Law in Nigeria (Ibadan: Heineman Educational Books (Nigeria) Plc 2002) p

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1 An Assessment of Majority Rule and Minority Right under the Nigerian Company Law By Abubakar Garba* Akura Baba Ali* and Ibrahim Mamman* ABSTRACT The majority power has great importance in the working of a company. The Courts will not generally intervene at the instance of minority shareholder in matters of internal administration of a company. It will not also interfere with the management of a company by its Board of Directors so long as they are acting within the powers conferred on them under the articles of the company. However, With a view to protecting the rights of minority shareholders and safeguarding the interests of investors from oppressive decisions of the majority shareholders, provision are made in the Companies Act so that those who control the affairs of the company exercise their power according to the principles of natural justice. These provisions are incorporated in Section of the Companies and Allied Matters Act, Laws of the federation The focus of this paper is on the examination of the application of minority protection in corporate activities in Nigeria as well as the problems surrounding its application. 1. INTRODUCTION Majority rule is a very familiar term in the vocabulary of the constitutional law of democratic nations. But because legal theory conceives a company as a democratic business organization the principle of majority rule is made applicable to registered companies. Like any other institution, a company is run by democratic process. The administration of its affairs is carried on by resolution of majority shareholders, passed at the duly convened general meeting and at the meeting of the Board of Directors. Matters on which the members are divided are decided by the majority votes of the shareholders. Thus majority power has great importance in the working of a company and the Courts will not generally intervene at the instance of shareholder in matters of internal administration, and will not interfere with the management of a company by its Board of Directors so long as they are acting within the powers conferred on them under the articles of the company 1. It therefore follows that the majority of the members enjoy the supreme authority to exercise the powers of the company and generally to control its affairs and the minority shareholders have to concede to the majority decision. This however, may lead to a possibility that the members * Lecturer Faculty of Law, Department of Public Law, University of Maiduguri, Borno State, Nigeria. * Lecture, Umar Ibn Ibrahim El-kanemi College of Education, Science and Technology(UICEST), Bama, Borno State, Nigeria. * Lecturer, Mohammed Goni College of Legal and Islamic Studies, Maiduguri, Borno State 1 O.Orojo Company Law and Practice in Nigeria 5 ed (London: Lexis Nexis 2002) p. 203 see also C. S. Ola Company Law in Nigeria (Ibadan: Heineman Educational Books (Nigeria) Plc 2002) p

2 having majority vote may tend to be oppressive towards the minority shareholders misusing their majority strength 2. It is for this reason it has been said that the protection of the minority shareholders within the domain of corporate activity constitutes one of the most difficult problems facing modern company law. The aim must be to strike a balance between effective control of the company and the interests of the small individual shareholders. With a view to protecting the rights of minority shareholders and safeguard the interests of investors from oppressive decisions of the majority shareholders, provision are made in the Companies Act so that those who control the affairs of the company exercise their power according to the principles of natural justice. These provisions are incorporated in Section of the Companies and Allied Matters Act, Laws of the federation The focus of this paper is on the examination of the application of minority protection in corporate activities in Nigeria as well as the problems surrounding its application. 2. Origin of the Rule The principle that the will of the majority should prevail over the will of the minority in matters of internal administration of the company was founded in the case of Foss v. Harbotle which is today known as the rule in Foss v. Harbottle. According to this principle the courts will not, in general, interfere at the instance of the shareholders, in the management of a company its direct so long as they are acting within the powers conferred on them by the articles of the company. The rule states that the proper plaintiff in an action in respect of a wrong done to the company or association of persons is prima facie the company or association itself. And, the court will not interfere in the internal affairs of a company at the instance of the minority if the irregularities complained of could be legally done or rectified by the majority. This rule was for the first time laid down in the historic case of Foss v. Harbottle 3. The facts of which are as follows: - In this case an action was brought by two shareholders (Foss and Terton) in an incorporated company called the Victoria Park Company against company s five directors and others, alleging fraudulent and illegal transactions