Minority Protection

Shareholders’ Freedom

As a general principle, the decision of the majority in value of the shareholders prevails. Shares are property and they may be used as the shareholder wishes, in his own interests. Subject only to the constraints mentioned below, shareholders have considerable latitude in relation to the manner in which they use their powers.

Generally, the votes of the bare majority in value of the shareholders carry a shareholders’ resolution. Exceptional decisions, such as those to change the company’s constitution require a special resolution of three-quarters in value of the shareholders concerned.

The majority in value of shareholders can appoint the directors. They can take control of a company and operate it to the detriment of the minority shareholders. They could, for example, choose to use their control to channel benefits and contracts towards themselves.

Shareholders do not generally owe fiduciary duties or duties of care to one another, other than in highly exceptional circumstances, where an unusual relationship exists between them, other than in their capacity as shareholders.

Constraints on Majority I

There are a number of constraints which may operate to protect the minority from the abuse of power by the majority. The principal constraints are dealt with in outline in this section, and in greater detail in the following sections.

Directors owe fiduciary duties and a duty of care to the company.  They must act in good faith in the interests of the company. There are several statutory obligations on directors to disclose conflicts of interests. Transactions for the benefit of directors and connected persons are subject to statutory controls and prohibitions.

The “majority” may not abrogate the individual rights of the shareholder which are conferred by the company constitution. They may not act unlawfully. The majority must use its powers in good faith for the benefit of the company as a whole.

Constraints on Majority II

Although the minority shareholder may not usually take legal action on behalf of the company, and may not recover for the indirect loss to the value of their shares. there are exceptions to this principle.The minority may be permitted to issue legal proceedings on the company’s behalf in exceptional circumstances, in particular where there has been a “fraud” on the minority,

The powers of the majority are limited by the possibility that the minority may be granted relief in a petition based on oppression on the disregard of their interests. In such proceedings, the court has a broad discretion to grant relief where it finds that the majority has abused its powers.

The minority may also seek to wind up the company on the basis that it would be just and equitable to do so.

Individual Shareholder Rights I

Individual shareholders’ rights and class rights set out in the constitution/ memorandum and articles of association go some way to protecting against the abuse of rights by the majority. A shareholder can assert and enforce his individual rights as a shareholder against the company and the other members.

Individual rights conferred on members under the constitution may be enforced as if they were given in an instrument by deed. Individual shareholder rights include, in particular, the right to receive notice of, participate and vote in shareholders’ meetings and to receive dividends which have been declared.

Individual Shareholder Rights II

A shareholder may restrain a breach of the constitution. He may restrain unlawful action. The shareholder of a company with objects, such as designated activity companies, may restrain acts which are outside the powers of the company.

Most individual shareholder’s rights are participative and they may be of little avail if the majority is determined to act in their exclusive interests. His rights may be exhausted by participation in a general meeting in which he is outvoted.

A shareholder may have rights under a shareholder agreement.  This may provide for significant protections, depending on its terms.They can be enforced in accordance with the general principles of contract law.

Illegal Action

A shareholder may restrain unlawful action by the company.  Unlawful action by the company constitutes an inherent breach of the contract constituted by the constitution. An unlawful act cannot be ratified.

The courts may grant an injunction on the application of any shareholder against the company to restrain unlawful action on the part of the company and the company’s controlling shareholders.  The courts are prepared to restrain apprehended unlawful action.

A shareholder may bring an action in his own name or in the name of other shareholders where there is no other means open to have the illegal action declared void. In some cases, the courts have been willing to permit the minority to sue on behalf of the company for a declaration that an action or apprehended action is illegal.

A shareholder in a company with objects may take action to restrain a breach of the company’s objects. Since the Companies Act 2014 came into force in full, private limited companies may not have objects The right of shareholders of other types of company to take legal action to restrain a breach of the objectives in confirmed.

Derivative Action

Where wrong has been done to the company, the proper claimant is the company itself.  Shareholders may not maintain an action themselves nor may they do so on the company’s behalf. It is a matter for the company itself to take legal action for recovery or compensation. It has the exclusive right to recover.

Where a company’s actions are within powers of the company (where applicable) and are not unlawful, the majority of the shareholders and their appointees as directors can usually decide what course of action is taken (or not) by the company. Provided that acts are within the company’s powers and are not unlawful, they may be ratified, formally or informally by the majority.

The minority may be permitted take a derivative action on behalf of the company, where the majority (as directors or shareholders) has abused its powers.The conduct on the part of the majority must be highly inequitable. This is often referred as “fraud on the minority”.

The derivative action allows the company to take action where its controllers are unwilling to do so, typically for the very reason that they are the party at fault.vIt is based on conventionally legal grounds of wrongdoing such as breach of directors’ duties. It is primarily for the benefit of the company and not the shareholders directly.

Oppression I

The principal remedy for a minority shareholder who is being treated grossly unfairly is to apply to the court for an order on the basis that there has been oppression or disregard of his interests. Where a shareholder shows that the affairs of the company are being conducted in a manner which is oppressive to him and in disregards of his interests as a shareholder, the court may make remedial orders.

