Corporate governance and compliance - Minority shareholder p...

Learning Outcomes

This article outlines the main legal protections available to minority shareholders in UK companies. It covers the principles established by the rule in Foss v Harbottle and the statutory exceptions under the Companies Act 2006, specifically the derivative claim and the unfair prejudice petition. Additionally, it touches upon the remedy of winding up on just and equitable grounds under the Insolvency Act 1986. Your understanding of these mechanisms will enable you to identify and apply the relevant legal rules and principles to SQE1-style single best answer MCQs.

In addition, the article expands on the procedural and substantive aspects that determine whether a minority remedy is available and appropriate. It clarifies when a shareholder must proceed in the company’s name (derivative claim) and when the shareholder can seek personal relief (unfair prejudice), how the court filters and assesses derivative claims through the permission stages, and how equitable concepts—particularly legitimate expectations in quasi-partnership companies—inform the court’s view of fairness in s 994 petitions. It also distinguishes unavailable personal claims barred by the no reflective loss principle from viable personal actions, and explains common outcomes such as buy-out orders, valuation conventions, and the role of ratification and reasonable offers. Finally, it situates minority remedies within wider governance tools, including shareholder approval requirements for certain director transactions and contractual devices in the articles or shareholders’ agreements.

SQE1 Syllabus

For SQE1, you are required to understand minority shareholder protection under UK company law, with a focus on the following syllabus points:

• Recognise the rule in Foss v Harbottle and the consequences of separate legal personality for shareholder litigation.
• Distinguish between personal claims and claims brought on behalf of the company, including the no reflective loss principle.
• Identify grounds for derivative claims under ss 260–269 CA 2006 and the effect of authorisation/ratification under s 239.
• Apply the two-stage derivative claim permission process (prima facie stage; full hearing) and assess s 263(2) mandatory refusal and s 263(3)-(4) discretionary factors (good faith, s 172 approach, alternatives such as s 994).
• Understand eligibility to bring a derivative claim (members and persons who become members by operation of law) and that shadow directors are treated as directors for Part 11 purposes.
• Explain the broad scope of unfair prejudice under s 994 CA 2006, including proposed acts, objective fairness, quasi-partnership principles, and examples (exclusion from management, diversion of opportunities, excessive remuneration, non-payment of dividends).
• Evaluate remedies under s 996 CA 2006, especially share purchase orders (valuation issues, minority discount considerations) and orders regulating future conduct.
• Consider winding up on just and equitable grounds under s 122(1)(g) IA 1986, typical grounds (deadlock, substratum loss, exclusion in quasi-partnerships), and the effect of s 125(2) IA 1986 where alternative remedies exist.
• Recognise corporate governance measures that indirectly protect minorities, such as shareholder approvals for substantial property transactions, long-term service contracts, loans to directors, and payments for loss of office.
• Understand basic member powers (requisitioning a general meeting; demanding a poll; circulating written resolutions) and how these interact with minority protection strategies.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the general rule established in Foss v Harbottle regarding who can sue for a wrong done to the company?
   1. Any shareholder
   2. Only a majority shareholder
   3. The company itself
   4. Any director
2. Under which section of the Companies Act 2006 can a shareholder bring an unfair prejudice petition?
   1. s 172
   2. s 260
   3. s 994
   4. s 122
3. Which of the following is NOT a ground for bringing a statutory derivative claim under Part 11 of the Companies Act 2006?
   1. Negligence by a director
   2. Breach of duty by a director
   3. A breach of contract by a third party with the company
   4. Breach of trust by a director

Introduction

In company law, the principle of majority rule generally dictates that the wishes of the shareholders holding the majority of voting rights prevail. While this facilitates efficient decision-making, it can potentially leave minority shareholders vulnerable to oppressive or unfair actions by the majority or by the directors they control. UK law provides several mechanisms to protect the interests of these minority shareholders, ensuring a degree of fairness and accountability within the corporate structure. These remedies primarily stem from the Companies Act 2006 and the Insolvency Act 1986, offering avenues for redress when the company's affairs are conducted improperly or when the company itself fails to act against wrongdoing directors.