whereby the property and certain mortgages were improperly given over the company s property. The plaintiffs sought appointment of a receiver and actions against the defendants for losses caused to the company. The court rejected the petition and ruled that it was incompetent for the plaintiffs to bring such proceedings, the sole right to do so being vested in the company in its corporate character. The court observed: The conduct with which the defendants are charged is an injury not to the plaintiffs exclusively. It is an injury to the whole corporation. In such cases the rule is that the corporation should sue in its own name and in its corporate character. It is not a matter of course for any individual members of a corporation to assume to themselves the right of suing in the name of the corporation. In law the corporation and the aggregate of members of the corporation are not the same thing for purposes like this. The rule established in this case was that courts will not ordinarily intervene in a matter which the company is competent to settle itself or in case of an irregularity, can ratify or condone it by its own internal procedure 4. The principle which is akin to the doctrine of locus standi is also 2 N. V. Paaranjabe Textbook on Company Law, 10 th Edition ( India: Central Law Agency, 1995) at p (1843) 2 Here 461, the rule is judicially re-applied in many Nigerian cases Omisade v Akande (1987) 2 NWLR (pt. 55) 158, Yalaju Amaye v. Associated Registered Engineering Co. Ltd & Ors (1990) 4 NWLR (pt. 145) 422; Sparks Electronic (Nig) Ltd & Anor v. Ponmile (1986) 2 NWLR (pt. 23) 516; Edokpo & Co Ltd v. Sem-Edo Wire Industries & Anor (1984) 5 S.C 117, Agip (Nig) Ltd v. Agip Petrol Int (2010) FWLR (pt 520) S.C The rule is also recognized statutory see CAMA Laws of the Federation Cap N. V. Paaranjabe Op. cit p

3 enacted by Section 299 of the Companies and Allied Matters 5 as follows: Subject to the provisions of this Act, where irregularity has been committed in the course of a company s affairs or any wrong has been done to the company, only the company can sue to remedy that wrong and only the company can ratify the irregular conduct. As Lord Eldon colourfully observed, the court is not to be required on every occasion to take the management of every play house and brew house in the kingdom 6. Also Jenkins L.J articulated the rule more lucidly in Edwards v. Halliweell 7 thus: First, the proper plaintiff in an action in respect of a wrong alleged to be done to a company or association of persons is prima facie the company or association of persons itself. Secondly, where the alleged wrong is a transaction which might be made binding on the company or association and on all its members by a simple majority of members no individual member of the company is allowed to maintain an action in respect of that matter for the simple reason that, if a mere majority of the members of the company or association is in favour of what has been down, then cadet questio. If on the other hand, a simple majority of members of the company is against what has been done; then there is no valid reason why the company itself should not sue 8. The rule is acknowledged to be based on two principles the doctrine of corporate personality of registered companies and the principle of the supremacy of the majority which has its ancestry in the principle of partnership law that courts would not interfere as between partners in respect of internal irregularities which the partners could ratify 9. Affirming that legal position in Edokpolo & Co. Ltd v. Sem-Edo wire industries Ltd and another 10 the Supreme Court observed that the court will not interfere with the internal management of companies acting within their powers and if there is a wrong done to the company for which redress needed, it is the company that must sue. In Ephraim Faloughi v. Haniel Williams and other 11 where the plaintiff, a minority shareholder brought an action for a return of all property of the company, allegedly taken by the defendants and an account of all the affairs of the company to the plaintiff. It was held that the action would not be maintained at his instance since the alleged wrongs were done to the company, unless his action was within any of the exceptions to the rule. The rule has also been held applicable not only to incorporated bodies but also to unincorporated association in possession of a constitution ```or a set of rules and regulations entitling them to sue and be sued as legal entities 12. Accordingly, it was applied to trade unions in Nigerian Stores Workers Union v. Uzor and others 13, Mbene v. Otili 14 and Cotter v. National Union of Seaman 15 and to a religious community or organization in Alhaji Iman Abubakri and others v. Abudu Smith and others 16 and Eternal Sacred order of the Cherubim and Seraphim v. Adewunm Laws of the Federation Cap Carlen v Dunry (1812) 1 V & B 154 at 158 cited in 7 (1950) 2 ALL ER 1064 cited in Oshio P. op cit p. 2 8 Edward v. Haliwell (Supra) 9 P. Oshio The True Ambit of Majority Rule under CAMA 1990 Revisited:, Vol. 7, No. 3-4 Modern Practice Journal of Finance and Investment Law, Lagos p (1984) 5 SC (1978) 4 FRCR 32 the court further held that where a plaintiff is unable to bring his action within any of the exceptions, the rule in Foss v. Harbottle will apply with full force. Per Belgore J. (as he then was). 12 Oshio P. Op cit p (1971) 2 ALR Comm (1966) N CLR (1929) 2 Ch (1973) 1 All NLR (pt. 1) 730 3

