Minority Interests and protection in companies

A company is made up of a group of people coming together to form another entity with perpetual succession and a legal personality. The company is a new person in law and can sue and be sued in its name, can own properties in its name and can do whatever a legal person is allowed to do in society.

When seeking an issue against a company, the proper person to sue is the company itself and not its directors or shareholders of the company. Nonetheless, there lie some instances that the directors and/or the shareholders collide to the detriment of the company against the minority or the company itself. This article offers insight into the politics that play in a company and the protection of minority rights.

The general rule: The majority wins

In the politics of the company, the general rule is the majority decision wins and calls the order for the day. The majority are immune from being sued for the activities for which they have worked for the company, in the case of any dispute, the proper party to sue is the company and not the majority shareholders or directors.

The contemplation was the issue in the famous 1843 British case of Foss v. Harbottle, in that case, the minority directors claimed that the actions of the majority directors were fraudulent and detrimental to the company. The majority of the company’s shareholders who had collided with the directors to defraud the company refused to approve the company suing the directors, the courts dismissed the matter on the claim that the permission of the majority of the company’s shareholders was not sought before the action was brought.

This was the invention of the “proper plaintiff” rule, which stated that in the case of a dispute, the company is the proper plaintiff to sue and not its directors or shareholders.

The Exception: The Doctrine of Lifting the veil

The doctrine of lifting the veil is a common law doctrine accepted in almost every nation of the world today. Originally, the proper plaintiff rule as shown in the case of Foss v. Harbottle indicates that the directors and members of the company are covered or protected by a veil which is the corporate legal entity of the company.

In order words, the directors and members shall not be mentioned in any dispute or held responsible for their actions done to the company; the only person who can punish an officer of the company is the company itself through its members and/or directors.

A difficulty arises when the wrongdoers are the company’s members and directors who are supposed to protect the company from fraud. When this occurs, the veil of corporate personality would be lifted and the directors and members involved with the wrong can be brought directly to court in their name.

The minority protection rule

Despite the existence of the proper plaintiff rule, the minority rule is predicated upon the doctrine of lifting the veil and has recently been created to avoid a repeat of a circumstance that occurred in the case of Foss v. Harbottle. These minority protection patterns are as follows:

1. Member’s direct action

The member’s direct action can see a member (shareholder) of the company approaching the court, alone, in the member’s name for an injunction or a declaration, only. Such application by the single member to the court, shall plead to the court to restrict or stop the company from doing any of the following:

a. From entering into an illegal transaction or one that isn’t contained in the company’s object (ultra vires).

b. From attempting to pass an ordinary resolution for an issue which requires a special resolution.

c. From any action or omission of the company relating to the right of the member.

d. From committing fraud on the company or any shareholder when the directors have failed or refused to take appropriate action.

e. When there is no time for calling a company meeting to redress a wrong.

f. Where the directors have profited from their negligence or breach of duty.

2. Derivative action

A derivative action is one brought by an individual in the name and on behalf of the company. The applicant brings a derivative action to prosecute, discontinue and defend the company in a matter in which it is defrauded by a few members.

A derivative action is brought by leave of court, for the court to grant the derivative action, the following must be established:

a. That the wrongdoers are the directors of the company, who would not take action on the matter.

b. The applicant has given notice to the directors of the company to apply to the court on this matter if the directors fail to act.

c. The applicant is acting in good faith.

d. It is in the best interest of the company that the action be brought, prosecuted, defended or discontinued.

3. Relief on grounds of unfairly prejudicial and oppressive conduct

An individual who believes that the activities of the company are done in a manner that is unfairly prejudicial or oppressive to a member or members of the company can approach the court with a petition seeking relief.

The above petition can be made by any of the following:

a. A member of the company.

b. A director or officer of the company.

c. A former director or former officer of the company.

d. A creditor of the company.

e. The Corporate Affairs Commission (CAC).

f. Any other person who at the discretion of the court is a proper person to make such an application.

The FIFA corruption example

The Federation Internationale De Football Association (FIFA) was founded in 1904. FIFA had financial difficulties from the time of establishment up until the era of Joao Havelange in 1974. Joao introduced far-reaching changes to the financing of FIFA including selling all the marketing rights on the world cup stadium to International Sport and Leisure, a company Joao was accused of accepting a bribe.

In 1998, Joao handed over to Sepp Blatter; during Blatter’s era, FIFA was run as a mafia with insider trading and corruption at the peak of the FIFA executive members. From flashy cars to expensive hotels, exco members lived life with power and luxury. From an investigation conducted from 2008 to 2015 by the American Federal Bureau of Investigation and Interpol, corruption had eaten deep into the fabric of FIFA, with all 24 excos of FIFA being tied to one corruption scandal or the other.

From the corporate sense, FIFA’s longed defence from an investigation of corruption was the same raised in the case of Foss v. Harbottle being that FIFA is an independent organization from politics and nations’ economies, it, therefore, cannot be investigated by nations or an independent body without the approval of the excos, of whom the corruption was done. This corruption scandal spanned over two decades until the confession and cooperation of CONCACAF’s general secretary, American-born Chuck Blazer, who ratted out all the corruption taking place in FIFA since the year 1974 till 2015.

Following the doctrine of lifting the veil, the veil of FIFA being an independent corporation was lifted and the executives were arrested and tried by nations in courts of law. Sepp Blatter was however cleared of any wrongdoing but was banned from football for eight years for condoning such actions of corruption under his watch as president of FIFA. FIFA was cleared of every wrongdoing and was held to be a victim of corruption by the Swiss courts which offered over $200 million in compensation to FIFA.

Conclusion

Minority protection was created to provide further protection to corporations against their members, committees, directors and other principal officers whose duty it is to protect the company. The Companies and Allied Matters Act (CAMA 2020) provides for a minority protection mechanism to further safeguard the company.

Following the FIFA example, there is no telling what the principal officers of a corporation can do to it if left unchecked.