Beyond litigation, governance requirements and contractual arrangements also serve to mitigate risk. Statutory controls require shareholder approval for certain conflicted transactions with directors, enhancing transparency and giving minorities visibility and a voice before significant related-party deals proceed. Private ordering through shareholders’ agreements and tailored articles can embed vetoes, pre-emption, and buy-out mechanics that often prevent disputes from escalating into ruinous litigation. In this framework, it is important to determine whether a given complaint concerns a wrong to the company (calling for a derivative claim) or personal prejudice to a member’s interests (calling for s 994 relief), and whether winding up is proportionate or avoidable through less drastic remedies.

Key Term: Proper Claimant Rule
The principle derived from Foss v Harbottle stating that where a wrong is done to a company, the company itself is the correct entity to initiate legal proceedings.

Key Term: Internal Management Rule
The principle that courts will generally not intervene in the internal affairs of a company if the company is acting within its legal powers and the matter could be ratified by a simple majority of shareholders.

The Rule in Foss v Harbottle

The starting point for understanding shareholder remedies is the common law principle established in Foss v Harbottle (1843) 2 Hare 461. This case established two key rules:

1. The Proper Claimant Rule: If a wrong is done to the company, the company itself is the proper claimant to bring legal action, not individual shareholders. This reflects the company's separate legal personality.
2. The Internal Management Rule: Courts are generally reluctant to interfere in the internal management of a company where the company is acting within its powers. If an irregularity occurs that the majority of shareholders can ratify or approve, an individual shareholder cannot sue in respect of it.

These rules mean that, generally, a shareholder cannot sue for a loss suffered by the company (e.g., loss caused by a director's negligence) because the company is the proper entity to seek redress. Similarly, a shareholder cannot typically sue if the majority has approved, or could approve, the action complained of.

While the rule in Foss v Harbottle protects against a flood of litigation by individual shareholders over internal management issues, it created difficulties where the wrongdoers were the very people in control of the company (e.g., the directors or majority shareholders), as they would be unlikely to authorise the company to sue themselves. To address this, common law developed exceptions, which have now been largely replaced and codified by statute. Traditional exceptions at common law included acts that were ultra vires or illegal, matters requiring a special majority, and “fraud on the minority” where those in control prevented the company from suing. Today, the main practical vehicles are the statutory derivative claim under Part 11 CA 2006 and the statutory unfair prejudice petition under s 994 CA 2006.

The rule also underpins the modern no reflective loss principle, which limits personal shareholder claims where the company itself has a cause of action for the same wrong. Understanding reflective loss is essential to choose the correct route and avoid a claim being struck out for duplicating the company’s loss.

The Statutory Derivative Claim

Part 11 of the Companies Act 2006 (ss 260–269) provides a statutory procedure for a member of a company to bring a claim on behalf of the company. This is known as a derivative claim because the member's right to sue is derived from the company's right.

Key Term: Derivative Claim
A legal action brought by a member of a company on behalf of the company in respect of a cause of action vested in the company, typically arising from a director's wrongdoing.

Grounds for a Derivative Claim

A derivative claim may be brought only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty, or breach of trust by a director of the company (s 260(3) CA 2006). This includes breaches of the general duties owed by directors under ss 171–177 CA 2006 (for example, acting within powers (s 171), advancing success (s 172), avoiding conflicts (s 175), and declaring interests (s 177)). The claim can be brought against the director or another person (or both). Shadow directors are treated as directors for the purposes of Part 11, so claims may be brought in relation to their conduct where they exercise significant influence.

Eligible claimants include members and persons to whom shares have been transferred by operation of law (such as personal representatives of deceased members). The claim may be based on a cause of action that arose before the claimant became a member.

Importantly, derivative claims target wrongs to the company by directors. They are not a route to pursue commercial disputes with third parties for breach of contract with the company (except insofar as such third parties may be liable in addition to director wrongdoers if the cause of action belongs to the company and falls within s 260(3)).