4 The rule in Foss v Harbottle appears to be a matter of procedure going to the root of the court s jurisdiction 18. Thus Lord Davey tells us that in any suit where the rule applies, the court infact has no jurisdiction to deal with the case. 19 Apparently it is this factor that makes it possible for the court to invoke the rule as ousting its jurisdiction even where, as in Heyting v. Dupont 20 the rule was either not invoked at all or the parties to the action did not have any objection as such to the continuation of the proceedings. The rule has however been criticized as being unfair on two fronts. Wedderburm, 21 while commenting on the two problems associated with the application of the rule noted that the rule has not stated in clear terms what conduct of the directors are rectifiable and which are not. This has given rise to conflicting decisions. While in Hogg v. Cramphorn Ltd., 22 the court held that where an act of a director is in good faith and in the best interest of the company but for an improper corporate purpose, it could still be ratified. And yet in Provident International Corporation v. International Leasing Corporation, 23 the court was of the opinion that the view that where company directors exercise powers conferred on them malafide but in the best interest of the company, it could not be ratified by the general meeting was wrong. Again, in Ngurli ltd. v. McCann, 24 the court held that ratification is ineffective once it tantamount to fraud on the minority. The lack of unanimity by the courts in fashioning out what acts are rectifiable and which are not is highly regrettable. This cannot be determined by merely looking at an act. One expects a better approach by the courts in this regard. The second problem pointed out by Wedderburn is that the rule makes the incorrect assumption that ratification; to be effective depends not on the circumstances of those ratifying a particular act but on the nature of the act itself. Thus, the motive behind the ratification of a particular act is being relegated to the background. Inspite of the problems identified above, the rule has been justified on a number of grounds. 3. Rationale for the rule The main rationale behind the strict rule in Foss v. Harbottle 25 which puts significant procedural burdens on the plaintiff is to protect the company from unwanted and harmful litigation 26. It is more convenient for the company to sue by itself as this will prevent a multiplicity of suits and needless, futile, oppressive and blackmailing actions by the minority which may lead to a tearing apart of the company, waste of time and resources 27. Another rationale for the rule is that the courts belief that a company should be run like a democracy and that the majority will should be allowed to determine whether or not the company should sue. Another ground in support of the retention of the rule is that the company being a distinct legal person the right of action of any wrong committed against the company should be vested in the company itself. Apparently, this reason is based on the distinct legal personality of a company 17 (1969) N. CLR 18 G. A. Olawoyin Status and Duties of Company Directors( Ille-Ife: University of Ife Press 1977) p Birland v. Earle cited in G. A. Olawoyi Op. cit p (1964) 1 W.L.R. 843 CA at Unreformed Company Law (1969) 32 M.L.R. 563 at (1969) Ch See also Bamford v. Bamford (1969) 2 W.L.R (1969) 89 W.N. (Pt.1) (N.S.W.) 370, Per Helsham, J. 24 (1953) 90 C.L.R Supra 26 Getsadge & Patelshvilli LLC; Protection of Minority Shareholders under UK Law available at 27 P. Oshio Op cit p

5 which is different from that of its members, a principle founded on the now renown case of Salomon v. Salomon and Co. Ltd. 28 Possibly more serious reason for the continued justification for the rule is the unwillingness of the courts to make themselves an object of mockery since there is the likelihood of the company turning round to convene a meeting to ratify an action that had been decided in the favour of a single shareholder previously. 29 This possibility was confirmed by the Nigerian Supreme Court in Tika-Tore Press Ltd. v. Abina, 30 where the Supreme Court held that the company has a distinct legal personality and where there is an alleged improper exercise of allotment of shares by the Board of Directors, only the company could complain or sue and secondly, that however wrong the directors action might be, the company shareholder can still ratify such wrongdoings in the general meeting. It should, however, be pointed out that the rule in Foss v. Harbottle 31 concerns a wrong to the company by the directors or the majority of members. It has no application where the individual shareholder sues against an invasion of his own personal rights. Again, the rule applies only as long as the company is a going concern Exceptions to the Rule Because of the hardship and injustice that arise from the strict application of the rule on minority shareholders, various exceptions were recognized under which the rule may be excluded in its application. The four established exceptions to the rule