A directors purchased a debt owed by the company
• Asked other members of the company to transfer shares to her
and resign as directors
• Held? Not unfair Prejudicial
• Leeds United Holdings plc[1996]
• Major shareholder would not sell without consulting each other
other
• Held? Not Unfairly prejudicial conduct
57 Conduct past, future, continuing and isolated
• A petition may be grounded on conduct that has occurred in the
pas (Re a company [1986]) including conducts occurred before
the petitioner was a member of the company (Lloys v Casy
[2002])
• It could also be future conduct (Whyte [1984]) (See David Milman
‘Anticipated unfair prejudice’)
• It is for the court to decide whether an order is necessary to
protect the petitioner’s interests (Re Knyon Swansea Ltd [1987])
• A single act or omission may be sufficient/ no need to be a course
of action (Re Marchday Group [1998]) But the act must be
prejudicial. (Re Astec)
58 Orders the court may make under sec 994-996
58 Orders the court may make under sec 994-996

• Statutory power
• 996 if the court is satisfied that a petition under this Part is well
founded, it may make such order as it thinks fit for giving relief in
respect of the matters complained of.
• (2)the court's order may—
59 Orders the court may make under sec 994-996
• (a)regulate the conduct of the company's affairs in the future;
• (b)require the company—
• (i)to refrain from doing or continuing an act complained of, or
• (ii)to do an act that the petitioner has complained it has omitted to
do;
• (c)authorize civil proceedings to be brought in the name and on
behalf of the company by such person or persons and on such
terms as the court may direct;
• (d)require the company not to make any, or any specified,
alterations in its articles without the leave of the court;
• (e)provide for the purchase of the shares of any members of the
company by other members or by the company itself and, in the
case of a purchase by the company itself, the reduction of the
company's capital accordingly.
•
60 Common law ‘Derivative Claim’
The Proper Claimant principle and the Fraud on the Minority
61 What is the mischief?
• ABC Ltd has two directors, A and B. The directors and persons
connected to them hold a majority of the shares and votes. They
have breached their fiduciary duties to the company (e.g.
fraudulently appropriated corporate funds).
• C owns a minority stake in ABC Ltd. And wants to take an action
against the Directors.
• Remember, Directors’ duties are owed to the company.
• What is the problem here?
62 The Wrongdoer in Control dilemma!!!
• Foss v Harbottle (1843)
• The proper claimant principle
• If a wrong is done to a company, who can sue?
• The company!!!
62

• If a wrong is done to a company, who can sue?

• The company!!!
• Who acts on behalf of the Company?
• The Directors/ majority shareholder through a vote (51% or
more)???
• What if they are the ones committing the wrong? Who can sue
now???
• Also If the same act is rectifiable by a simple majority of
members?
• No cause of action lies when it has been rectified, because it is
no longer a wrong
63 The proper claimant principle

• The company is the proper claimant of enforce its rights

• The legal rights of a company belong to the company as a
separate person and not to its members.
• Whether a company sues should normally be decided by
directors (Breakland Group Holdings Ltd V London And Suffuok
Properties Ltd [1989])
• And if the Directors ( or majority SH) refuse to sue?
64 Foss v. Harbottle (1843) 2 Hare 461

