Remedies Available To Aggrieved Minority Shareholders In A Company: A Review Of The Supreme Court's Decision In Mainstreet Bank Registrars Ltd And Ors V. Temitope O. Oshinuga (2024) LPELR-62980 (SC)

Introduction

A fundamental principle of company law is that a company is a separate legal entity distinct from its shareholders and directors. This distinction raises an important question: who has the right to sue when a wrong is committed against the shareholders or the company?

Section 341 of the Companies and Allied Matters Act 2020 (CAMA), in line with the rule in Foss v. Harbottle, provides that where a wrong is committed against a company, it is the company that possesses the right to sue and that an individual shareholder would not have the right to sue in their name. For ease of reference, section 341 of CAMA, 2020, provides as follows:

"Subject to the provisions of this Act, where an irregularity is made in the course of a company's affairs or any wrong is done to the company, only the company can sue to remedy that wrong and only the company can ratify their regular conduct."

Instructively, the exception to Foss v. Harbottle is also codified in section 343 of CAMA 2020, which provides that a shareholder may approach the Court for an injunction or declaration to restrain the company or its officers from:

• Entering into any transaction which is illegal or ultra vires;
• Purporting to do by ordinary resolution any act which by its articles or this Act required to be done by special resolution;
• Any act or omission affecting the applicant's individual rights as a member;
• Committing fraud on either the company or the minority shareholders where the directors fail to take appropriate action to redress the wrong done;
• Where a company meeting cannot be called in time to be of practical use in redressing a wrong done to the company or to minority shareholders;
• Where the directors are likely to derive a profit or benefit, or have profited or benefitted from their negligence or from their breach of duty; and
• Any other act or omission, where the interest of justice so demands."

In the recent decision of Mainstreet Bank Registrars Ltd and ors v. Temitope O. Oshinuga (2024) LPELR-62980 (SC), the Supreme Court of Nigeria addressed the instances under which minority shareholders can validly file a lawsuit against a company and its majority shareholders to protect their rights as shareholders. The Supreme Court also discussed the rule in Foss v. Harbottle, as well as its exceptions.

Summary of the Facts of Mainstreet Bank Registrars Ltd and ors v. Temitope O. Oshinuga

The Respondents were former employees and minority shareholders of Mainstreet Bank Limited ("the company"). The Respondents sued the company and its directors ("the Appellants") for unlawfully transferring the majority shares in the company to Afribank Bank Plc without the consent of the minority shareholders. They also alleged that the appointment of new directors was made without giving them the statutory notices of the meeting where the directors were appointed. Finally, they alleged that dividends were paid to the majority shareholders, while the minority shareholders received no payment, and that the company reduced its share capital without consulting them.

Therefore, the Respondents sought various reliefs from the Federal High Court, nullifying the Appellants' actions and protecting their rights as minority shareholders of the company.

The Appellants challenged the suit by filing a Preliminary Objection, arguing that the Respondents lacked the locus standi (legal standing) to file the lawsuit because they did not provide any evidence to establish the fact that they were shareholders of the company and that they did not provide any documentary evidence to establish that they had secured the consent of the other minority shareholders to file the lawsuit in a representative capacity. Instructively, the Appellants did not file their Statement of Defence before filing their Preliminary Objection.

The trial court dismissed the Preliminary Objection on the ground that the Appellants' failure to file a Statement of Defence in response to the Statement of Claim means that they had admitted the facts contained in the Respondents' Statement of Claim. Therefore, since the Respondents had alleged in their Statement of Claim that they were shareholders of the company, the Court was bound to accept this fact. However, the trial court eventually struck out the lawsuit due to the Respondents' failure to issue a pre-action notice before filing it.

The Appellants were dissatisfied with the trial court's decision, and they appealed to the Court of Appeal. The Court of Appeal upheld the trial court's judgment, and the Appellants appealed to the Supreme Court.

The Supreme Court upheld the Court of Appeal's decision and held that the Respondents had the locus standi to file the lawsuit in their names because they fell within the exceptions to the rule in Foss v. Harbottle. The Supreme Court further held that the mere fact that the Respondents had pleaded the irregular and illegal actions of the company in their Statement of Claim was enough ground for them to file the lawsuit in their names for the protection of their rights as shareholders of the company. Mohammed Lawal Garba, JSC, at P. 22-23 Para D-A of the judgment, held as follows:

"To benefit from the exception to the rule in Foss v. Harbottle (supra), the minority shareholder(s) must plead irregularities and/or illegalities in the matters of the internal management of the company and proceed to disclose in the pleadings that the majority shareholders are oppressive in the irregular conduct of the affairs of the company to the detriment of the minority shareholder. In other words, if the majority shareholders are abusing their powers, and are depriving the minority shareholders of their rights the minority shareholders are entitled to sue to maintain their rights."

Furthermore, the Supreme Court held that the Appellants lacked the right to challenge the Respondents' legal basis for filing the lawsuit in a representative capacity, as the Appellants were not members of the group that the Respondents claimed to be representing.

The Supreme Court concluded that where a company is controlled by the very persons alleged to have committed the wrong, it would be futile to expect the company to sue itself. In such circumstances, the law permits a minority shareholder to initiate the action in their name against the company.

Key Takeaways from the Supreme Court's Decision in Mainstreet Bank Registrars Ltd and ors v. Temitope O. Oshinuga

1. The courts will not hesitate to uphold the rule in Foss v. Harbottle in deserving circumstances since the rule has been recognised and adopted in section 341 of the Companies and Allied Matters Act 2020 (CAMA).

2. Minority shareholders have the right to file a lawsuit against a company and its directors if they can establish that the majority shareholders of the company are running the company in an illegal, irregular, or oppressive manner. However, minority shareholders must ensure that they bring their claims against the company and its directors under one of the grounds specified in Section 343 of CAMA 2020.

3. Minority shareholders must provide the company, its directors, and the majority shareholders with a pre-action notice before filing a lawsuit, as the Court will strike out their lawsuit if they fail to do so.

4. Any company sued by its minority shareholders must ensure that they file their Statement of Defence alongside their Preliminary Objection, as the Court will deem the Statement of Claim as being uncontested if the company merely files a Preliminary Objection without filing its Statement of Defence.

5. Where the minority shareholders allege that they have filed the lawsuit as representatives of the other minority shareholders, the majority shareholders or the company will be precluded from challenging this assumption since they are not members of the class of minority shareholders.

6. Minority shareholders must provide sufficient proof to establish their status in the originating court processes.

Conclusion

This decision reinforces that Nigerian law provides robust protections for minority shareholders and enables them to challenge oppressive acts when the majority controls the company and refuses to act in the best interest of the company and its shareholders. It also affirms that the rule in Foss v. Harbottle should not be applied rigidly to the detriment of aggrieved minority shareholders.

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