The Permission Requirement

A member wishing to bring a derivative claim must apply to the court for permission to continue the claim (s 261 CA 2006). This involves a two-stage process designed to filter out weak or vexatious claims:

• Prima facie case (paper stage): The court considers the application without a hearing based on the evidence filed. If the application and evidence do not disclose a prima facie case, the court must dismiss the application (s 261(2)).
• Full permission hearing: If a prima facie case is established, the court proceeds to a full hearing. The court must refuse permission if satisfied that:
  • A person acting in accordance with the s 172 duty (to advance the success of the company) would not seek to continue the claim (s 263(2)(a)); or
  • The relevant act or omission has been authorised by the company before it occurred (s 263(2)(b)); or
  • The act or omission has been ratified since it occurred (s 263(2)(c)). Ratification requires an ordinary resolution passed disregarding votes of the director concerned and connected persons (s 239).

If the mandatory refusal grounds are not met, the court then considers discretionary factors in s 263(3), including:

• Whether the applicant is acting in good faith.
• The importance a director acting under s 172 would attach to continuing the claim.
• The likelihood of authorisation or ratification.
• Whether the company has decided not to pursue the claim.
• Whether the claimant could pursue the action in their own right (e.g., under s 994 unfair prejudice).

The court must also have particular regard to the views of members with no personal interest in the matter (s 263(4))—for example, independent shareholders unconnected to the alleged wrongdoer. In practice, the s 172 approach overlaps with a cost–benefit analysis: the likely benefit to the company, the prospects of recovery, the proportionality of litigation costs, and whether litigation might harm commercial interests.

In leading decisions applying these provisions, the courts have emphasised that the permission filter is robust and that the statutory factors should be addressed explicitly. Where the company’s management has, for rational reasons, chosen not to litigate, or where a well-founded alternative personal remedy (s 994) is available, permission is less likely to be granted. Conversely, where wrongdoing is serious (e.g., misappropriation of corporate opportunities) and those in control are conflicted, permission may be granted.

Key Term: Ratification
Approval by the members of a company, typically by ordinary resolution, of conduct that would otherwise be a breach of duty, with votes of the director concerned and connected persons disregarded (s 239 CA 2006).

Key Term: Reflective Loss
The principle that a shareholder cannot recover personally for loss consisting of diminution in share value or distributions where that loss reflects loss suffered by the company, for which the company has its own cause of action.

Remedies and Costs

Because a derivative claim is brought on behalf of the company, any relief granted (damages, equitable compensation, account of profits, declarations, injunctions) is awarded to the company. The court can also grant permission for proceedings in the name of the company against third parties connected to director wrongdoing. While Part 11 is silent on costs indemnities, courts may order the company to indemnify a successful claimant for reasonable costs of pursuing a derivative claim, recognising that the claimant has acted to protect the company’s interests.

Worked Example 1.1

Anya is a minority shareholder (10%) in TechStart Ltd. She discovers that Ben, the managing director and majority shareholder (60%), has diverted a lucrative contract opportunity intended for TechStart Ltd to another company wholly owned by Ben. TechStart Ltd's board (controlled by Ben) refuses to take action against him. Can Anya bring a derivative claim?

Answer:
Yes, Anya may be able to bring a derivative claim on behalf of TechStart Ltd under Part 11 CA 2006. Ben's actions likely constitute a breach of his director's duties (e.g., s 175 - duty to avoid conflicts of interest). Anya would need to apply to the court for permission to continue the claim. She would need to establish a prima facie case. The court would then consider the factors in s 263. Given Ben's control, it's unlikely the company would ratify the breach, and a director acting under s 172 would likely pursue the claim to recover the lost opportunity for the company. Permission might therefore be granted.

Worked Example 1.2

River holds 15% of the shares in EcoBuild Ltd. The board approved a contract in which a director’s sibling sold plant machinery to the company. The transaction meets the thresholds for a substantial property transaction but was not approved by the members. River seeks a derivative claim alleging breach of duty by the director who proposed the deal. The company has since passed an ordinary resolution ratifying the director’s breach, discounting votes of the director and connected persons. Is permission likely?