• Action by two shareholders in a company incorporated by Act of

Parliament: Victoria Park Company , on behalf of themselves and
all the other shareholders against the five directors, charging
defendants with concerting and effecting various fraudulent and
illegal transactions, whereby the property of the company was
misapplied, aliened, and wasted
• That in such circumstances the SH had no power to take the
property out of the hands of defendants( the Directors),;
• praying that defendants might be decreed to make good to the
company the losses and expenses occasioned by the acts
complained of.
• Held. No cause of action because ; in such circumstances there
was nothing to prevent the company from obtaining redress in its
corporate character in respect of the matters complained of;
• So the company was the proper claimant for the wrongs done to
the company
65 A brief history of derivative claims:
Foss v Harbottle
65 A brief history of derivative claims:
Foss v Harbottle
• ‘the corporation should sue in its own name and in its corporate
character’
• Only the company can sue for a wrong suffered by it, unless the
relevant act is not capable of being ratified by an ordinary
majority ( the exceptions to the Foss v Harbottle rule):
• Because it is illegal
• Because it is ultra vires the company
• Because there is fraud on a minority
66 Derivative claims!!
• So in essence the Derivative claim is a claim that a minority SH
can initiate when the Majority SH/ Directors are the ones
committing the wrong to the company.
• In this situation, the courts will allow/authorise the Minority
shareholder to ‘represent’ the interests of the company and bring
a Derivative claim
• The Derivative claim, gets its name because the SH ‘derives’
his/her authority from the company itself i.e. it is given special
permission by the courts to represent the company and correct
the wrong that is being done to the Company by those in control,
because there is no other solution!!!
• NOTE: Derivative claims cannot be used by the Minority SH to
bring a personal claim
67 Common law Derivitive claims? Problematic?
• The problem with common law Derivitive claim is that only three
exceptions apply to the FvH principle: i.e. UV, Illegality and Fraud
on minority
• All very difficult to prove.
• In England they have now allowed for Statutory derivative Claim
under sec 260-265 CA 2006, whereby the SH can bring a claim
other than these three exception.
• But Pakistan does not have any such provision for Derivative
claims under the Companies act.

68 The codification of the common law on derivative claims in

2006
• Companies Act 2006, Part 11
• Sections 260 – 264: England, Wales and N. Ireland
• Sections 265 – 269: Scotland
68

• Sections 260 – 264: England, Wales and N. Ireland

• Sections 265 – 269: Scotland

• Civil Procedure Rules r. 19.9, r. 19.9A-F

• Both came into force on 1 October 2007

• It is not a new substantive rule but rather a new procedure for

bringing such actions.
• Explanatory Notes, para 491
•
69 The current process to obtain permission to bring a derivative
claim
• Process
§ Two-stage process of permission (section 261):
• Prima facie case to be decided on paper evidence provided by
the claimant. If not, the court must dismiss the application. The
company is not involved.
• Full hearing of permission application. The court may direct the
company to provide evidence and adjourn the proceedings to
enable the evidence to be obtained.
§ Then follows the main trial on the facts of the case.
70 The criteria to permit a derivative claim to be brought: when
the court must refuse
• 263. (2) Permission (or leave) must be refused if the court is
satisfied—
• (a)that a person acting in accordance with section 172 (duty to
promote the success of the company) would not seek to continue
the claim, or
• (b)where the cause of action arises from an act or omission that
is yet to occur, that the act or omission has been authorized by
the company, or
• (c)where the cause of action arises from an act or omission that
has already occurred, that the act or omission—
• (i)was authorized by the company before it occurred, or
• (ii)has been ratified by the company since it occurred.
71 The criteria to permit a derivative claim to be brought
• 263. (3) In considering whether to give permission (or leave) the
court must take into account, in particular—
• (a) whether the member is acting in good faith in seeking to
continue the claim;
71

• (a) whether the member is acting in good faith in seeking to

continue the claim;
• (b) the importance that a person acting in accordance with
section 172 (duty to promote the success of the company) would
attach to continuing it;
• (c) where the cause of action results from an act or omission that
is yet to occur, whether the act or omission could be, and in the
circumstances would be likely to be—(i) authorized by the
company before it occurs, or (ii)ratified by the company after it
occurs;
• (d) where the cause of action arises from an act or omission that
has already occurred, whether the act or omission could be, and
in the circumstances would be likely to be, ratified by the
company;
• (e) whether the company has decided not to pursue the claim;
• (f) whether the act or omission in respect of which the claim is
brought gives rise to a cause of action that the member could
pursue in his own right rather than on behalf of the company.
• (4) In considering whether to give permission (or leave) the court
shall have particular regard to any evidence before it as to the
views of members of the company who have no personal
interest, direct or indirect, in the matter.
72 How do courts decide whether to grant permission after the
2006 act?
73 Franbar Holdings Ltd v Patel
• Diversion of business opportunities (main) claim.
• Combination of the two stages of the procedure by agreement of
the parties.
• Permission was not granted.
Ø Clarification about s. 239 (7) CA.
• Factors a hypothetical director would take into account:
• Prospects of success of the claim
• Disruption to the company’s business
• Cost of the proceedings
• Damage to reputation if action fails
74 Stainer v Lee
• Permission was granted.
• Observation of the judge about the standard of proof required by
section 263(3).
• “I consider that section 263 (3) and (4) do not prescribe a