at common law 33 and the two exceptions in decided cases 34 have been codified under Section 300 of the Companies and Allied Matter Act 35 to the effect that the court, on the application of any member, may, by injunction or declaration, restrain the company from the following: - (a) Entering into any transaction which is illegal or ultra vires. (b) Purporting to do by ordinary resolution any act which by its constitution or the Act requires to be done by special resolution. (c) Any act or omission affecting the applicant s individual rights as a member. (d) Committing fraud on either the company or the minority shareholders where the directors fail to take appropriate action to redress the wrong doing. (e) Where a company meeting cannot be called in time to be of practical use in redressing a (f) wrong done to the company or the minority shareholders and 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. These exceptions to the rule provided under section 300 (a)-(f) of CAMA are discussed below: I. Illegal or ultra Vires Act In the first place, the powers of the majority of members are subject to the provisions of the company s memorandum or Articles. A company, therefore, cannot legally authorized or ratify 28 (1897) AC D. Asada Effective Corporate Governance and Management in Nigeria: An analysis. A PhD thesis presented to the Faculty Law University of Jos 2006 P (1973) 4 S.C Supra 32 N. V. Paaranjabe Op. cit Gower: The Principles of Modern Company law 4 th Edition (Sweet & Maxwell) p. 645, Heytin v. Dupont (1964) 1 WLR Hodgson v. Nako (1972) 1 WLR 130, Daniels v. Daniels (1970) Ch. 406, Alexander v. Automatic Telephone co. (1900) 2 Ch CAP 20 Laws of Federation 2004, P. Oshio Op cit p. 4 5

6 any act which being outside the ambit of the memorandum, is ultra vires the company such acts being illegal, there can be no question of the transaction being confirmed by any majority and a shareholder is entitled to bring an action against the company and its officers in respect of such matters 36. Thus, in Associated Registered Engineering Co. Ltd and others v. Yalaju-Amaye 37 where the purported appointment of new directors, by the board was held ultra vires as there was no such power in the article of association, the minority shareholders was allowed to sue. The fact that a shareholder present at a meeting voted for a resolution does not preclude him from attacking its validity on the ground that it was not authorized by its constitution or that it was illegal. Shareholders can restrain the directors from committing illegal or ultra vires acts at anytime. II. Acts Requiring Special Resolution Generally the decisions on internal affairs of the company are taken by passing ordinary resolution at the general meeting. But there are certain acts which can be done only by passing special resolution. Therefore if the majority purports to do any such act by passing ordinary resolution as opposed to special resolution required by the law, any member or members can bring an action to restrain the majority 38. Accordingly, the rule does not prevent an individual member from suing if the irregular act in respect of which he is suing is one which could validly be done or sanctioned not by a simple majority of the members of the association, but only by some special majority 39. This exception also covers a breach of any particular procedure laid down in articles or constitution or rules of the organization. Thus, in Quin and Axtens Ltd v. Salmon 40 ratification by a simple majority by members at general meeting of a transaction entered into with the consent of one Managing Director instead of the consent of the two Managing Directors as required by the articles, was held void, as being an attempt to alter the terms of the contract in the articles by an ordinary rather than by a special resolution. III. Invasion of Personal Rights As was pointed out earlier, the rule in Foss v. Harbottle is concerned with corporate rights-that is, the rule applies only to cases arising as a result of the invasion of the rights of a company in other words any matter relied upon by a defendant as constituting a cause of action to which the rule applies must be one which properly belongs to the general body of members of the company in question as opposed to a cause of action which some individual member could assert in his own right 41. Elias, C.J.N (as he then was) said that the rule would not apply to individual members who can establish that their personal rights, as distinct from those of the union 42 (or the jumat in the present case) have been invaded. In Edokpolo and Company Ltd v. Sem-Edo Wire Industries Ltd 43. The appellant, a shareholder, alleged collusion between, 2 nd and 3 rd respondents, the result 36 N. V. paarangabe op. cit p (1986) 3 NWLR (pt. 31) N. V. Parangabe op. cit G.A. Olawoyin op. cit p (1950) 2 All ER G. A. Olawoyin Op. cit p The rule in Foss v. Harbottle applies to a trade union on and other incorporated associations in the same way as it does to a company; Howden v. Smith (1973) 6 S.C.R 31. Association (1903) 1 K. B. 308; Abubakar v. Smith (1973) 6 S.C.R 31 p. 44. The rule seems inapplicable to unregistered trade unions. See also G. A. Olawoyin op cit p (1984) NSCC 553 6

