Understanding Agency Conflicts in Corporations

Achieve good relationship and promote minority shareholder rights

Shareholder based protection as a concept has now evolved to a degree in the UK company law with an emphasis on the “enlightened shareholder value” approach, which requires corporate managers for considering human rights issues when making decisions that may impact the company and the stakeholders in the long run. The need for shareholder protection comes from the fact that in companies, agency conflicts do take place and such conflicts of interests can emerge between the management and the shareholders, and the major shareholder and minority shareholders. The Anglo-American system has shareholder based system especially with the emphasis on corporate governance and the main objective of corporate law in the US and the UK is to protect corporate investors from being expropriated by the firm’s management. There is a difference between shareholder protection and stakeholder protection systems, with the former system prevailing in the Anglo-American system and the latter prevailing in European and Asian countries. Stakeholder based systems have blockholder-oriented, labour-oriented, or state-oriented systems where the corporate law works to prevent the expropriation of investors by the management by monitoring by large shareholders, creditors or employees. In stakeholder based system, there is less need to address the problem at the regulatory level since it is the large shareholders, creditors or employees that do the monitoring of the activities of the companies. In general, there are three broad models of protection in corporate law that are seen in different countries: first, corporate shareholders can be protected from being expropriated by the firm’s management; second, minority shareholders can be protected from being expropriated by large block holder shareholders (which is the focus in this chapter); and third, creditors may be protected from being expropriated by the firm’s shareholders. Although the UK follows a shareholder based protection and not a stakeholder based protection system as is applied in the European and many Asian countries, an argument may be made for also including some elements of the stakeholder based protection as a part of a flexible approach towards governance. For example, employee participation can be a way for implementing protective mechanisms in the UK companies but this may arguably work only for listed and large private companies. In such companies, employee participation can be ensured by the introduction of formal employee advisory panels, employee share ownership schemes and special rights to appoint some directors. Since small private companies do not likely have larger employee pool, it is likely that this may not be a useful mechanism for the small private companies. In the UK, the shareholder based protection system is largely applied through the corporate governance model. There are also other systems of protection of shareholder rights, predominant amongst which are the unprejudicial conduct petitions and derivative action remedy. This chapter details the way in which the good relationship between majority and minority shareholders can be achieved and how minority shareholder rights can be promoted using these methods.

MINORITY SHAREHOLDERS PROTECTION

In the common law, minority shareholders have traditionally received protection against the majority shareholders through suits against the actions of the majority under ultra vires principles, breach of shareholders’ personal rights, or breach of the articles of association. These protections are available for minority shareholders in the company law itself and have been important aspects of the remedies available to the minority shareholders in the UK corporate law. However, it is important to understand how the company law provides protection to minority shareholders while balancing the other important principles of company law, such as, separate identity of the company. In this respect, there are dynamics in the corporate law which balance the interests of the minority shareholders with the interests of the company and the majority shareholders. In some ways, these dynamics can also lead to the tilting of the balance away from the minority shareholders’ interests. This is manifested in the way minority shareholders may be limited or restricted in taking actions in some contexts. Prior to engaging with the ways in which minority shareholders receive protection in the UK private companies, it would be useful to get an overview of how this protection is provided under different categories of remedies that are provided under the UK company law. Company law rules limit minority shareholders’ rights to access actions against wrongdoers against the company under the Foss rule. The Foss rule, it is considered that the company being a distinct and separate person, even from its shareholders, it is the only proper plaintiff to file suits against wrongdoers. This principle is then derived from the fundamental principle of company law in common law, which relates to the idea of corporate personality. Another restriction on the minority shareholders’ to access courts is in the form of the majoritarian or the majority rule principle, which considers that decisions taken by the majority consensus as per the constitutional arrangements of the company are the basis for the effective functioning of the company. These restrictions on the rights of minority to access courts to sue the wrongdoers against the company can lead to the conclusion that the concept of minority shareholder protection is only ostensibly recognised in the common law, but limited in actual protection offered to the minority shareholder; however, this would be a hasty conclusion. There is a need to explore the ways in which minority shareholders can still take action against the majority shareholders or directors. It has been argued that the Foss rule exposes the minority shareholders to risk by restricting actions against majority shareholders or directors in the company. This argument may be justified on the basis of the caselaw in which minority shareholders were not allowed to take action due to the application of the Foss rule. This was the case in Johnson v Garewood, in which case derivative action remedy was refused even though the directors’ wrongdoing had led to losses for the company; the House of Lords was of the considered opinion that the company was the proper plaintiff to take such action and even the fact that the company failed to take the action did not lead to the right being given to the minority shareholders to take such action. Due to the operation of the Foss rule, there may be cases where the company’s failure to take action against the wrongdoer director or majority shareholders may go unaddressed. In such cases, the company will not get any remedy for the losses suffered by it. The idea that only companies be the proper plaintiff to take action in such cases or the idea that decisions on whether such actions can be taken be only taken by the majority consensus can then lead to a situation that is not conducive to the interests of the company and by extension may also impact the interests of the minority shareholders. Such cases may even involve mismanagement or breach of duties by directors that lead to loss to company, without any action taken to avoid such action or to make the directors account to the company or provide remedy for its actions. It is also noteworthy that for the company to act against the majority shareholders when it is the latter that have taken decisions that are harmful to the company, decision has to taken by either the board of directors or the shareholders and it may be the case that the majority shareholders or the directors are implicated in the wrongful act and this may predictably lead them to not favour any action. There are practical impacts of this issue including the possible continuance of mismanagement. This may be one of the reasons why there can be an argument for strengthening shareholder remedies against the directors or majority shareholders. It remains the case however that courts may disallow minority shareholder action on the ground that an internal remedy for mismanagement is available in the articles of association, regardless of the fact that such remedy is of not much import if the directors or shareholders decide against taking such remedies.