75
74

section 263(3).
• “I consider that section 263 (3) and (4) do not prescribe a
particular standard of proof that has to be satisfied but rather
require consideration of a range of factors to reach an overall
view.’’
75 Kiani v Cooper
• Permission was granted to continue the claim until disclosure of
relevant information was made by defendant.
• Kiani was a director and shareholder and brought a claim against
Cooper who was also a director and shareholder.
• Criteria: member’s good faith, hypothetical director’s views,
alternative remedy. But the availability of a 994 petition is not
conclusive.
76 Conclusion
• Derivative claims a good option for a minority SH to bring a claim
against a wrong doer in control of the company.
• However it looks like that the courts are not willing to allow
derivative claims as a matter of right. They consider a number of
factors before allowing the claim to get through.
• The two stage process under sec 260 CA 2006 allows for the
Courts to weed out the weakest claims and only allow for the
strongest claims.
• Even when the courts allow for the claim to go through, the
procedural requirements are very tough to over come.
• Do you think Pakistan can replicate something similar?
77 Derivative Claims in Pakistan
A possible framework for minority shareholder litgation
78 Existing Framework: Sec 286 CA 2017
• Borrowed from the old and repealed section 210 of the English
Companies Act, 1948, it permits the aggrieved parties to apply to
the Court if they have suffered from oppression, fraud,
misconduct, or prejudicial conduct by any member of the
company.
• However, the courts exercise wide discretionary powers to define
“oppression” which favors majority shareholders
• The provision creates a locus standi requirement; the aggrieved
should be holding 10% share capital in order to be eligible
claimants.
• Problem? This proviso automatically disadvantages minority
shareholders of public limited companies who may have less
 • Problem? This proviso automatically disadvantages minority
shareholders of public limited companies who may have less
share capital. While this additional standard may prevent
excessive litigation in Pakistan, it is detrimental to the minority
shareholders who may just have 9 or 8% share capital.
•
•
•
•
•
•
79 Comparsion with Section 996 CA 2006: Unfair and preducial
remedy
• Following the principle set in O’Neil v Phillips , English Courts go
an extra mile to shield the minority shareholders even if their
complain does not fit in the definitions of oppression or prejudicial
conduct
• In several cases, England has broadened the ambit of the
provision by including burdensome, harsh and wrongful, as
sufficient factors and also excluded the word “oppression”
replacing it by “unfair and prejudicial conduct”.
• English courts also account for mismanaged conduct under
Section 994, while Section 286 demands that the claimant must
be constrained in a manner.
• No locus standi requirement
• the English Courts also allow the minority shareholders to leave
the company or recoup their investments under the share
purchase order. The courts can also order specific performance
for majority shareholders.
•
•
80 Scope of Deriavtive Claims in Pakistan
• No minority shareholder litigation available
• Only Oppression Remedy Available
• There has been a positive attitide towards derivative claims (see
Mst. Sakina Khatoon and others Vs. S.S. Nazir Ahsan and others
2010 CLD 963)
• Who to turn to? Security and Exchange Commission Of Pakistan
(SECP)????
•
81
 •
81 Section 256 CA 2017
• Under Section 256 CA 2017, SECP has the powers to investigate
into matters of a company, when approached by members of the
company having no less than one-tenth of the total voting power
having share capital or application of members constituting no
less than one-tenth of the total members.
• Before appointing an inspector, the Commission awards the
company an opportunity to be heard.
82 Section 257 CA 2017
• Under Section 257, the Commission can order investigation in
the company, at the request of the company or the order of the
Court
• The Commission is mandated to interject in the functioning of the
company if under (b)(iii) where certain members have been
deprived of:
• (iii) a reasonable return,
• (iv) where members of the company have not been provided with
reasonably expected information and or
• (v) any shares of the company have been allotted for inadequate
consideration
83 Approval by the Commission
• As the SECP will be exercising Suo-moto powers into
investigation in the companies, it exercises its own discretion in
deciding whether it wants to initiate investigation into the affairs of
the company or not.
• The aggrieved shareholder must prove substantial grounds
necessary for intervention as under Section 256(3).
• Applicants should provide documents and evidence which
proves that they have a “good reason” for an investigation.
•
84 Power of Inspectors to act as Courts
• Under Sec 259 , the SECP appointed inspectors have the same
powers as vested in the Court under the Code of Civil Procedure
(CPC):
• enforcing the attendance of persons and examining them on
oath,
• compelling the discovery and production of any related
documents,
• and issuing commission for the examination of witnesses.

