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S00175360

CRIS

RODANEL

Course: Bachelor of Commerce (Accountancy)

Unit code: LEGL201

School: ACU Offshore - MANILA

Unit title: COMPANY LAW

Due date: 18 APRIL 2016

Date submitted: 18 APRIL 2016

Lecturer-in-Charge: ATTY. GABRIEL GUY P. OLANDESCA

Assignment Title and/or number: semesters assignment

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Signature of students:

RODANEL L. CRIS

Date:

14 APRIL 2016

RODANEL L. CRIS
LEGL-201 COMPANY LAW

S00175360
ATTY. GABRIEL GUY P. OLANDESCA

PROTECTING THE INTERESTS OF MINORITY SHAREHOLDERS

Shareholders and directors are key stakeholders of a company. Shareholders provide capital to
the company and entrust company directors to protect their interests through dutiful decision
making. Directors receive compensation in exchange for their services and for facing the risk of
legislative penalties for failure to carry out their fiduciary duties 1. Shareholders have ultimate
control of a company, while directors run the companys business and are responsible for its
management2. Directors of a company are required under legislative and common law to
perform their duties in good-faith and for the proper purpose of the company.

Shareholders protect their investments by examining directors conduct and taking remedial
action if directors perform badly. Shareholders also have the power to absolve directors who
have breached their fiduciary duties to act for the best interests of the company 3. In order to
review the directors performance, the Corporations Act enforced mandatory obligations to
maintain financial records and prepare Annual Financial Statements for its shareholders to
inspect. These reports are in place to enable users to make informed investment decision,
participate actively in general meetings and hold directors accountable for corporate operations.
They keep shareholders engaged and critically evaluate their investments.

Shareholders can minimize the risk on their investments by critically evaluating the conduct of
the directors and by using their voting rights to align management strategies against their
personal interests. Minority shareholders are holders of less than 50% of a company and, by
1 Christofer Adrian, Good Corporate Governance: What Matters Most to Shareholders and Directors
(2014) 28 (1) Equity 8.

2Institute of Directors, Protection for Minority Shareholders (May 2015) <

http://www.iod.com/~/media/Documents/PDFs/IAS/Advisory%20Factsheets/Protection%20for
%20minority%20shareholders.pdf>

3 Bob Baxt, Division of power (2015) 31(3) Company Director, 69.

virtue, do not have voting control of the firm. Whereas majority shareholders hold the majority of
votes to be cast at a general meeting of the company. By virtue of controlling more than half of
the voting interests in the company, the majority shareholder has a very significant influence in
the business operations and strategic direction of the company. As a result, if a dispute or an
issue arises requiring shareholder votes, a minority shareholder doesnt have voting strength on
his own. The Corporations Act provides statutory rights for minority shareholders when the
actions of a company are oppressive and unfairly administrated.

The potential for abuse arises because the board of directors is in control of the management of
the company and the majority shareholders are in control of the general meetings of the
company. Minority shareholders are vulnerable to the actions of both directors and majority
shareholders whenever the interests of the controllers and the minority differ. Members
remedies were established to protect shareholders (particularly minority shareholders), from
abuse at the hands of the controllers of the company, whether they be the directors or majority
shareholders of the company.

Examples of unfair prejudice include failure to give accurate accounting information, serious
mismanagement, restricting members voting rights, inaction by directors and company,
controlling member gains, diverting business to another company in which the minority have no
shareholding, co-option by the board of a director who has been overwhelmingly rejected by the
shareholders, or failure to pay dividends.

Although minority shareholders have little ability to influence the activities of a company, they
are protected from minority oppression by way of section 232 of the Corporations Act of 2001.
Section 232 provides relief to shareholders who have been exposed to commercial unfairness,
or discriminatory actions from a company. The member must believe wither that the affairs of
the company are being conducted in a manner which is; or that an act or omission or a
resolution by the company or a class of members was, or would be oppressive, or unfairly
prejudicial to, or unfairly discriminatory against, a member or members, or contrary to the
interests of members as a whole.

Section 233 gives the court discretionary powers to assist an affected minority shareholder by
ordering a companys constitution to be appealed, injunction or requiring a specific act from the
directors. These powers to protect minority shareholders were dispensed in William Arthur
Forge v ASIC4, where it was held that the majority cannot exercise their voting power to commit
fraud on the minority by appropriating rights which belong to the company.

Fraud on the minority can be interpreted simply as misrepresentation or an act to deceive. A

precedent case of such abuse of power by the directors of a company is in Scottish Cooperative
Wholesale Society Limited v Meyer [1959] AC 324 5. The Scottish Cooperative in 1946 formed a
subsidiary company with two individuals who had a license to manufacture rayon cloth. The
subsidiary company was to enable the Scottish Society to participate in the manufacture and
sale of rayon materials which it otherwise would not have been able. Shares in the subsidiary
company were issued as follows: the Scottish Society acquired 4,000 shares and the two
individuals who held the relevant licenses for the manufacture of rayon cloth in the amount of
3,900. The subsidiary company traded successfully for several years and earned substantial
profits. In 1951 the Society sought to purchase from the individuals their shares at less than
their true value. The offer was rejected by the individuals. After the removal of government
control the Scottish Society adopted a policy of transferring the company's business to a new
department within its own organization, thereby forcing down the value of the company's
shares. The Court found that the actions of the Scottish Society was oppressive and the two
individuals were entitled to relief by way of compulsory purchase of the shares by the Scottish
Society.