The application of the Foss rule has not always led to the conclusion that in no case can the minority shareholders take action against the wrongdoers because there have also been exceptions to the Foss rule, which have been developed by the courts under the common law and which are now available under the statutory law as well. Arguably, one of the purposes for the courts to develop such exceptions is to provide greater protection for the minority shareholders’ interests. The areas under which the courts traditionally extended remedies to the minority shareholders were where the actions of the majority or the directors were ultra vires the company’s constitutional documents, related to the harm to the members’ personal rights, or where the actions are in the form of ‘fraud on minority’. The courts have been able to develop these exceptions based on the premise that the Foss rule is not an “inflexible rule” which cannot be relaxed when “necessary in the interests of justice.” The fraud on the minority exception is allowed to the Foss rule, so as to provide remedy to the minority shareholders where the majority’s actions are in the nature that they may be considered to be fraud on minority. However, such actions will only be allowed where actions are not capable of ratification by the majority shareholders. Where actions are capable of ratification then regardless of the actions of the majority shareholders and the directors being fraudulent, the courts may not allow such action if the articles of association allow such actions to be ratified by the majority. To consider a hypothetical case where the majority shareholders are also directors and have breached duties of directors, then the remedy may not be available to the minority or the company. Courts have to also create a balance between the interests of the company and the minority shareholders and the interests or rights of the directors. Thus, there is a need to draw a distinction between the negligent actions of directors, which may lead to the loss to the company but which are not committed by the directors with the purpose of making personal gain and the actions of directors that are committed for personal gain and the directors are committing these acts with the motive to make a personal gain. It becomes irrelevant whether the actions of the directors were unintentional or negligent if they stand to make personal gain. Therefore, the courts will allow the minority shareholders to take action if the facts show that the directors sought to benefit at the expense of the company. The minority shareholders must therefore be able to establish in such cases that there was an intentional or negligent breach of duty with the result that the director stands to benefit at the expense of the company.

CORPORATE GOVERNANCE CODE

Prior to the discussion on how the corporate governance code is used for the protection of minority shareholders’ rights, it would be interesting to consider the theoretical background against which corporate governance code can be considered. This theoretical background relates to the separation between ownership and control in a company and how this impacts the agency problem in the company. One of the prominent theories in this area is the Berle-Means thesis, which was first articulated in ‘The Modern Corporation and Private Property.’ The Berle-Means thesis states that when ownership and control is separated in a limited liability company, the owners/shareholders become reliant on the directors to represent their interests but while they have some supervisory role on the directors, this role dilutes and becomes ineffective over a period of time. The separation of ownership and control is a necessary fact of limited liability companies because there is a distinction between ownership over the company and the management of the company. In the British companies, such distinction between ownership and management has become a fact since the “function of managing the company has become to some degree specialised and separated from that of providing risk capital to the company.” Regardless of the separation of ownership and control in limited liability companies, shareholders do exercise supervisory powers over a board of directors albeit such control is seen only in certain circumstances. For example, shareholders have the power to alter the Articles of Association, through which they can alter the powers of the directors. Furthermore, there are certain decisions that the directors cannot take without approval of the shareholders in the general meetings. Not only are the directors under a duty to inform the shareholders about certain facts regarding the decisions to be taken, the shareholders also have the right to expect that accurate information is fairly presented. One of the methods by which the shareholders can exercise control over the directors is via the disclosure regime because the principle of shareholders’ primacy requires that the directors provide accurate and transparent information to the shareholders. The role of the shareholders is important because the company is governed indirectly through the majoritarian rule of the shareholders and not just because of the role of the managers of the company. Judiciary has also supported this in Re Chez Nico (Restaurants) Ltd, where Browne-Wilkinson VC observed that “in certain special circumstances fiduciary duties, carrying with them a duty of disclosure may arise which place the directors in a fiduciary capacity vis-a-vis the shareholders.” The placing of the directors in a fiduciary position to the shareholders may also be the basis for devising mechanisms within the corporate governance code for enhancing the protections of shareholders, particularly, the minority shareholders. However, it is also a point worth noting that minority shareholders may not be able to exert the same level of control over the actions of the directors as the majority shareholders can, and this can then provide a distinction between minority and majority shareholders where the former may need more enhanced protection. Such enhanced protection is provided under the law; for example, minority shareholders can take the recourse to derivative actions under Companies Act 2006, part 11 read with Section 260 (1). However, the efficacy of such regulatory based approaches can be critiqued for their inability to provide remedy in all cases involving harm to shareholders’ rights; for example, Section 260 (1) allows the derivative action to proceed only where the shareholder has taken permission from the court to continue with such action. This is particularly problematic for minority shareholders who may not been able to proceed with action under Section 260 because the majority shareholders have ratified the actions of the directors. This can then raise problems for minority shareholders who are not able to get remedies for the loss suffered by them due to the wrongful actions of the directors due to the nexus between the majority shareholders and the directors, which is also explained in terms of the relations between corporate insiders and outsiders, with the minority shareholders being outsiders. Nevertheless, it is important to consider the position of the minority shareholder and how it is impacted by the actions of the directors and majority shareholders because they all form part of the same corporate structure and both majority and minority shareholders are directly interested in the financial affairs of the company, making their interest an important consideration under Section 172 of the Companies Act 2006. Section 172, also called as the ‘enlightened shareholder value provision’, requires that the director must have regard to the long term consequences of his acts on the interests of the shareholders and “must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.” Section 172 does not distinguish between the majority and minority shareholders and gives equivalence to the interests of all categories of shareholders in the company. Section 172 is also peculiarly linked to corporate governance code because in requiring that the director consider the interests of shareholders, company employees, and the community and the environment, it also creates a link to the development of more transparency and accountability to these disparate stakeholders, which is also one of the aspects of Corporate Governance Code. This is explained by Tricker who writes that “if management is about running business; governance is about seeing that it is run properly.” Thus, transparency and accountability are some of the important aspects of governance as distinguished from management, and which are also necessary to understand the ways in which corporate governance code seeks to draw a distinction between the duties of the directors as managers and duties as those in fiduciary position to the other stakeholders in the company. How this leads to the better management of relationships between the minority shareholders on one hand and the majority shareholders and directors on the other hand, is one of the crucial parts of discussion in this chapter. A number of independent reports that delved on the link between directors’ duties and and interests of the shareholders have led to the adoption of Corporate Governance Code in the UK, which suggests that one of the important aspects of the code was the management of the relationships between the corporate constituents, including minority shareholders. While reports by Jenkins Committee, and Hampel Committee, emphasised on duties of directors and directors’ accountability to shareholders respectively, it was the Cadbury Committee report that first clearly articulated the responsibility of the directors towards governance of the company. In the starting point of how the Corporate Governance Code came to be developed in the UK, it is necessary to first engage with the Cadbury report and assess whether this report laid the foundations for the improvement of relations between minority shareholders and other constituents of the company.