Answer:
The alleged wrong (entering the conflicted transaction without prior approval) is capable of being a breach of duty. However, s 263(2)(c) requires the court to refuse permission if the act has been ratified. Ratification under s 239 has now occurred by ordinary resolution excluding votes of the director and connected persons. Unless the ratification is itself impeachable (e.g., for impropriety or illegality), the mandatory refusal ground applies and permission should be refused. River may need to consider personal remedies if the ongoing conduct is unfairly prejudicial (e.g., diversion of value through excessive remuneration or refusal to pay dividends), but a derivative claim would not proceed.

Revision Tip

Remember that a derivative claim is brought on behalf of the company. Any remedy awarded (e.g., damages) goes to the company, not the shareholder bringing the claim. This differs from personal actions like the unfair prejudice petition. The court will test whether continuing the claim aligns with advancing the success of the company (s 172) and whether ratification or authorisation has neutralised the complaint.

Unfair Prejudice Petition

Section 994 CA 2006 provides a significant remedy for members (including minority shareholders) who feel the company's affairs are being conducted in a manner that is unfairly prejudicial to their interests as members, or to the interests of some part of the members. The section also covers proposed acts or omissions that would be unfairly prejudicial if carried out.

Key Term: Unfair Prejudice
Conduct relating to a company's affairs that is both unfair and prejudicial (harmful) to the interests of a member or a group of members in their capacity as members.

Scope of "Unfairly Prejudicial" Conduct

The term "unfairly prejudicial" is interpreted broadly by the courts. It requires more than just disagreement with management decisions; the conduct must be genuinely unfair as well as causing prejudice (harm). Examples include:

• Exclusion from management in quasi-partnerships where there was a legitimate expectation of participation (Ebrahimi v Westbourne Galleries Ltd [1973] AC 360).
• Diversion of business opportunities or assets by directors/majority shareholders.
• Non-payment or inadequate payment of dividends, especially where directors award themselves excessive remuneration instead.
• Serious mismanagement or breaches of directors' duties.
• Breaches of the company's articles or shareholders' agreements that affect members' interests.
• Alteration of the constitution for an improper purpose (e.g., issuing shares to dilute a minority’s voting power).
• Removal of an auditor based solely on a divergence of opinion on audit or accounting procedures, which is deemed unfairly prejudicial by statute (s 994(1A)).

The test is objective: would a reasonable bystander consider the conduct unfair? The courts look beyond strict legal rights in appropriate cases, particularly in smaller private companies functioning as quasi-partnerships—entities characterised by mutual trust and confidence, expectations of participation in management, and restrictions on share transfers. In O’Neill v Phillips [1999] UKHL 24, it was emphasised that fairness is based on enforceable rights and legitimate expectations arising out of agreements, understandings, and the company’s structure. Conduct permitted by the articles can still be deemed unfair if it breaches equitable considerations or understandings between the parties.

Key Term: Quasi-Partnership
A small, private company where the relationship between the members is based on mutual trust and confidence, similar to a partnership, often with an understanding that all members will participate in management.

Legitimate expectations often arise on formation or later restructuring: if shareholders agreed (expressly or impliedly) to share management or financial rewards, excluding a member without a buy-out or proper cause may be unfair even if technically permitted. Conversely, where relationships were purely commercial with clear constitutional terms, it is harder to persuade the court that equitable considerations override the contract.

Reasonable Offer to Buy Out

Courts frequently consider whether the petitioner has been given a reasonable offer to be bought out. If a timely, fair offer has been made, the petition may be dismissed on the basis that the principal remedy sought has effectively been achieved without court intervention. A reasonable offer commonly includes:

• Purchase of the petitioner’s shares at fair value.
• Valuation by an independent expert.
• No minority discount where the company is, or is akin to, a quasi-partnership (discount may be applied in other contexts).
• A valuation date that avoids rewarding the wrongdoers (often as at the date of the petition or the date of the order, depending on circumstances).
• Provision for disclosure of accounts and relevant financial information to support valuation.
• Payment terms that are commercially reasonable and secure.

Worked Example 1.3

Chen holds 20% of the shares in FamilyDine Ltd, a small restaurant business run by the majority shareholders, David (40%) and Eva (40%), who are siblings. Chen invested on the understanding he would be involved in key financial decisions. David and Eva consistently exclude Chen from board meetings where financial strategy is discussed and have started paying themselves significantly increased salaries while refusing to declare dividends, despite healthy profits. Does Chen have grounds for an unfair prejudice petition?