In Roberts vs Walter Developments Pty Ltd (1997) 15 ACLC 882, the court discussed relevant
principles relating to business judgment and oppression. In this case it was held that a course of
conduct engaged in by the chairman and majority shareholder which included failure to pay
dividends, failure to consider the minority shareholders request that the remuneration of the
majority shareholder as director be reduced, and refusal to give the minority shareholder access
to company records, was held to be oppressive6.

4 Zammit, M., Shareholder Oppression (Black Stone Chambers)

5 Zammit, M., Shareholder Oppression (Black Stone Chambers)

It is not enough that a minority disagree with decisions of the majority or the directors: there
must be an unfair adverse effect on the minority. The unfairly prejudicial conduct must affect the
shareholder in that capacity not solely as a director or creditor of the company. In Wayde v New
South Wales Rugby League Ltd (1985) 180 CLR 459 (High Court) 7 case, the court concluded
that the decision of directors of the NSW Rugby Limited to reduce the number of competitors in
the Premiership Competition to twelve and to exclude Wests was taken in full knowledge of the
disability that the decision would place on Wests. But, it was found, the directors also knew that
that the larger competition was burdensome to players and that a shorter season was conducive
to better organization of the Premiership Competition. The court found that there was nothing to
suggest unfairness aside from the inevitable prejudice to and discrimination against Wests That
was insufficient to show that reasonable directors with the special qualities possessed by
experienced administrators would have decided that it was unfair to exercise their power in the
way the League's directors did. The action is still in good faith for the benefit of the company as
a whole.

Corporate governance can address disputes within the company, including, but not limited,
disputes between minority and majority shareholders, in ways that reduce the power of the
majority for the benefit of the minority. Corporate governance is framework of rules,
relationships, systems, and processes within and by which authority is exercised and controlled
in corporations8. It attempts to provide a framework for resolution of disputes and conflicts
between the members, company officers, and other interested parties 9. It lays down the rules
which are designed to ensure accountability and to promote the objectives of transparency and
enhanced shareholder value10.
6 Jervis, E., What is minority shareholder oppression? (Legal Vision, April 30, 2015)
<https://legalvision.com.au/what-is-minority-shareholder-oppression/>

7 Zammit, M., Shareholder Oppression (Black Stone Chambers)

8 Ciro, T., & Symes, C., Corporate Law: In Principle.(Thomson Reuters (Professional) Australia Limited,
9th ed. 2013) 115.

9 Ibid 115.
10 Ibid 115.

Companies can apply different strategies in setting up corporate governance for protecting
minority shareholders11. One strategy is to reserve a seat on the board of directors for a minority
shareholder, thus limiting the voting rights of controlling shareholders. Another strategy is the
trusteeship strategy wherein directors can represent the interest of the minority shareholders to
the extent that they are independent from the corporations managers and from the
corporations controlling shareholders.

Good corporate governance captures the rights of minority shareholders to be informed about
and to participate in general shareholders meetings and decisions relating to extraordinary
transactions. They investigate rules relating to insider trading and whether all shareholders of
the same series of a class are treated equally. And they increase the extent of disclosures and
transparency in decision making12.

Statutory regulations have not been very effective in achieving protection for shareholders, as
demonstrated by the very fact that very few derivative actions have been brought before the
courts13. It is true that self-regulation cannot adequately protect the minority shareholders from
exploitation. However, statutory regulations would be in no better position to protect the minority
shareholders and would probably be less effective on its own. In order to achieve the optimum
level of protection to the minority shareholders, companies are better off abiding by the existing
statutory regulations while implementing their own corporate governance strategies or selfregulations.

11 Law Teacher, Position of Majority And Minority Shareholders (November 2013)

<http://www.lawteacher.net/free-law-essays/business-law/position-of-majority-and-minorityshareholders.php?cref=1.>

12World Bank Group, Doing Business 2015: Protecting Minority Investors (2015)
<http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/AnnualReports/English/DB15-Chapters/DB15-CaseStudy-Protecting-Minority-Investors.pdf>

13 Ciro, T., & Symes, C., Corporate Law: In Principle.(Thomson Reuters (Professional) Australia Limited,
9th ed. 2013) 378.

Companies have unique structures, nature, business models, and shareholder profiles.
Statutory regulations are generic guideline that the government laid out to control and manage
its constituents. But these statutory regulations are not fully applicable to all types of
businesses. Self-regulations are custom made to fit the needs of companies to fill gaps that
statutory regulations fail to cover.

ASX Corporate Governance Council, Corporate Governance Principles and Recommendations

with 2010 Amendments14, are self-regulatory codes or guidelines that companies can adopt.
Companies can pattern their self-regulations after these codes to improve the standards of their
corporate governance. Adoption of a stringent self-regulation serves as an early warning
mechanism that signals company directors and officers that something is happening that may
require disclosure. It helps companies to ensure accountability and to promote the objectives of
transparency and enhanced shareholder value.

The government has instilled measures to protect the minority shareholders from potential
oppression. Companies are practicing good corporate governance to promote transparency and
shareholder value. The tools and laws were already laid out for shareholders to factor in
choosing in which company to invest in. More so, it is now up to the minority shareholders to
study, ask, learn, know and practice their rights in order to protect their interests in the company.

14 Ibid 117.