The Cadbury Committee report is considered to be one of the seminal works on corporate governance because it has had immense impact in not just the drafting and shaping of the corporate governance code in the UK but also elsewhere. Interestingly, Cadbury Committee report suggested a compliance based model to governance of companies as opposed to a more rigid regulatory based model, preferring a flexibility to governance, which is also relevant to how far the code based on this report is able to protect minority shareholders. The report noted: “We believe that our approach, based on compliance with a voluntary code coupled with disclosure, will prove more effective than a statutory code. It is directed at establishing best practice, at encouraging pressure from shareholders to hasten its widespread adoption, and at allowing some flexibility in implementation. Statutory measures would impose a minimum standard and there would be a greater risk of boards complying with the letter, rather than with the spirit, of their requirements.” In context of making minority shareholders more empowered to address the breaches of their duties by directors or addressing the failure to keep the company’s best interest at heart by the majority shareholders, the Cadbury Committee report may arguably fall short since it emphasised on ‘encouragement’ thus relying on the good will of the majority shareholders and directors to do what it right by the company and its stakeholders rather than making certain parts of their actions mandatory as this discussion will also delve into. Thus the principle purpose of adopting the Code appears to be to encourage agents (directors and majority shareholders) to voluntarily adopt best practices that lead to protection of the interests of the principals (minority shareholders). The emphasis is on reflexivity of the agents to lead to right decisions in terms of governance rather than mandatory action. This is also reflected in the adoption of the principle of ‘comply or explain’, in the corporate governance code, which allows the directors to avoid compliance with the code as long as they are able to explain why they should not have to comply. It may be argued that such approach does not appear to strengthen minority shareholder protection if there is a built in presumption in the code that there are circumstances under which directors may be able to avoid the adoption of these best practices in the code. If there are certain identified best practices in the code, it is a matter of argument that there should be no circumstances under which these best practices can be deviated from since to do so would be to counteract the very necessity of having such identified best practices. Brenda Hannigan has written that “the starting point, however, is that good corporate governance primarily stems from internal structures.” The reliance on the strong internal structures in the company is more or less based on the board of directors and shareholders’ meetings and how these internal structures interact with each other. This is also related to the public listed companies more than it is to the private companies because the structures of primate limited companies, particularly, the small companies, are formed in peculiar ways. It may be noted that the Cadbury Report also defined corporate governance in terms of companies being directed and controlled with the board of directors responsible for the governance of the company and the shareholders ensuring that the appropriate structures is in place thus emphasising on the shareholders’ power to appoint directors and auditors in the company. Due to this, it is generally accepted that there is a greater focus on the public limited companies in the UK Corporate Governance Code. The overemphasis on the public listed companies in the UK Corporate Governance Code can be seen in the number of regulatory legal rules in corporate governance which are meant to regulate public companies. Examples can be found in the Code as well as the legislation. Rules such as, Listing Rules, the Disclosure and Transparency Rules and the Prospectus Rules, which are enforced by the Financial Services Authority are all specifically related to the public listed companies and do not have much relevance to private companies. The justification for the emphasis on the public listed companies in the UK corporate governance is related to the market based system in the UK where “securities markets share centre stage with banks in terms of getting society’s savings to firms, exerting corporate control, and easing risk management.” Due to the fact that investors in the UK can be private individuals whose savings are invested in companies listed on the stock market, there has been a focus on the need to protect their interests in companies where widely held shareholdings are also common. It is also considered that to an extent the UK adopts a market-based outsider model of corporate governance, whose central features can be described as follows: “Diffuse equity ownership with institutions having very large shareholdings; shareholder interests are considered the primary focus of company law; there is an emphasis on effective minority shareholder protection in securities law and regulation; there is a stringent requirement for continuous disclosure to inform the market.” The corporate governance norms then emphasise on the need to protect the shareholders whose interests are the primary focus of company law and whose interests are protected by an emphasis on principles such as, disclosure. Since private companies are not structured in the same way with reference to shareholders being investors through the stock market, there is little need then to protect their interests through the same scheme as is applied in the public companies. Thus, it can be seen that in the UK, there is a focus on listed companies through the Listing Rules, the Disclosure and Transparency Rules, and even through the UK Corporate Governance Code.

In private companies, owners continue to play a significant direct role in management as compared to in public listed companies, where there are large numbers of outside minority shareholders and the companies are run by professional managers. Therefore, the structures of the public listed companies see a clear delineation between ownership and control of the companies, which may justify the use of various corporate governance rules in order to ensure that those in control do not harm the interests of the owners of the company who may not have much idea about or say in the management of the company. There is also the issue of blanket application of the rules to private companies in the same way as they are for public listed companies, which may not be appropriate for the latter. This may be said of the disclosure and audit requirements which are enforced for the purpose of ensuring greater transparency and accountability. Judith Freedman has argued that disclosure and filing requirements should not be imposed on the small private company since it may not be appropriate for such companies being of different form and structure than public company where ownership and management is more clearly distinguished from each other. However, if such norms are not imposed on the small companies then there is reduction of transparency and accountability, which are the necessary aspects of corporate governance. On the other hand, one may ask to whom private companies owe transparency and accountability since these companies do not have the same principal-agent problem as is seen in the small private companies. The answer to that question may be that the small company may still owe some transparency to the third parties that enter into contracts or relations with the small company. Be it as it may, company law, and corporate governance code, is structured in a way that the level of disclosure requirements for private company is not at par with the public company. Although, the UK has mandatory disclosure requirements and companies have to file their statements with some information that is mandatory for disclosure, the extent to which this applies to the small private company is not the same as it is for the public company. As also discussed in the previous chapter, the Fourth Company Law Directive (78/660/EEC) did require limited liability entities to file audited annual financial statements at the public registry and the same obligations were incorporated in the Companies Act 2006. For small companies, the Micros Directive (2012/6/EU) exempts micro-entities from certain financial reporting requirements that are applied to small undertakings and the same is applied in the UK under the FRSSE (Financial reporting standards for smaller entities). Since this was discussed in the previous chapter, it is not necessary to go into the details of the way these requirements are applied and it may be simply stated that there is indeed difference between small private companies and the public companies and that small companies can simply submit ‘abbreviated accounts’. Thus, in terms of disclosure and transparency requirements, there is a difference for the small private company. This then brings the discussion to whether there are provisions in the Corporate Governance Code, which can be relevant to the relationship between the minority shareholders and the other constituents of the small company.