Answer:
Yes, Chen likely has grounds. The exclusion from management relating to financial decisions, contrary to the initial understanding, could constitute unfair prejudice, especially if FamilyDine Ltd resembles a quasi-partnership. The payment of excessive salaries to David and Eva while withholding dividends, despite profits, could also be seen as unfairly prejudicial to Chen's interests as a member entitled to a return on his investment.

Worked Example 1.4

Priya holds 12% in MedTech Ltd. The board has persistently refused to pay dividends for three years while increasing executive pay far beyond market levels. Priya petitions under s 994. Before the hearing, the majority offers to purchase her shares at a price reflecting a 25% minority discount and insists on valuation at a date two years prior when profits were lower. Should Priya accept, and how might the court view this offer?

Answer:
The offer is unlikely to be considered reasonable. In a closely-held company with quasi-partnership characteristics, courts typically reject minority discounts in buy-outs, and an artificial valuation date that predates misconduct or masks current value may be unfair. A fair offer would provide independent valuation, use a valuation date that does not reward the wrongdoers, and avoid a minority discount where equitable considerations apply. Priya’s petition should proceed unless a revised reasonable offer is made.

Remedies for Unfair Prejudice

If the court finds that the conduct is unfairly prejudicial, it has broad discretion under s 996 CA 2006 to make such order as it thinks fit. The most common order is a share purchase order requiring the majority shareholders (or sometimes the company itself) to buy the petitioner’s shares at a fair value. Courts often direct valuations by independent experts and set terms ensuring fairness (e.g., no minority discount where appropriate; appropriate valuation date; interest for delayed payment). Other remedies include:

• Regulating the future conduct of the company's affairs (e.g., requiring board processes to improve transparency and include the petitioner).
• Requiring the company to do or refrain from doing a specific act (e.g., declare a dividend consistent with policy and profits, if withholding was unfairly prejudicial).
• Authorising civil proceedings to be brought in the name of the company (effectively initiating a derivative claim where this aligns with s 172 considerations).
• Restricting alterations to the articles without leave of the court.
• Orders concerning access to information and accounts to facilitate valuation and prevent further prejudice.

Key Term: Share Purchase Order
A court order under s 996 CA 2006 requiring the petitioner’s shares to be purchased (by the other shareholders or the company) at a fair value determined by the court or an expert, often without a minority discount in quasi-partnership cases.

In practice, buy-out orders are preferred where the relationship has irretrievably broken down and continued co-ownership is untenable. Courts aim to craft orders that unwind the relationship fairly without destroying a viable business.

Winding Up on Just and Equitable Grounds

A member can petition the court to wind up the company under s 122(1)(g) of the Insolvency Act 1986 (IA 1986) if it is “just and equitable” to do so. This is a drastic remedy of last resort, as it leads to the dissolution (“death”) of the company.

Grounds where winding up might be considered just and equitable include:

• Complete deadlock in management (e.g., two equal factions unable to make decisions: Re Yenidje Tobacco Co Ltd).
• Loss of the company’s substratum (its main original purpose no longer achievable).
• Exclusion from management in a quasi-partnership contrary to legitimate expectations (Ebrahmi v Westbourne Galleries Ltd).
• Justifiable loss of confidence in the management due to lack of probity or serious misconduct.

Because winding up is so drastic, s 125(2) IA 1986 requires the court to consider whether an alternative remedy (such as an unfair prejudice petition leading to a buy-out) is available and whether the petitioner is acting unreasonably in seeking winding up instead. If a fair buy-out can resolve the dispute, the court will usually prefer s 994 relief to preserve the company and allow an exit for the minority.

In terms of standing, a petitioner must be a contributory (a member or someone liable to contribute to the assets in winding up). If the petitioner’s name has been removed from the register, the court may require rectification or other steps to confirm standing. The court also considers insolvency and creditors’ interests, but s 122(1)(g) typically addresses solvent companies where equitable breakdown rather than insolvency drives the petition.