85
 documents,
• and issuing commission for the examination of witnesses.
• non-compliance of the orders of the inspectors would result in the
same penalties, liabilities and consequences prescribed under
both CPC and PPC.
• Inspector also writes a report which is forwarded to the Court and
or published on the company’s webiste
85 Remedies and Penalties
• Section 264 empowers the SECP to decide whether members of
the company are guilty of fraud, some members have not been
given adequate information, other shareholders have not
received expected return. The SECP can apply to the Court and
after taking necessary evidence into account:
• remove any officer, direct certain changes in the company,
• direct the company to call a meeting and take remedial actions,
• or direct any existing contract which is detrimental to the
company or its members or favoring certain members.
•
86 Case Law?
• Daewoo Pakistan Express Bus Service v Security Exchange
Commission of Pakistan (SECP) (2020 CLD 919)
• Depilex Smileagain Foundation v Security of Exchange
Commission of Pakistan (2019 CLD 861)
• Hira Textile Mills v Bank Al-Falah Ltd (2022 CLD 285)
• Tariq Iqbal Malik v Multiplierz Group Pvt Ltd (2022 CLD 468. )
87 Problems?
• Main objective of the Courts and the Commission is to ensure
that the Act and the prescribed procedures are followed.
• No mention of the prosecution of the alleged company nor any
redressal provided to the aggrieved shareholders.
• No data available on how the investigation of the company is
actualized and the impact of the inspector’s reports
• Locus standi Requirememt
• Under S 256(4), the Commission also obligates the party bringing
forward the claim to bear the cost of the investigation
•
88 Solutions?
• SECP special tribunals
• No locus standi requirement
88
• SECP special tribunals
• No locus standi requirement
• More importance given to minority shareholders than the
reputation of the company
• The Commission can set up a fund dedicated for such cases
given its elaborate set up or mandate the company to cover the
cost. Asking the company to bear the cost would also act as a
guarantee for the companies to not violate the rights of the
minority shareholders.
• Reporting of the hearings that the SECP undertakes,
transparency in the appointment process of inspection officers
and the outcomes of the investigations.
•
89 Commercial Law
By: Laiba Tariq
90
The existence of a separate corporate personality means that the
directors are agents of the company and not the shareholders,
thus shareholders cannot hold the directors accountable for the
breach of any directors duty.