UNFAIR PREJUDICE REMEDY

Minority shareholders may get remedies in private companies on the basis of unfairly prejudicial conduct by the majority shareholders or directors which then leads to loss for the minority shareholders. Such unfairly prejudicial conduct can be in the form of mismanagement of company affairs, misappropriation of company assets, appropriating financial benefits from minority, exclusion of the minority shareholder from company’s management, refusal to pay dividends or do proper allotments of shares. There are many ways in which the unfairly prejudicial conduct of the majority shareholders or directors may be manifested. There are statutory remedies available for such unfairly prejudicial conduct. The Companies Act 2006, Section 996 read with Section 994 provides the unfairly prejudicial remedy. In a small private company, where the shareholders are restricted from selling their shares to outsiders, remedies to the minority shareholder may take the form of enforcing purchase order for the purchase of the petitioner’s shares. This remedy may be offered by the courts to the minority shareholders to alleviate their position in an oppressive environment of the company by allowing them to exercise an exit option from the company. The unfair prejudicial remedy remains one of the common remedies to alleviate minority shareholders’ position in the small private company under Section 994. This provision allows any member of a company to petition to the court based on the ground that the affairs of the company are being conducted in a manner that is prejudicial to their interests as members of the company. Unfair prejudice remedy was allowed in O Neill v Phillips, as a remedy against removal from directorship when such removal was unfair to his interests as a member in the company. While it may appear that the unfair prejudicial remedy is protective of the interests of the minority shareholder, there are also grounds to critique this option for its failure to protect minority interests in some situations while also providing protection in some others. One of the benefits of the unfair prejudicial remedy under Section 994 for the minority shareholders is that there is broad application for protection of minority shareholders under different circumstances. In part, this flexibility is due to the application of certain terms in the provision itself. Section 994 is concerned with ‘interests’ of the shareholders and the courts apply the principle of member’s legitimate expectations for defining the interests of the minority shareholders. For the private companies, the principle of legitimate expectations applies because private companies generally have informal agreements between members and this is the basis for the creation of expectations of the members. Section 994 has therefore found more application in private companies, where even informal agreements when entering in the company can lead to the creation of legitimate expectations which then become the basis for the action. This remedy also makes sense for small private companies where shareholders can face a different kind of oppressive environment because of the role that the directors can play as single nominated director, with little restriction on them or there may be situations where the directors are the sole shareholders so that there is little challenge to them. The internal arrangements of the private companies are also different to the arrangements that are part of the public companies; for instance, in the private companies, the board of directors may avoid the conducting Board Meetings. Against this background, the unfair prejudice remedy can be a very useful mechanism for protecting the interests of the minority shareholders. Despite the utility of the unfair prejudice remedy, there is also some criticism of the remedy in that it is not always considered to be an effective mechanism for providing recourse to the minority shareholders. However, this problem may be more relevant in the public companies due to the reflective loss principle.

The unfair prejudice remedy is more relevant to private company minority shareholders because litigation is considered to have negative effect on share prices, which the courts may see as a reason against using this remedy in the public company where the long-term interests and success of the company may be adversely affected by the litigation. Furthermore, unfair prejudice action is not relevant to matters related to inter-relationships of the shareholders since there is absence of personal stakes in such relationships; therefore, this remedy is generally limited to corporate constitutional issues. The question of what happens when there is personal cause of action was raised in Marex Financial Ltd v Sevilleja. In his judgment, Lord Sales had observed that the shareholder’s personal cause of action against the wrongdoer is not to be “subjected to the collective decision-making procedures which apply when the company decides what to do in relation to any cause of action the company may have.” Contractual rights under shareholder agreement lead to personal cause of action. This was the fact in the Giles v Rhind case, where the shareholder wanted to pursue personal claim for damages caused due to the loss suffered by the company. Personal claim can also arise in cases where the tort of the wrongdoer becomes the basis for loss of the shareholder. Personal claim can arise in cases where trust is breached by the wrongdoer and the shareholders are beneficiaries who can claim for damages. Recently Sevilleja judgment has raised some questions about whether the rights of the shareholder under a personal action against the wrongdoer would be jeopardised due to the judgment of the court since the Supreme Court has definitively overruled Giles v Rhind which allowed the shareholder action for personal claim when the company failed to recover the loss from the wrongdoer. It will also be useful to consider another judgment of the Supreme Court recently in the case of Breeze v Chief Constable of Norfolk. In this case, the claimants had a personal claim against the tort of the defendant, which they alleged led to the diminishing of the company’s business. The loss of business led to the diminution of the claimants’ share value to the tune of £15 million per shareholder. Contrary to the approach taken by the courts in Giles v Rhind, the court did not allow the claimants to pursue the claim on the basis of the reflective loss principle and on the ground that Sevilleja does not allow the continued application of the exception in Giles v Rhind. Why should the unfair prejudice remedy be more suited for protecting the interests of the private company minority shareholders as compared to the public company minority shareholders as the broad discussion above has led to conclude? There are a number of reasons, which may be identified in the literature and caselaw on unfair prejudice remedy. The language of Section 994 itself gives credence to the argument that it is more suited to the private companies. Section 994 speaks of ‘interests’ and not legal rights and courts have used the concept of legitimate expectations for defining interests of the minority shareholders. The concept of legitimate expectations is more relevant to determining the interests of the minority shareholders in private companies rather than those in public companies because informal agreements are not common in public companies for the purpose of organising relations between members, these are more common in small private companies. This makes the application of unfair prejudice remedy under Section 994 more relevant to the private companies. Another reason for the application of unfair prejudice remedy to the private companies more than to the public companies is based on the form and structuring of the two kinds of companies. Private companies may often operate with a single nominated director, their directors may be sole shareholders who are not often challenged, and their board of directors are not bound to conduct Board Meetings where their decisions could face some internal challenges. In such an environmental structuring, the directors or the majority shareholders may have very little challenge to their decisions and actions by the minority shareholders. Furthermore, the minority shareholders in private companies have strict restrictions on selling their shares. These parts of the private company structuring can lead to the making of an oppressive environment for minority shareholders where they are not able to challenge the decisions that the majority or the directors are taking and are also not able to leave the company by selling their shares. This is a reason why unfair prejudice remedy may be more appropriate for the private company shareholders. It has been argued that the potential for oppression of minority shareholders is higher in private companies, the corporate law has failed to mitigate the agency costs for minority shareholders in private companies and that the ostensible protections for the minority shareholders are not adequate for protecting the interests of the shareholders of small private companies.