7 of which was the allotment to the 2 nd and 3 rd respondents of shares out of the 40 percent belonging to the appellant. The Supreme Court held that the appellant minority shareholder was entitled to sue to protect its personal right to the shares held by it. In Pender v. Lushington 44, a minority shareholder was allowed to sue to enforce his right to have his votes recorded at the general meeting of the company. Also, in Nigeria Stores Workers Union v. Uzor and others 45, where the court found that the scale of contributions of members of the trade union was altered contrary to the rules of the union, it was held that this was an invasion of the personal rights of the members in the union for which they could sue. Other examples of member s individual rights which are statutorily recognized are: - (a) Right to transfer his shares 46 (b) Right to use his voting right at the poll 47 (c) Right to object to appointment of two or more directors by a single resolution 48 (d) Right to insist for a notice of not less than twenty one days for the annual general meeting 49 (e) Right to apply to the Corporate Affairs Commission for calling an annual general meeting on failure by the company to do so 50. (f) Right to file a petition for a compulsory winding up of the company Apart from the above individual membership rights, there are certain other individual rights of shareholders which can be exercised with the consent of a specified number of shareholders or a specified percentage of shareholding or voting power in the company. These rights include inter alia: - 1. Right to Requisition of Resolution: Section 235 CAMA provides that holders of 1/20 of total voting rights can requisition a notice of their resolution to be circulated to members entitled to receive notice of the meeting which the requisition relates. 2. The right to call an extra ordinary general meeting on requisition by members holding not less than one tenth of the paid up capital or not less than one tenth of the total voting rights of members where the company has no share capital (Section 215(2) CAMA). The shareholders general meeting remains the main vehicle for shareholders who wish to influence the course of corporate business. Because of its obvious necessity and benefits, it has become common practice for major company laws in the world to give minority shareholders the right to convene 51 for example, in Canada, modern reforms have attempted to broaden the extraordinary power of shareholders to force the holding of general meeting 52. According to Canada Business Corporation Act (CBCA), the holders of not less than 5 percent of the issued shares carrying the right to vote at the meeting may requisition 53. If the directors do not call the meeting within twenty one days after receiving the requisition, any shareholder who signed the 44 (1877) Ch. D 870 cited in P. Oshio Op cit. p (1970) 2 N.C.L.R See section 115 CAMA 47 See section 225 CAMA 48 See section 261(1) CAMA 49 See section 217(1) CAMA 50 See section 213(2) CAMA 51 B. Welhing, Corporate Law in Canada: The Governing Principles, 2 nd ed. (Toronto: Butterworths,1991) p Ibid p CBCA S. 143(1) 7

8 requisition may call the meeting 54. However, the company law of China provides no solution for the case where the directors refuse to call the meeting. According to the Companies Act 2006 UK the shareholders must hold at least one-tenth of the paid-up voting capital in order to have the right to require the directors to convene a meeting. This provision which is similar to Section 215(2) CAMA further provides that if the directors do not duly convene the meetings within the prescribed period, the requisitions, or any of them representing more than one half of the total voting rights of all of them, may themselves convene a meeting to be held within three months of the date of the deposit of the requisition. 55 IV. Fraud on the Company or on the Minority This appears to be the most important exception. At common law, fraud would include dishonesty and deceit 56. Hence, in Associated Registered Engineering Contractors Ltd and others v. Yalaju-Amaye 57 the Supreme Court held that in going on a withdrawal spree from the bank account, and forging minutes of meetings to cover lack of a resolution to change the signatories to cheques, the majority had committed fraud on the company. However, under this exception, fraud is not restricted to its common law definition and the Supreme Court defined it in a wider sense 58 as any act which may amount to an infraction of fair dealing; or abuse of confidence or unconsciously conduct, or abuse of power as between a trustee and his shareholders in the management of a company. In such cases the minority shareholders are allowed to sue. Thus, fraud is used in a loose, wider and equitable sense as an abuse or misuse of power on the part of the majority or the directors, and indeed breach of duty by directors. Consequently, no actual fraud need be proved, it may simply be presumed 59. In this sense, it includes expropriation of the company s property or other member s property and any attempt to release the directors from liability arising from breach of good faith. To succeed, plaintiff must proof (a) fraud on the minority and (b) that the wrongdoers are in control of the company and this prevents the company itself from bringing