News Update, Winter 2000 - Company Law

Previous articles in In Brief have discussed the problems of a minority shareholder in a company who falls out with the majority. A further case addresses whether a minority shareholder can be forced by the majority to sell his shares (please see endnote 1).

Courts have a discretion under section 459 of the Companies Act 1985 to take certain actions including ordering that shares be transferred 'when a company's affairs have been conducted in a manner unfairly prejudicial to some part of the members'. This provision is generally regarded as a way of giving a minority shareholder some protection against the might of the majority. However, in this case it was the three majority shareholders, who had sacked the minority shareholder from his employment and obtained his resignation as a director, who wanted to use section 459 to force the minority shareholder to sell his shares as well. The Court was unimpressed and refused to grant the order. Being a 75 per cent majority, the Court concluded they had the power to bring the prejudicial state of affairs to an end. Moreover the remedy sought was confined to situations where the conduct complained of was committed by the company rather than by an individual.

Points to watch: The case shows that a petition alleging unfair prejudice is a shield for the minority shareholder and cannot be used as a sword by the majority. Readers may recall from the Summer 99 issue of In Brief that the DTI has published a consultation document which includes the proposal that, when a director holding 10 per cent or more of the voting shares in a company has been ousted, unfair prejudice will be presumed. Unless the Court decides otherwise, the majority will then be required to buy the shares.

Two recent cases look at how it is possible to remedy procedural oversights in the running of a company - these involve, respectively, payments to directors and amendments to a pension scheme.

The first case (please see endnote 2) involved a Mr Wright who had an air conditioning company for some years before selling the shares to another company, Wheway plc. After the sale Mr Wright entered into a service agreement terminable on 12 months notice. After a year Mr Wright decided to retire and his service agreement was replaced by another agreement which Mr Wright managed to negotiate with Wheway's managing director which provided for a 'life presidency' for Mr Wright and payments for life. Section 319 of the Companies Act 1985 requires, however, that any contracts with directors of over five years in length have to undergo certain formalities including shareholder approval. This never happened. Wheway plc itself was subsequently acquired and the new owner, Atlas Wright Ltd, sought to exploit this oversight to stop further payments to Mr Wright.

Mr Wright's response was that, as Wheway's managing director had been fully authorised by his company to enter into this deed, he could himself rely on a common law principle of company law to the effect that it was open to the shareholders, for whose protection the five year limit was designed, to waive such formalities. The Court agreed with Mr Wright, who saw no reason why the shareholders' power to waive formalities should not apply to the restriction on the length of directors' contracts. Wheway, the sole shareholder of the company, had, acting through its managing director, approved the contract and this constituted the necessary resolution.

A further decision (please see endnote 3) concerned the status of an oral agreement by a majority of the directors of a company to the terms of a draft board resolution suggesting certain changes to a company pension scheme. The minutes of the next board meeting recorded that the resolution had been passed but no formal board resolution was in fact ever taken. Was the decision valid and if not could it be validated by the company?

The Court decided that acts of the directors could only be considered to be acts of the company if the decision had been unanimous - this decision was therefore neither a board nor a company decision. However, the board could ratify the decision simply by confirming the minutes of the previous meeting at the succeeding board meeting. The decision would be effective at the meeting at which the minutes of the meeting recording the passing of the resolution were approved.

Points to watch: In the above instances the absence of formalities was not considered to be fatal to the matters in hand - but the company did have to go to court to confirm it! This only serves to reiterate the importance of ensuring that matters are fully approved by the board, that minutes are agreed before they are approved for signature and that, where necessary, shareholder approval has also been obtained.

The extent to which accountants and other advisers owe duties to shareholders and directors of companies is a controversial and changing area. A further case (please see endnote 4) demonstrates how each case will depend on the individual facts.

The individual shareholders and directors were not parties to the retainer between the company and a firm of accountants acting as auditors and management accountants. However, they claimed that they had received negligent advice from the firm of accountants over the repayment of some borrowings and that they had lost out personally as a result.

The established principle of law is that auditors do not, in respect of their audits, owe a duty of care to anyone other than the company itself save in exceptional circumstances. However, in this case it was established that the firm of accountants were not simply acting as auditors, they were rendering much broader accounting services to the company. On the facts it was considered arguable that a duty of care was owed by the firm of accountants to the shareholders/directors in giving advice regarding the repayment of the borrowings. The firm of accountants therefore failed in their application to strike out the claim on the ground that the pleadings did not disclose a cause of action. However, the shareholders would still need to prove that the firm of accountants intended that they personally relied on the services being provided to the company and did in fact rely on the services.

Walker Morris Client Newsletters can serve only to alert the reader to recent developments and to act as a preliminary, but no comprehensive guide. They should not therefore be relied upon in place of specific advice.

1. Morris and Others v Hateley and Another: Times 10 March 1999
2. Wright and another v Atlas Wright Europe Limited: Times 3 February 1999
3. Municipal Mutual Insurance Ltd v Harrop and others [1998] 2 BCLC 540
4. Siddell and another v Smith Cooper and Partners: Court of Appeal 18 December 1998 (Unreported)