The predicament of the minority shareholder (and therefore the need for protection of the unfair prejudice remedy) was explained recently in an article: “In a small closed company, shareholders often have an expectation that they will participate in the management of the company while investing, such as being appointed as a director of the company. Usually in such companies, rights and interests of shareholders are not clearly defined in the articles of association or written agreements but are only based on the fundamental understanding and trust among shareholders. This understanding is the basis for shareholders to set up and operate the company jointly, even if it is not stipulated in a contract. To some extent, then, it can be argued that depriving shareholders of their legitimate expectation of management is to reduce their return on investment. In other words, the legitimate expectations of shareholders in a closed company are not only the expectation of the equity income, but also the earnings of the director or manager. Therefore, for a private company with a small number of members, this fundamental understanding among shareholders is the basis for its rights and interests. Any violation of such expectations by either party is unfair to the other. Consequently, this legitimate expectation is necessary to be protected by the unfair prejudice provisions in the company law.” Clearly, there is established understanding that the minority shareholder is placed in a precarious situation in a private company where the form and structure of the company itself makes it necessary for the shareholder to have added protections against oppression. How the courts do indeed allow the shareholders to gain protection can be considered on the basis of the decided caselaw where an exit option appears to be the most proffered route by the courts. This is called as a ‘buy out order’ and its purpose is to allow the shareholder to exit the company after receiving a fair value for their investment in the company. The buyout option allows the minority shareholders to have their shares purchased after the commencement of the unfair prejudice action so that as non-controlling shareholders of the company, they are “no longer trapped in the internal contradictions of the company and get the due return, on the other hand, it can also make the company focus on its own business activities.” In Bilkus v King, the members had orally agreed upon the ownership and control of the company prior to the incorporation. After the incorporation, King excluded Bilkus from participation in the management of the Company and also declined to issue to him 50 percent share in the company’s equity which actions became subject to the unfair prejudice petition brought by Bilkus. The court held that seeking an order for the purchase of his shares would lead to the most appropriate remedy for Bilkus. Similar approach was taken in another case, Grace v Biagioli, in which the minority shareholder brought an action for unfair prejudice remedy asking the court to reverse the conduct that had justified the making of the order. The Court had to decide on the discretion it had to make appropriate orders once it established that unfairly prejudicial actions had taken place. The court held that generally speaking, the appropriate order for addressing internal disputes in small private companies is a share purchase order so as to allow a clean break to the minority shareholder and allow the company to function. The court did hold that its discretion in dealing with unfair prejudice petitions in terms of the remedies that it may give once the unfair prejudice is established is wide and not limited merely to reversing or putting right the immediate conduct against which the remedy was sought by the minority shareholders. Reference may also be made to Section 996 of the Companies Act 2006, which provides that the relief can be granted against anyone who is responsible for the unfairly prejudicial conduct, including those who are not directors or shareholders of the company. Section 996(2) also provides that some of the examples of the type of order which may be made is the purchase of the shares of any members of the company by other members or by the company itself. This suggests a move to flexibility with regards to the interpretation of the interests of the minority shareholders and the best possible way to protect them in situations of unfair prejudice. This is also aligned in the judicial approach as seen in a number of cases. In re Macro (Ipswich) Ltd, the court held that the jurisdiction for unfair prejudice remedy “has an elastic quality which enables the courts to mould the concepts of unfair prejudice according to the circumstances of the case.” The flexible approach is also adopted towards the interpretation of the terms, such as, “the company’s affairs”, “conducted”, “unfairly prejudicial” and “the interests of members” as also observed by Arden LJ in Re Annacott Holdings Ltd, that the Parliament intended the courts to adopt a flexible approach to proceedings under Section 994. One of the clear statements on the issue was made by Vos J in Apex Global Management Limited v Fi Call Limited & Others:

“In my judgment, these authorities all speak with one voice. They show that sections 994-6 provide a wide and flexible remedy where the affairs of a company have been conducted in a manner that is unfairly prejudicial to the interests of some or all of its members. A section 994 petition is appropriate where, for whatever reasons, the trust and confidence of the parties to a quasi partnership has broken down. Relief can be granted to remedy wrongs done to the company, and in such a situation the alleged wrongdoers must be made parties to the petition. Non-members of a company who are alleged to have been responsible for such conduct can be joined as respondents, and, in an appropriate case, such non- members can be made primarily or secondarily liable to buy the petitioners’ shares. Artificial limitations should not be introduced to reduce the effective nature of the remedy introduced by sections 994-6.” The discussion on the case law above suggests that the courts have sought to adopt a broad interpretation approach towards the unfair prejudice remedy. That being the case, one may be excused for assuming that the courts have adopted a robust approach to the protection of minority shareholders’ rights. However, there are grounds to critique the present state of protections available to the minority shareholders. The specific weaknesses of the unfair prejudice remedy cases can be discussed briefly to assess its utility as a remedy for minority shareholder. One of the weaknesses of this remedy is that it can be time consuming and expensive due to which minority shareholders may be actually deterred from taking this route. One of the reasons why it is time consuming, especially in private companies, is that the reliance on the legitimate expectations of minority shareholders requires the courts to not only review company's articles of association but also any other oral or other arrangements that may have led to the shareholders deriving legitimate expectations. In one case, the costs of the proceedings went up to 320,000 pounds while the value of the stock fell from about 40,000 pounds to 24,600 pounds in the same time, while in another case, the 45 day hearing considered facts and issues of 40 years of the history of the company to assess the creation of legitimate expectations. These cases demonstrate how the unfair prejudice hearings can be counter productive for the minority shareholders who may lose more than they gain in terms of the costs of the proceedings and the value of their investments. Worthington and Sealy identify another problem with the unfair prejudice proceedings in the form of their being detrimental to the interests of the company itself since the proceedings will affect the reputation of the company as well as distract the company from its operations while they are embroiled in litigation. Yet another negative impact of the unfair prejudice actions for the company could be that the court gets to exercise its wide discretion to do what is fair and equitable but which can have negative implications for the internal affairs of company. While this last criticism has been made by an American commentator with regard to small American companies and the unfair prejudice actions, the same may be relevant to the UK as well because British corporate law jurisprudence also has given wide discretion to the courts as some of the cases discussed above have indicated. Reference may be made to Re Macro (Ipswich) Ltd, where the court considered its jurisdiction in such matters to have an ‘elastic quality’, and Re Annacott Holdings Ltd, where the court referred to the Parliament’s intention for courts to adopt a flexible approach to proceedings under Section 994. In the specific context of organising the relations between minority and majority shareholders or minority shareholders and directors of the company, the wide discretion of the court may become a problem where abused by minority shareholders for getting excessive protection but with adverse implications for the internal management and affairs of the company. While this may speak more to how the courts exercise their jurisdiction in a responsible and balanced manner, the concerns about how unfair prejudice remedy can skew the organisation of the common interests of all shareholders, interests of the company, and interests of the minority shareholders, are relevant concerns. It can be argued that this does not mean that the remedy ought not to be provided but that the courts exercise their powers in a manner that balances the interests between majority shareholders and minority shareholders, and apply their discretion reasonably.