action in its own name 60. The principle that the court will interfere to protect the minority where majority was trying to benefit itself at the expense of the minority shareholders, was further reiterated by the English Court of Appeal in Cook v. Deeks 61 in this case three directors of a railway construction company obtained a contract in their own name to construct a railway line. The directors had used their position as directors to obtain the contract and it obviously amounted to breach of trust by them who then used their voting powers to pass a resolution of the company declaring that the company was not interested in the contract. It was held that the directors must account to the company for the profits they made, apparently at the expense of minority. V. Belated Meetings 54 CBCA S. 143 (4) 55 CBCA S. 143(4) 56 Oshio P. op. cit p (1990) 4 NWLR (pt. 145) p Ibid 59 Ibid 60 Ibid 61 (1916) A.C 554 8

9 This enacts the principle in the decision in Hodson v. National and Local Government Officer Association 62 where it was held that where a company meeting cannot be called in time to be of practical effect to redress a wrong to the company a shareholder can sue. In that case, the trade unions executive council had passed a resolution which purported to mandate the union s delegates at the TUC conference a month later to vote in a manner contrary to an earlier resolution of the union s conference. Since there was no time for the union s conference to meet again prior to the TUC conference, the court held that, even if the Foss v. Harbottle rule applied to an unregistered trade union that could not sue in its own name, a suit at the instance of a minority member could be entertained in this situation to enable the majority to decide on the matter at a later case. The court ordered the withdrawal of the executive s direction and the delegates should vote in accordance with the union conference s earlier resolution. VI. Directors benefiting from negligence or Breach of Duty This enact the principles in Daniel v. Daniels and Alexander v. Automatic Telephone Co, 63 to the effect that where directors benefit from their breach of duty a minority shareholder may be allowed to sue. In Daniels v. Daniel a husband and wife were the directors and majority shareholders of a company, the company sold land to the wife for N4,250 which she sold for N120,000 four years later there was no proof of any intention to defraud the minority shareholders. However, the court held that there had been a misappropriation of the company s land in respect of which an action would lie at the instance of the minority. 5. Types of Actions open to Minority Shareholders a. Personal Action A minority shareholder can bring a personal action to protect a right which is personal to him. In Frank v. Abdu 64 the court held that the rule in Foss vs. Harbottle is subject to a number of exceptions among which is the right of the members of a company to protect the invasion of their individual rights. The right of an individual shareholder of a company to sue in his own name is guaranteed by Section 300 of the Companies and Allied Act for the protection of the interest of the company 65. However, the right cannot be exercised where the plaintiff does not have locus standi to institute the action. In Frank v. Abdu 66 the court per Mohammed, JCA held that the plaintiff had not been able to show that he is a shareholder in the Dragetanos Construction Nigeria Limited, the company in dispute, it is not possible to clothe him with any locus standi to bring the action as a shareholder to protect his own interest 67. Thus having failed to show that he is a shareholder in the defendants company, the plaintiff/respondent certainly has no locus standi 68 to bring the action against the appellants. 62 (1972) WLR (1864) 4 NLR 64 (1864) NLR 65 (2003) FWLR (pt. 321) p Supra 67 See also Jadesim v. Okotie Eboh (1989) 4 NWLR (pt. 113) 113 at Locus standi can only arise from a right cognizable and conferred on the plaintiff by law. Therefore where there is no such right, the plaintiff cannot said to have standing to commence or institute the action. In order to show the existence of such legal right, the law requires the plaintiff to show that he has sufficient interest which is adversely affected to his detriment. See Bursari vs. Osen (1992) 4 NWLR (pt. 237) 557, Nwankwo (1972) 4 NLR 9

10 b. Limitations to the Right of Personal Action Some limitations exist as to the right of a shareholder to institute personal action. For instance, he is not entitled to bring personal action in respect of anything which happened before he became a member of the company, since his rights are usually incidents of membership based on the contract established by the regulations of the company 69 further, a shareholder suing to enforce a right personal to himself is not entitled to use a representative action unless, there exists a company interest between him and the other shareholder 70. Also where a member institutes a personal action to enforce a right due to him, or even representative action on behalf of himself and other affected members to enforce any right due to them, he will not be entitled to any damages but only to a declaration or injunction to restrain the company and/or directors