Key Term: Just and Equitable Winding Up
A winding-up remedy under s 122(1)(g) IA 1986 where equitable considerations (e.g., deadlock or exclusion in a quasi-partnership) justify dissolving the company; generally a last resort when less drastic remedies are unreasonable or unavailable.

Worked Example 1.5

Leo and Maya each hold 50% of CraftLab Ltd and are its only directors. Relations have collapsed. They cannot agree on budgets, strategy, or appointments, and board meetings end in stalemate. The articles require both to approve major decisions. Leo petitions for winding up under s 122(1)(g) IA 1986. Maya argues that an unfair prejudice buy-out would be preferable. What is the likely outcome?

Answer:
This is classic deadlock. Winding up may be just and equitable. However, the court must consider whether a less drastic remedy is available and whether Leo is acting unreasonably in seeking winding up (s 125(2) IA 1986). If Maya makes a reasonable buy-out offer or the court can order a buy-out under s 994, the court is likely to prefer that outcome to preserve the business. If no fair buy-out is possible and deadlock prevents operation, a winding-up order may be made.

The No Reflective Loss Principle

Shareholders generally cannot sue for a loss that merely reflects the loss suffered by the company itself, for which the company has its own cause of action against the wrongdoer (Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204). For example, a shareholder cannot sue a director whose negligence caused the company loss, resulting in a fall in the company's share value or reduced dividends. The fall in share value or dividends simply reflects the company's loss. The company is the proper claimant. The Supreme Court in Sevilleja Garcia v Marex Financial Ltd [2020] UKSC 31 confirmed this rule applies specifically to shareholders claiming for diminution in share value or distributions resulting from actionable loss suffered by the company.

The principle does not bar claims for breaches of duties owed directly to shareholders (such as misrepresentation inducing them to invest) where the loss is separate and not merely reflective of company loss. Nor does it prevent derivative claims brought in the company’s name. The court is concerned to avoid double recovery and to respect corporate personality: if the company has a cause of action, the company should recover the loss.

Exam Warning

Be careful to distinguish between personal claims (like unfair prejudice under s 994) where the shareholder sues for harm to their own interests, and derivative claims (under Part 11 CA 2006) where the shareholder sues on behalf of the company for a wrong done to the company. The no reflective loss principle primarily bars personal claims that duplicate the company's claim.

Worked Example 1.6

Sam holds 8% in GreenCore Ltd. A director’s negligence caused the company to lose a major contract, and the share value fell by 30%. Sam sues personally for the loss of value and missed dividends. The company has not sued the director. What is the likely result?

Answer:
Sam’s claim is barred by the reflective loss principle. His loss (diminution in share value and distributions) reflects the company’s loss. The proper claimant is the company. Sam should consider a derivative claim to compel action on behalf of the company, subject to the Part 11 permission process.

Contractual Protections

Minority shareholders can also seek protection through contractual means, primarily via:

• Shareholders’ Agreements: Private contracts between some or all shareholders setting out agreements on management, voting, share transfers, exit routes, dividend policy, and dispute resolution. These agreements can provide rights beyond the articles but only bind the signatories. Clauses often include:

  • Pre-emption rights on share transfers to prevent unwanted entrants and enable proportional exits.
  • Drag-along and tag-along rights to coordinate exits in a sale.
  • Put/call options or buy–sell mechanisms to enable a clean exit if relationships deteriorate.
  • Management participation rights or reserved matters requiring minority consent.
  • Valuation mechanisms to set fair prices on compulsory buy-outs. Note that an agreement cannot fetter statutory powers of the company (e.g., a promise not to issue further shares may be unenforceable against the company), but it binds the contracting shareholders inter se. Breach sounds in contract, allowing damages or specific performance, and sometimes injunctive relief.

• Articles of Association: Specific provisions can be included in the articles to protect minorities, such as weighted voting on specific resolutions (Bushell v Faith [1970] AC 1099 concerning weighted votes on director removal), class rights, higher quorum or majority thresholds for certain decisions, and restrictions on share transfers. Because articles bind members in their capacity as members (s 33 CA 2006), rights under the articles may be enforced by personal action to vindicate membership rights (e.g., to restrain an ultra vires alteration or insist on proper notice and procedure).