Oppressive conduct usually implies burdensome or wrongful conduct. It implies a lack of fair dealing. A single act may constitute oppression. Hearings can be in private, if necessary.

Relief may be sought where the minority is being excluded from participation in the management of a small closely held company. The existence of the possibility of making an application based on oppression may lead the shareholders voluntarily, to settle the dispute.

Oppression II

Where it finds oppression, the court can make such orders as it believes to be just and equitable. The court may order the winding of the company with the consequent realisation of its assets and the distribution of the proceeds to shareholders. It may require that the majority purchase out the minority shareholder so that they are given the value of their shares. It may be ordered that the shares be purchased at a fair price, which may include an element of compensation.

The statutory remedies for oppression and disregard of interests may give relief in some cases.  However, they focus principally on the interests of the applicant shareholder, rather than on the loss and damage caused to the company. It is available exceptionally, only and it is somewhat discretionary and nebulous in scope. It focusses primarily on the interests of the shareholder.

Winding up I

The minority can seek to have the company wound up by the court on the basis that it is just and equitable to do so.  Generally, a resolution of the directors or a majority of shareholders is required to initiate winding up.  Winding up in itself would usually involve the breakup and sale of the company’s assets, with a substantial loss in value.

It may be sought as an alternative to a remedy for oppression. If the court finds that the affairs of the company or the powers of the directors are being exercised in the manner oppressive to any member or in disregard of his interests, it may order the winding up as a remedy for oppression in itself of the Company.   A court may dismiss a petition for winding up if it is satisfied that relief for oppression is more appropriate.

Partners owe each other duties of good faith.  In contrast, shareholders may be as selfish as they wish with their shareholding. The shares are property rights. Directors owe fiduciary duties, which imply obligations of good faith.  However, they are owed to the company as a whole, and not to individual shareholders.

Winding up II

The courts are rarely willing to find that shareholders are each other’s partners. The adoption of a company law structure is inconsistent with a partnership in itself.  Arguments that a particular relationship between shareholders, constitute a partnership, have not generally been accepted by the courts.

The courts have granted petitions to wind up where there is a breakdown of trust and confidence.  This may occur in the case of a deadlock between two finally balanced shareholders. The courts have held that it may be just and equitable grounds to order winding up where the shareholders had formed the company on the basis of a personal relationship of mutual confidence and understanding as to the extent and participation in management, which has broken down.

In smaller quasi-partnerships, an underlying confidence, business relationship and trust may be a characteristic of the company. Where this has broken down and, for example, one shareholder/director shareholder is frozen out, there may be oppression or just and equitable grounds for winding up. Even in the absence of oppression, recourse may be had to the “just and equitable”  discretionary basis for winding up a company, where a quasi-partnership relationship has broken down.

Winding up III

The courts have, in the exercise of their powers on the “just and equitable” ground, indicated that each case must be determined on its own facts. The courts may order winding up on the basis that it is “just and equitable” where the there is a disappearance of “substratum”.

This is may be so because:

  • the subject matter of the company is gone;
  • the object for which it was incorporated has substantially failed;
  • it is impossible to carry on the business of the corporation except for at a loss;
  • there is aa justifiable lack of confidence in the management of the corporation;
  • there is deadlock.

Winding up is often a crude option as it may lead to the break-up of the business and the sale of component parts.  It is less easy to secure break-up as a going concern in winding up, than under a court-ordered partition / buy back where oppression has been found.

References and Sources

Primary References


Companies Act 2014 (Irish Statute Book)

Companies Act 2014: An Annotation (2015) Conroy

Law of Companies 4th Ed.  (2016)  Ch.11   Courtney

Keane on Company Law 5th Ed. (2016) Ch.26 Hutchinson

Other Irish Sources

Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury

Introduction to Irish Company Law    4th Ed. (2015) Callanan

Bloomsbury’s Guide to the Companies Act 2015      Courtney & Ors

Company Law in Ireland 2nd Ed. (2015) Thuillier

Pre-2014 Legislation Editions

Modern Irish Company Law   2nd Ed. (2001) Ellis

Cases & Materials Company Law 2nd Ed. (1998) Forde

Company Law 4th Ed. (2008)  Forde & Kennedy

Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy

Companies Acts 1963-2012   (2012)  MacCann & Courtney

Constitutional Rights of Companies   (2007)  O’Neill

Court Applications Under the Companies Act (2013) Samad

Shorter Guides

Company Law – Nutshell 3rd Ed. (2013) McConville

Questions & Answers on Company Law (2008)        McGrath, N & Murphy

Make That Grade Irish Company Law 5th Ed. (2015) Murphy

Company Law BELR Series (2015)   O’Mahony

UK Sources

Companies Act 2006 (UK) (Legilsation.gov.uk)

Statute books Blackstone’s statutes on company law (OUP)

Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington

Company Law in Context 2nd Ed. (2012) D Kershaw

Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam

Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington


UK Practitioners Services

Tolley’s Company Law Handbook

Palmer’s Company Law