While the concerns about the excessive protection to the minority shareholder under unfair prejudice remedy are also real concerns, the recent approaches in the UK have seen the narrowing of the protection offered to the minority shareholders. This is not just related to the unfair prejudice remedy but extends to the other remedies in the corporate law that are meant to protect the interests of the minority shareholders. The Supreme Court’s approach in the recent cases of Breeze and Sevilleja have led to the narrowing of the scope for minority shareholders’ protection even when the company fails to sue the wrongdoer. Going back to the approach taken in the Giles v Rhind case, this judgment led to the flexible application of remedies for minority shareholders since the court considered that the shareholder could take action against the wrongdoer when the company failed to do so and the defendant’s actions were also responsible for disabling the company from taking action; in Giles the loss of company business and its inability to then pursue litigation was the reason why the company had failed to take action and the court considered it just and proper to allow the shareholders to pursue such actions as an exception to the Foss rule as well as the reflective loss principle. Now reading the court’s approach in Breeze and Sevilleja with the Giles ruling, it can be argued that the shareholders’ remedy is ineffective to the extent that even the inability of the company to take action is not seen as a reason enough to allow the minority shareholder to take such action. In the case of private companies, the Breeze judgment could also lead to the conclusion that the only available remedies are derivative action and unfair prejudice petition. The difficulty is that both the unfair prejudice remedy and the derivative claim have been considered to be ineffective in protection of the rights of the minority shareholders. The derivative claim remedy is discussed in detail in the ensuing section.

DERIVATIVE ACTION

The statutory derivative action remedy is provided in Companies Act 2006, part 11 read with Section 260 (1). Minority shareholders have the right to apply for statutory derivative actions for cause of action that is otherwise vested in the company. However, clause (3) of section 260 allows derivative action remedy only for negligent actions of the director or actions in breach of duty or breach of trust. The derivative claim remedy, important as it is, is subjected to some criticism in terms of whether it allows protection of shareholders in an effective manner as also noted by Lord Denning: “A shareholder who brings a derivative claim has nothing to gain, but much to lose. He feels strongly that a wrong has been done—and that it should be righted. But he does not feel able to undertake it himself. Faced with an estimate of the costs, he will say: ‘I’m not going to throw away good money after bad’. Some wrongdoers know this and take advantage of it. They loot the company’s funds knowing there is little risk of an action being brought against them.” As noted above, derivative claim remedy has little to offer shareholders in terms of protection because while the shareholder takes on himself to take the action against the wrongdoer and thereby bears the costs of the litigation, there may be cases whether the shareholder may believe that such actions are not of use to him and may lead to considerable expense without giving benefits. On the other hand, wrongdoers may be aware that the shareholders are unlikely to take derivative action because of the costs involved in such actions and the fact that even if the shareholder is successful in taking such action, it is the company that will get the benefit from the same. This can lead the wrongdoers to become confident enough to harm the company and cause losses to it for their own personal gain on the belief that they are likely to get away with such action. This ironical or even paradoxical situation can lead to the situation where despite being a remedy in the statute books, derivative action remedy is not effective enough to stop the wrongdoers from taking actions that lead to loss for the company and nor is it effective enough to give confidence to the shareholders to take action against the wrongdoers. Furthermore, the courts have traditionally adopted a non-interventionist position where actions relate to decision of the directors that were capable of being ratified by the majority shareholders on the basis of ‘internal management’ of the company. Furthermore, the derivative claim remedy is narrower than the remedy in unfair prejudice claims because it is based on the courts’ consideration of the subjective elements of the fault of the directors and also considers whether the members comply with the principle of "clean hands”. This can be contrasted with the statutory unfair prejudice provisions under Section 994 of the Companies Act 2006, which sees the court emphasise on whether the conduct of controlling shareholders caused an unfair consequence. The unfair prejudice remedy involves an objective standard to be considered by the courts while giving the latter wide powers of discretion to provide remedies to the shareholders, whereas the derivative claim remedy involves consideration of subjective standards and does not give wide discretion to the courts to design remedies for the minority shareholders’ protection. Thus, it can be seen that the way the derivative claim remedy is conceptualised is in any case narrower than the unfair prejudice remedy. Having considered how the unfair prejudice remedy itself has some problems in context of relations between minority and majority shareholders, it then becomes interesting to consider how the much narrower derivative claim remedy organises or responds to these relationships in the company. The inclusion of derivative claim remedy as a statutory remedy did open the possibility of the courts taking the opportunity to widen the scope of the remedy for the protection of the minority shareholders as compared to what was offered under the common law exceptions to the Foss rule, but it was always open to doubt whether the courts would take that opportunity. The hope that the courts would widen the scope of the derivative action remedy was also related to the inability of the unfair prejudice remedy to at times provide recourse to the minority shareholder when the majority has acted on their powers to alter the articles of association in a way that is "bona fide for the benefit of the company as a whole.” Despite this protection in the law, in one case, the Court refused to strike down a special resolution, which altered the articles of association to free shareholders from the application of pre-emption provisions. Although in another case, the court did not allow the allotment of shares authorised by ordinary resolution because it seemed that the majority's purpose was not to raise capital but to dilute the interest of the minority shareholders. It is also a relevant point that despite the inclusion of the derivative claim petition in the statutory remedies available to the shareholders, the courts are still concerned with preserving the fundamental principles underlying the rule in Foss, which is that of respect for the separate legal entity of the company and the respect for majority rule. This makes the application of derivative claim remedy problematic in many cases where claims are brought by the minority since claims traditionally are meant to be brought by the company. This is a problem that minority shareholders face not only in bringing derivative claims against the wrongdoers but also in bringing claims that may be reflection of the loss suffered by the company.

Even where a derivative claim may lie because the shareholder satisfies the conditions of the statutory claim, the shareholder would need permission of the court to continue, which as one author puts it, is in reality difficult for the majority of claims that “fail to surmount the judicial permission hurdle.” Even where shareholders may surmount the judicial permission hurdle, which is rare, they would still have to face the “further and major pragmatic issue of litigation costs.” This makes the derivative claim remedy put up both legal and practical impediments before the minority shareholders who may be thinking of the remedy as a recourse against the majority shareholders’ or director's actions. It is important that the inclusion of the enlightened shareholder provision in Section 172 was meant to organise relations between the directors of the company and other stakeholders in specific ways. However, how far does this translate into the minority shareholders being able to take action when the directors breach their duties is moot.