Statutory governance requirements also provide preventive protection:

• Substantial Property Transactions (ss 190–196 CA 2006): Member approval by ordinary resolution is required where the company buys from or sells to a director or connected person a non-cash asset of “substantial value” (generally over £100,000, or over £5,000 and more than 10% of net asset value). Transactions without approval are voidable; directors and connected persons must account for gains and indemnify the company.
• Long-Term Service Contracts (s 188 CA 2006): Member approval by ordinary resolution is required for director service contracts with a guaranteed term of more than two years.
• Loans to Directors and Certain Credit Transactions (ss 197–214 CA 2006): Member approval by ordinary resolution is usually required, subject to exceptions (e.g., small amounts, intra-group transactions, ordinary course of business).
• Payments for Loss of Office (ss 215–222 CA 2006): Member approval by ordinary resolution is generally required unless falling within statutory exceptions.

These controls ensure transparency in areas ripe for abuse and provide minorities with an opportunity to challenge conflicted transactions before they occur.

Minorities also benefit from member powers:

• Requisitioning a general meeting (s 303 CA 2006) and compelling directors to call it (s 304), failing which requisitionists may call it themselves (s 305).
• Demanding a poll vote (s 321 CA 2006 and Model Articles), converting voting to one vote per share.
• Circulating written resolutions and statements to members where thresholds are met (e.g., 5% of voting rights).

Collectively, these tools help minorities ventilate grievances, obtain information, and engage in corporate decisions without immediate resort to litigation.

Worked Example 1.7

A 5% minority bloc in AlphaCo Ltd suspects the board plans to approve a loan to a director that exceeds the small loan exception. They lack votes to block an ordinary resolution but want scrutiny and disclosure. What can they do?

Answer:
They can requisition a general meeting (s 303 CA 2006), require circulation of a written resolution and a statement explaining objections if appropriate thresholds are met, and demand a poll vote to ensure voting reflects shareholdings. If the loan proceeds without approval where required, a derivative claim may be considered to challenge breaches of duty and seek remedies for the company.

Key Point Checklist

This article has covered the following key knowledge points:

• The rule in Foss v Harbottle generally prevents shareholders suing for wrongs done to the company; the company is the proper claimant.
• The statutory derivative claim (Part 11 CA 2006) allows members to sue on behalf of the company for director wrongdoing (negligence, default, breach of duty/trust), subject to obtaining court permission.
• The derivative claim permission process has a prima facie filter and a full hearing stage; the court must refuse where a s 172 actor would not continue the claim or where conduct is authorised/ratified.
• Ratification under s 239 CA 2006 (ordinary resolution excluding votes of the wrongdoer and connected persons) can bar derivative claims; the court also weighs good faith, importance to success, and alternative remedies.
• The unfair prejudice petition (s 994 CA 2006) allows members to seek remedies if the company's affairs are conducted in a manner unfairly prejudicial to their interests; it covers proposed acts and applies an objective fairness test shaped by equitable considerations and quasi-partnership features.
• The most common s 994 remedy is a share purchase order, often at fair value without a minority discount in quasi-partnership scenarios, alongside orders regulating conduct, restricting alterations, or authorising proceedings.
• Winding up on just and equitable grounds (s 122(1)(g) IA 1986) is a drastic remedy available in situations like deadlock, substratum loss, or exclusion from management in quasi-partnerships; courts prefer s 994 buy-outs where fair and available (s 125(2) IA 1986).
• The no reflective loss principle prevents shareholders bringing personal claims for losses that merely reflect the company's loss; derivative claims and s 994 petitions remain viable routes.
• Contractual protections (shareholders’ agreements and specific article provisions) and statutory approval requirements for conflicted director transactions provide preventive safeguards for minority shareholders.
• Minority shareholders can use member powers (requisition meetings, poll demands, circulation of resolutions/statements) to influence corporate decisions and scrutinise conflicted transactions.

Key Terms and Concepts

• Proper Claimant Rule
• Internal Management Rule
• Derivative Claim
• Ratification
• Unfair Prejudice
• Quasi-Partnership
• Share Purchase Order
• Just and Equitable Winding Up
• Reflective Loss