from doing the particular act Representative Action This is normally instituted by a member on behalf of himself and other affected members to enforce any rights due to them. The company will usually be joined as a defendant so that it will be bound by the judgment in the case 72. Since these kinds of action deal with the plaintiff and others having a common interest with him, they are generally regarded as the true or normal representative actions 73 as opposed to corporate or derivative ones which are also representative, but by no means at truly so as the one under discussions. Unfortunately, this procedure had, in the past, been confused with a derivative action, the two actions are quite different, the latter being in the name or on behalf of the company 74. The rationale for a representative action as explained by the court in chief Otuguor Ogamiobe & others v. Chief D. O Oghene & others 75 is that those joined as co-plaintiffs have a common interest and a common grievance and the relief sought is in its nature beneficial to them. In providing for a representative action Section 301(2) says that the plaintiff/member is not entitled to any damages but only a declaration or injunction to restrain the company and/or directors from doing a particular act although the court may award costs to him whether or not the action succeeds 76. Prominently, some of the acts which a member is likely to challenge through the instrumentality of a representative action are embedded under Section 300 (a) and (b) respectively. Under section 300 (a), a member or members may restrain the company from engaging in an ultra vires or illegal act by obtaining an injunction or a declaration. This provision is an adequate safeguard for prospective investors since it is a re-assurance that errant directors would not be allowed to fiddle with investors funds and go free. 77 It is interesting to note that the potential of Section 300(a) is not likely to be affected by the abolition of the ultra vires doctrine in Nigeria. While commenting on the provision of Section 35(2) of the English Companies Act of 1989 (similar to S. 300(a) of the CAMA) Professor Gower noted that Despite the abolition of the strict ultra vires rule by the 1989 Act this seems to 69 G.A Olawoyin Op. cit. p Ibid 71 Sec. 301(1) (2) CAMA 72 P. Oshio Op. Cit. p Gower, Modern Company Law, 3 rd ed.(london: Sweet & Maxwell) p P. Oshio Op. cit p (1961) All NLR Section 301 (3) CAMA 77 See Yalaju Amaye v. AREC Ltd, Supra. See Gower (5th Ed.) Op. cit at

11 be unaffected as the new Section 33(2) expressly entitles a member to bring proceedings to restrain an act which but for Section 35(1) would be ultra vires. But the point must be made that the potential of Section 300(a) is narrowed down to cases where the directorial act is only at its executory stage. The section would not apply where the act has already been engaged in, executed, or completed. Section 300(a) is only a prohibited relief, and nothing more. 78 Secondly, under Section 300(b) of the CAMA, a member is also in a position to restrain the company by injunction or declaration when the company purports to do by ordinary resolution an act which can only be done by special resolution having regard to the company s memorandum and articles of association. This provision constitutes an important protective provision for the preservation of company s constitution in particular and the provision of the CAMA in general. Apparently restating the fact that vigilant and well-meaning members or shareholders of the companies should not be allowed to labour in vain, Section 301 (3) of the CAMA empowers the court to award costs to members or shareholders who dutifully restrains or attempt to restraint personal wrong meted out on individual members of the company 79 It should be noted that for the purpose of Section CAMA member include (a) the personal representative of a deceased member (b) any person to whom shares have been transferred or transmitted by operation of law 3. Derivative Action This is an action in the name or on behalf of a company. It is founded on the presumption that the wrongdoers would not sue themselves. The right of derivative action is codified in section 303 of the CAMA. The Supreme Court also recently in Agip (Nig) Ltd v. Agip Petro 80 defined the term derivative action as: A derivative action also known as a shareholder derivative suit is a law suit brought by a shareholder on behalf of a company against a third party. Often the third party is an insider of the corporation such as the directors or executive officers. Derivative suits are unique because under the traditional corporate law, management is responsible for bringing and defending the corporation against suit. The Supreme Court went further to give the two basic requirements at common law for a derivative action 1. That the alleged wrong or breach of duty is one that incapable of being ratified by a simple majority of the members and 2. That the alleged wrongdoers are in control of the company, so that the company which is the claimant cannot claim by itself. 4. Bringing of Derivative Suit A derivative action may only be brought were the wrong complained of: (a) Amounts to a fraud on the minority and the wrongdoers are in control of the company. (b) Activities by the directors, officers and employees causing harm to the company, breach of duty etc. that cannot be ratified by ordinary resolution or (c) Is outside the company s objects and so cannot be ratified under any event See S. 39 (4) of the CAMA; where the act has already been engaged in accordance with the provisions of Ss. 300 and 303 (1), (2) it would be more helpful for the litigating shareholder or member. But the obstacle of proving fraud or control must be surmounted 79 See also Wallersteiner v. Moir (1975) Q.B. 373, where the House of Lords laid down this all important equitable principle. 80 (2010) All FWLR (p. 520) p at Agip (Nig) Ltd v. Agip Petrol Intl (Supra) see also section 303(2) a-d CAMA 11