NO REFLECTIVE LOSS

The principle of no reflective loss is also relevant to understanding how minority shareholder protection is organised in the system. It would be useful to understand the background of the no reflective loss principle in the UK corporate law and the effect of this principle on shareholder rights. The principle of no reflective loss is one of the prominent principles of English company law, which has also been applied in other jurisdictions. Simply explained, the principle of no reflective loss provides that the loss suffered by the shareholders as a resulting loss due to the loss suffered by the company is not recoverable under a suit by the shareholder because the shareholder’s loss is a mere reflection of the loss of the company in terms of loss of investment when the company loses share value. The principle is based on the company law rule that company is the only proper plaintiff in a case related to the wrong suffered by the company and the members of the company regardless of their loss ensuing from the wrong do not have locus standi in the case. Although the reflective loss principle was first laid down in England, it has come to wield significance impact on other common law jurisdictions as well. The principle of no reflective loss was first laid down in Prudential Assurance Prudential Assurance v Newman Industries, where the court held that “the shareholder does not suffer any personal loss” as a result of the wrong committed by the wrongdoer against the company and it is merely a reflection of the loss suffered by the company as manifested in the falling of the value of the shares. The ‘no reflective loss’ principle came to be entrenched in the common law with the courts in common law countries applying this principle in the cases before them. It would be useful to consider the decision of the Court of Appeal in Prudential Assurance case and the basis for the way the court approached the right of the shareholder to claim for the losses suffered due to the wrongs of the wrongdoer. The Court of Appeal’s position was that wrong of the person does not lead to any direct effect on the value of the shares since the shareholders continue to hold shares even after the loss to the company, although the value of the shares has suffered significant loss. However, as mentioned earlier in the case of derivative claim remedy, at times minority shareholders may be disadvantaged because the company fails to take action against the wrongdoers and the restriction on the shareholders to take such action can have negative impacts on the interests of the shareholders. The same effect can be seen in the cases where the rigid application of the principle of ‘no reflective loss’ means that the shareholders become restricted from taking action although the company also fails to take such action to gain a remedy from the wrongdoer. It is the possible unjust outcomes for shareholders in the application of the no reflective loss principle that makes it a relevant issue to study for understanding how minority shareholder protection may be organised. The no reflective loss principle is justified on the basis of the possible ill effects of allowing double recovery in the same cause of action. Indeed, the issue of overlapping claims of the shareholder and the company in cases of wrong against the company leading to a loss for the shareholder is one of the concerns and courts have sought to justify the bar on shareholders from action on the basis of avoiding double recovery problem in corporate law. Recently, the Supreme Court has clarified that the no reflective loss rule is based on the company law principles alone and not on the concerns related to the avoidance of double recovery, which is more a private law issue and not a corporate law issue. Therefore, it can be argued that if concerns of double recovery are not relevant to such cases, then there is a case for flexibility on the issue of whether the shareholders should be allowed to make claims against the wrongdoer when even the company can have such claims. On the issue of corporate law, the principle of no reflective loss can be related to the Foss rule which says that the only proper plaintiff in cases involving the company is the company itself. A further argument can be made that the company law principles should not be rigidly applied in cases where the company may be disabled from taking action. In other words, there should be some protection offered to shareholders in such cases where the company may not be able to take any action. Again, regard may be paid to the judgment in Gardner v. Parker, where the court was required to consider the question whether shareholders may pursue claims against wrongdoers where the company fails to do so either because it chooses not to or settles the claim in a way that is generous to the wrongdoer or detrimental to itself, or is prevented from staking the claim due to some other reasons. The court did not consider that all these situations merited allowing the shareholder the right to claim and the only ground for the claim is where the wrongdoer directly impacted the company’s pursuit of the claim. A discussion on no reflective loss principle becomes more relevant now after the Supreme Court judgment in Sevilleja and positions taken by the three judges who delivered the judgments for the court. The majority judgment was delivered by Lord Reed while the minority judgment was delivered by Lord Sales and the fact that these judges took different approaches to constructing the no reflective loss principle is a significant point since the court arrived at the same conclusion by taking different reasons.

Lord Reed opined that the rule laid down in Foss v Harbottle remains the important anchor for the corporate law related to reflective losses. However, it is also important that Lord Reed distinguished between the situation where the claim is made by shareholder due to diminution in share value as a reflection of loss of company and where the claim is made company in respect to matter where the company too has a concurrent right of action but the case is not one of reflective loss. Lord Reed held that the Prudential principle is limiting of the rights of shareholders to make any claim in cases of reflective loss. Lord Sales’ minority judgment emphasised on the need to not have "bright line rule to be introduced in the common law as a matter of policy to preclude what are otherwise, according to ordinary common law principles, valid causes of action.” Lord Sales observed that the no reflective loss rule "gives undue priority to the interests of other shareholders and creditors of the company in circumstances where the claimant shareholder is not subject to any obligation to subordinate his interest in vindicating his personal rights to their interests.” This may be specifically relevant to the position of the minority shareholder in the company where the interests of the minority shareholder may get relegated to the interests of the other shareholders and creditors. What is significant is that the majority and minority judgments show a marked difference on how courts should approach the continued application of the no reflective loss principles since the majority judgment sees Prudential as a bright line and the minority judgment sees justifications for deviating from the rule where necessary and not considering the principle to be one that needs to be applied rigidly in the common law. The distinction between the shareholders’ claims in case of no reflective loss and claims in case of reflective loss is recognised in the English law with judges drawing on such distinction in other cases as well. For example, in Johnson v Gore Wood & Co, Lord Bingham distinguished between the following three categories of loss and how the courts deal with the loss. First, with relation to a loss to the company, which is attributed to breach of duty owed to the company, the shareholder does not have any claim because the company is the proper plaintiff and the reflective loss principle will apply. Second, in the event that there is loss to the company but the company has no action, the shareholder can have a right to claim in case they have an action. Third, in the case of any independent losses due to any independent breaches where both company and shareholder have claims, they both will have the right to take action. However, contrary to how the Supreme Court approached the matter in Sevilleja v Marex Financial Ltd, the judgment in Johnson v Gore Wood & Co held that the position of the court is based on the need for avoidance of double recovery. It is also noteworthy that the court has considered it to be unjust to prevent shareholders from taking action in cases where the company has failed to take action or does not wish to pursue it. However, after the decision of the Supreme Court in Sevilleja v Marex Financial Ltd, it is possible that the approach of the court would be to not allow the shareholders to take action even if the company is not able to take such action. This would be consistent with the majority Supreme Court judgment. Indeed, recent cases have taken this line in cases. For example, in Sharp v Blank, the judge denied the right to action for the shareholder who claimed that loss was to the company by a breach of duty by directors where the duty was owed to both the company and the shareholder; the court was of the opinion that the shareholder had no action when the company has right to such action. Similarly, in Broadcasting Investment Group v Smith, shareholders could not take action but other parties were allowed to take action against the wrongdoer. The majority judgment in Sevilleja v Marex Financial Ltd may have implications for how private companies experience the relations between shareholders and directors or minority shareholders and majority shareholders. An indication of this can be seen in a New Zealand decision where the court has explained the nature of double recovery problem in small private companies as being different to the public companies: “No doubt, such a possibility [of double recovery] is most likely with smaller private companies where the interrelationship between the company, the directors and the shareholders may give rise to independent duties on the part of the professional advisers involved. But the situation where one defendant owes a duty to two persons who suffer a common loss is not unknown in the law, and it will need to be examined in this context. It may be found that there is no necessary reason why the company's loss should take precedence over the loss of the individuals who are owed a separate duty of care. To meet the problem of double recovery in such circumstances it will be necessary to evolve principles to determine which party or parties will be able to seek or obtain recovery. A stay of one proceeding may be required. Judgment, with a stay of execution against one or other of the parties, may be in order. An obligation to account in whole or in part may be appropriate. The interest of creditors who may benefit if one party recovers and not the other may require consideration.”