Only the company is the proper claimant when the wrong is done
to the company. The concept that legal rights belong to the
company as a “separate person” and not to its members was
established by the English case, Foss V Harbottle
91 Remedies for the enforcement of the director's duties
1. Oppression remedy
2. Unfairly prejudicial conduct remedy
3. Derivative Claim
92
Although the Companies Act 2017 ( “CA 2017”) in Pakistan
provides protection to minority shareholders in the form of
enforcement of their personal membership rights under the section
17, application for just and equitable winding up under section 268,
and application against the oppression by majority shareholders
under section 286, the interpretation of these provisions along with
the social context of Pakistan render these protections inadequate.
Hence, the scope of the CA 2017 should be widened to include
unfair prejudicial conduct and derivative claims.
93
 unfair prejudicial conduct and derivative claims.
93 Section 286
Application to Court.—(1) If any member or members holding not
less than ten percent of the issued share capital of a company, or
a creditor or creditors having interest equivalent in amount to not
less than ten percent of the paid up capital of the company,
complains, or complain, or the Commission or registrar is of the
opinion, that the affairs of the company are being conducted, or
are likely to be conducted,
• in an unlawful or fraudulent manner, or
• in a manner not provided for in its memorandum, or
• in a manner oppressive to the members or any of the members
or the creditors or any of the creditors or
• are being conducted in a manner that is unfairly prejudicial to the
public interest,
• such member or members or, the creditor or creditors, as the
case may be, the Commission or registrar may make an
application to the Court by petition for an order under this section.
94
• Under oppression remedy, claims can only be brought in cases
where the conduct of the majority shareholders constitutes
“oppression”. This makes the scope of this provision narrow
because of the definition of oppression.
• While the courts have relied on the English jurisprudence when
it comes to deciding matters related to the “equitable and just
principle”, they have not applied the central concept highlighted
in the Re West Bourne Galleries case that distinguishes
between the rights and interests of the parties involved.
• The word “oppression” restricts the remedies available to
minority shareholders. What is interesting is that “the
interpretation and application of section 286 have been
nonuniform in Pakistan”.
95 Recent Case Law
• In a recent case, Nadeem Kiani v Messrs American Lycetuff,
the court highlighted the equitable basis of the remedy “if any
dispute arises between them in respect of any business
transaction, then the partner at the receiving end will be required
to show not only that he had acted in accordance with law; but
that his conduct will bear to be tried by the highest standard of
honor”.
• The court held that “ this section has been incorporated in the
 honor”.
• The court held that “ this section has been incorporated in the
law to safeguard the minority shareholders from oppression and
mismanagement of majority shareholders…”.
•
•

•
96
• In the case of Inam Ullah Khan versus Aksa Solutions
Development Services Private Limited, the court defined
oppression as
• “ oppression by the majority involving a lack of probity and fair
dealing in affairs of a company to the prejudice of some portion of
its members or to public interest and exercise of authority by the
majority in a manner that was burdensome, harsh or wrongful”.
• Also, “mere illegality is not sufficient to bring an action under the
oppression remedy”.
• This is because an illegal act may not always be oppressive.
•
97 287. Powers of Court under section 286.—
• Without prejudice to the generality of the powers of the Court
under section 286, an order under that section may provide for—
1.(a) the termination, setting aside or modification of any
agreement, however arrived at between the company and any
director, including the chief executive or other officer, upon such
terms and conditions as may, in the opinion of the Court be just
and equitable in all the circumstances;
• (b) setting aside of any transfer, delivery of goods, payment,
execution or other transactions not relating to property made or
done by or against the company within ninety days before the
date of the application which would, if made or done by or against
an individual, be deemed in his insolvency to be a fraudulent
preference; and
• any other matter, including a change in management, for which in
the opinion of the Court it is just and equitable that provision
should be made.
1.
•
98
 •
98 Power to regulate the conduct of the company: sec 288
• 288. Interim order.—Pending the making by it of a final order
under section 286 the Court may, on the application of any party
to the proceedings, make such interim order as it thinks fit for
regulating the conduct of the company’s affairs, upon such terms
and conditions as appear to it to be just and equitable.
•
99 Court powers under CA 2017 vs 2006
1 • Sec 286/287/288
• (a) the termination, setting aside or modification of any
agreement,
• setting aside of any transfer, delivery of goods, payment,
execution or other transactions
• any other matter, including a change in management, for which in
the opinion of the Court it is just and equitable that provision
should be made
• Interim order.—Pending the making by it of a final order under
section 286 the Court may, on the application of any party to the
proceedings, make such interim order as it thinks fit for regulating
the conduct of the company’s affairs, upon such terms and
conditions as appear to it to be just and equitable
2 • Sce 996
• (a)regulate the conduct of the company's affairs in the future;
• (b)require the company—
• (i)to refrain from doing or continuing an act complained of, or
• (ii)to do an act that the petitioner has complained it has omitted to
do;
• (c)authorize civil proceedings to be brought in the name and on
behalf of the company by such person or persons and on such
terms as the court may direct;
• (d)require the company not to make any, or any specified,
alterations in its articles without the leave of the court;
• (e)provide for the purchase of the shares of any members of the
company by other members or by the company itself and, in the
case of a purchase by the company itself, the reduction of the
company's capital accordingly.
•
100
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