12 An applicant may apply to court for leave to bring an action in the name or on behalf of a company, or to intervene in an action to which the company is a party, for the purpose of prosecuting, defending or discontinuing the action on behalf of the company. 5. Procedure for Obtaining Leave By the community reading of sections 303 of the Companies and Allied matters Act and rules 2(1) and (2) of the companies proceedings rules, proceedings in an application for leave to prosecute a derivative action is to be commenced by an originating summons but not otherwise 82 the summon for derivative action must be on notice to the company. 6. Failure to comply with the Condition Precedent Non-compliance with the requirement of bringing derivation action via originating summons goes to the root of the case. The court will not treat it as an irregularity but as nullifying the entire proceedings. 83 In the UK under the Companies Act 2006, a derivative claim may be brought only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company. Important novelty in statutory derivative claim in comparison with the common law rule in Foss v. Harbottle, is that the former allow a claim to be brought in respect of negligent act or omission 84. The common law rule in Foss v. Harbottle put huge burdens on litigants thus marking such claims extremely difficult to succeed. Derivative action was possible only were fraud on the minority was established, where the wrong could not have ratified and the wrongdoers cannot prevent the company Relief on Grounds of Unfairly Prejudicial and Oppressive Conduct A member who alleges that the affairs of the company are being conducted in a manner oppressive or unfairly prejudicial to a member or members, may apply to court for relief by petition. 86 It is obvious that, by reference to the conduct of the company s affairs, the scope of this section extends not only to the directors but to the controller of the company in general 87. The member shares this right of action with the following: - (a) A director or officer or former director or officers of the company (b) A creditor (c) The commission (d) Any other person permitted by the court in its discretion 88. Meaning of oppressive conduct Section 312(1) CAMA further provides if the court is satisfied that petition under section 310 and 311 of this Act is well founded, it may make such order or orders as it thinks fit of giving 82 Agip (Nig) Ltd v. Agip petrol Intl (Supra) see also Section 304 CAMA. See generally Section 305, 306, 307 and 308 CAMA on derivative action. 83 See Ajao v. Alaw (1986) 3 NWLR (pt. 45) 802, Asore v. Lemomu (1974) 7 NWLR (pt. 356) 284, Udene v. Ugwu (1977) 3 NWLR (pt. 491) Companies Act 2006, see 260 (3); the section defines directors as including former and shadow directors at S. 260 (5) (a) & (b) 85 Getgadze & Pateishavill op. cit p Section 310 (1) and S. 311 CAMA 87 P. L. Davies, Gower & Davies, the Principle of Modern Company Law 8 th edition (London: Sweet & Maxwell 2008) at 662, Gower made the statement while commenting on S. 94(1) of English Companies Act 2006 which is similar to S. 311(2) CAMA 88 Section 310, CAMA 12

13 relief in respect of the matter complained of. In addition to subsection (1) subsection (2) also listed this orders the court may make on petition they include inter alia (a) That the company be wound up (b) Regulating the conduct of the affairs of the company in future (c) Appointing a receiver or a receiver and manager of property of the company Conclusion From this critical appraisal of the true ambit of majority rule as presently enacted by the Companies and Allied Matters Act 1990, it is evident that in recognition of the prevailing need as exemplified by existing judicial authorities, the Act has extended the exceptions beyond the common law established exceptions. However, to avoid confusion, the Act clearly omitted the so-called interest of justice as a separate exception thus lying to rest existing controversies on the subject. The six exceptions recognized by the Act would appear to furnish substantial means of protection of minority rights and interests in the company. They afford minority shareholders avenues to challenge corporate wrongs perpetrated by the majority. However, although the provisions of the Act on this subject may be said to be comprehensive, the flexibility with which the courts will interpret them would go a long way to justify the arduous task undertaken in furtherance of the clear intention of the legislature to reform the law on the subject. 89 Section 314(a) & (2) (c) 13