The above excerpt from the judgment is based on the premise that small private companies may have more significance of double recovery issues as compared to public companies because of the interrelationship between the company, directors and shareholders. This may mean that the bar of no reflective loss for shareholders in private companies may work to prevent cases of double recovery although the court is of the view that such a bar should not be placed because the duty owed by one person to two parties may need further consideration in different contexts. However, not that Sevilleja v Marex Financial Ltd clearly denies any link between double recovery and no reflective loss and clearly places the principle in the paradigm of the corporate law instead of private law, the above excerpt will not be able to explain why shareholders should be denied access to remedy simply because there is a possibility of double recovery. This leads to the corporate law justification for applying no reflective loss principle, which is based on the Foss rule, which provides that only company is the proper plaintiff in such cases. This is also in line with the general position of the English law on no reflective loss principle, which is reflected in the judgment of Lady Justice Arden, in Day v Cook as follows: “It will thus be seen from the speeches in Johnson v Gore Wood that where there is a breach of duty to both the shareholder and the company and the loss which the shareholder suffers is merely a reflection of the company's loss there is now a clear rule that the shareholder cannot recover. That follows from the graphic example of the shareholder who is led to part with the key to the company’s money box and the theft of the company's money from that box. It is not simply the case that double recovery will not be allowed, so that, for instance if the company's claim is not pursued or there is some defence to the company's claim, the shareholder can pursue his claim. The company's claim, if it exists, will always trump that of the shareholder. Accordingly the court has no discretion. The claim cannot be entertained.” The above excerpt indicates that the double recovery problem is not the principal reason why the courts will not allow the action to the shareholder in such cases where the company also has a claim. The rule is more grounded in company law principles. As such, the bar on the shareholder to take action when the wrongs of other shareholders or directors is rigidly applied by linking it to the entrenched corporate law principles of proper plaintiff. It may be mentioned that the American position on the same point is more flexible because in situations where the shareholder suffers a fall in the share value due to the wrong against the company, the courts apply what is called as a ‘non-conductor principle’, which precludes the personal claim by the shareholder but allows the shareholder to take derivative action instead. This is reflected in Durham v Durham: “Courts generally require a shareholder to bring a derivative, as opposed to a direct, suit against corporate officers to redress injuries to the corporation because the derivative proceeding:

(1) prevents a multiplicity of lawsuits by shareholders;

(2) protects corporate creditors by putting the proceeds of the recovery back in the corporation;

(3) protects the interests of all shareholders by increasing the value of their shares, instead of allowing a recovery by one shareholder to prejudice the rights of others not a party to the suit; and

(4) adequately compensates the injured shareholder by increasing the value of his shares.”

However, even the American position works to prevent shareholders from taking personal action even where the shareholder is able to establish the infringement of a direct personal right but there is some problem in distinguishing between individual and derivative actions because the shareholder does not have an obvious independent personal claim. However, if the shareholder is able to establish a direct claim, then the courts in America do allow personal recovery. What is significant is that American approach to small private companies may be different to how the courts respond to public companies. This is reflected in the suggestions made by the American Law Institute for closely held corporations, which can be seen as the counterparts of the private companies in the UK. The similarity between closely held corporation and the private company in the UK is that both have few shareholders, and there is close participation of the shareholders in the company’s management, and shareholders cannot freely transfer their shares to outsiders. The American Law Institute proposes that court should have discretion to treat an actionraising derivative claims as a direct action in closely-held corporation: “the court in its discretion may treat an action raising derivative claims as a direct action, exempt it from those restrictions and defenses applicable only to derivative actions, and order an individual recovery, if it finds that to do so will not (i) unfairly expose the corporation or the defendants to a multiplicity of actions, (ii) materially prejudice the interests of creditors of the corporation, or (iii) interfere with a fair distribution of the recovery among all interested persons.” This is an interesting suggestion, which can also be considered critically for the small private companies in the UK as well since it will address the double recovery issue as well as protect the interests of any creditors. It is also relevant that Lady Justice Arden made reference to the suggestion made by the American Law Institute in Day v Cook. Therefore, it would be correct to say that there is some judicial observations on how small private company shareholders may have more protection in cases where they may have personal action against wrongdoers. This may require some discussion into the distinction between personal and corporate rights.

Personal rights are usually contractual in nature where the shareholder may have an independent contractual right against the defendant and this is distinct from any rights that are company may have in the same subject matter. In such cases, the small company shareholder may have personal claims arising out of contractual rights and in such contexts, it may arguably not be relevant to apply objections related to double recovery to prevent shareholders from taking action. The difficulty may however arise where the contractual rights of the shareholder arises out of a contract that is also one to which the company is also a party. In the case of shareholders and companies, such rights for both shareholders and companies can arise out of shareholders' agreement. In such cases, the courts may have to examine the contract carefully to distinguish between personal right of the shareholder and corporate right for assessing whether the shareholder should be allowed a direct claim for reflective losses or not. The company law does recognise the personal claims of shareholders in other contexts, which can make a case for the recognition of personal claims in the context of no reflective loss principle. Thus, personal claims are the basis for the statutory right conferred on shareholders to petition for an order to remedy oppression" or unfair prejudice". This is because many of the claims by minority shareholders involving unfair prejudice remedy also involve wrongs against the company. Thus, many of such cases also involve concurrent wrong against the company, for example, such cases may involve a breach of directors’ duties. Therefore, there is already recognition of personal action even where corporate rights are involved in the same case. In cases involving corporate and personal wrongs, such as, oppression by the majority on the minority shareholders, there are overlapping claims of both the company and the minority shareholders. When the courts can allow the unfair prejudice claims despite concurrent claims, there is no reason to deny remedies to the minority shareholders even in the cases where the loss of the shareholder is reflective of the loss of the company.