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According to the Companies Act 2006, minority shareholders have now been given more legal rights to undertake derivative actions on companies as a result of actions by the management that can be regarded not to be in the best interest of the company. However, to advance a derivative suit, a shareholder is required to certify two things. One, provide evidence that such actions were undertaken without the best interest of the company, and two; provide evidence that the management had done nothing to resolve the issue (Dignam and Lowry 221). Regarding the first condition, Charles has a chance of proving that the company director Mr. Alan had not acted in good faith by choosing to transact business with a company he owned.
Indeed Charles can advance the same argument towards the Easyways Company board members for approving a decision that was clearly in a conflict of interest and which therefore could not be said to have been in the best interest of the company. A court of law also requires another key step to have been covered by the plaintiff when determining the grounds for derivative actions brought by a shareholder. This is petitioning the company management to take corrective actions, and which for some reason did not rectify the problem. From the outline of the case, it is clear that Charles also met this condition when he initially lodged his complaints with the Easyways board members. The board members responded by calling a shareholders’ meeting to validate their decision, an action that essentially did not solve the decision.
Even from this perspective, strictly speaking, the board and the management are at fault since the Company Act 2006 is very clear about the duties of a company director and its management. By transferring the responsibility of decision-making to shareholders the Easyways management can be accused of negligence and incompetence. Again from this action alone, Charles can argue that the Easyways management actions amounted to hoodwinking the shareholders from two ends. One, as pertains to the transparency of the transaction by passing it as an open and fair transaction since they have involved them in the decision making. Two, in the way that the management in the process gain their consent in matters that are beyond their purview and which they are not equipped knowledge-wise in a way to confer an informed judgment.
Hence Charles should not only get to see Alan but the management as well. Even if in these particular areas Charles does not have a strong enough case there are other areas that he can still use as a ground for the case. In Foss v. Harbottle, there is one instance which Charles can site as a ground to sue the company; ultra vires (Chin 3). Based on this doctrine this ground is one of the four exceptions in Foss v. Harbottle principles which states that a company director or shareholders cannot use their authority to ratify company decisions that are ultra vires the company. However, the question is if indeed the action ultra vired the company
The chances of Charles winning such a case seems to be only 50% at most even with these grounds that he can use as the basis for the case. In Edwards v. Halliwell, the judge stated that where the majority of shareholders vote on a resolution and a ruling was made in the favor of the company, no other shareholder has a right to challenge the decision (Chin 9). In Foss v. Harbottle that principle was upheld again where it was determined that a court should not interfere with the internal management of an organization where a majority voted in favor of it even if such a decision amounts to illegality in what is referred to as the principle of credit quaestio (Chin 8)
In any case section 216 (A) of Companies Act, 2006 requires Charles to be assessed by the court as having brought such a suit in good faith, which means he should not be motivated by maliciously intent against the Company director, perhaps due to any past conflicts between them. On that basis, I would advise Charles not to institute any suit against the management since it is most likely that the suit will not succeed.
Chin, C. Minority Shareholders and Derivative Action, 2008. Web.
Dignam, A & Lowry J. Company Law. London: Oxford University Press, 2008. Print
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