"Cleaning-up" minority shareholdings – the case of Staray Capital Ltd v Cha

Corporate Alert

The recent Privy Council decision in Staray Capital Ltd v Cha [2017] UKPC 43 confirmed that a company's constitution can be validly amended in a manner which is intended to adversely affect a minority shareholder, including for the purposes of removing them as a shareholder of the company, as long as the amendment is not so oppressive or extravagant that it cannot be regarded by any reasonable person as being for the benefit of the company. Whilst this case concerned the actions of shareholders of a BVI company, the substantive legislative provisions in the BVI are consistent with the UK Companies Act.

Dissenting or absent minority shareholders can often be a problem in corporate transactions, or even in the day to day operations of a company. Under section 994 of the Companies Act 2006 (the "Act"), any shareholder has the right to petition for relief where the affairs of a company are being conducted in a manner which is unfairly prejudicial to his interests as a member. This right means that majority shareholders are often wary of using their powers in a manner which could be construed as being oppressive to a minority.

The case of Staray demonstrates how difficult it is for a minority shareholder to challenge a shareholder resolution. It concerned a dispute between the two shareholders in a joint venture company which had been incorporated for the purpose of participating in a mining project. The shareholding in the company was split 80:20 between the two shareholders, and each was appointed as a director.

The relationship between the shareholders broke down, and the majority shareholder caused the minority shareholder to be removed as a director. The majority shareholder then passed a shareholders' resolution amending the memorandum and articles of association of the company to give the company the power to compulsorily redeem the shares held by any shareholder who had been found to have either (i) made material misrepresentations in the course of acquiring his shares, or (ii) caused the company to incur or suffer any disadvantage or negative publicity. The company then gave notice purporting to redeem the minority shareholder's shares.

Previous cases have stated that the power of a special majority (75%) of shareholders to amend the articles and bind the minority will only be valid if it is "exercised in good faith in the interests of the company" (Sidebottom v Kershaw Leese and Co Ltd [1920] 1 Ch 154) or "bona fide for the benefit of the company as a whole" (Allen v Good Reefs of West Africa Ltd [1900] 1 Ch 656).

These principles were clarified in Citico Banking Corp NV v Pussers Ltd [2007] UKPC 13 and summarised in Re Charterhouse Capital Ltd [2015] EWCA Civ 53 which stated that:

  1. a power to amend the articles will be validly exercised if it is exercised in good faith in the interests of the company;
  2. it is for the shareholders, and not the court, to say whether an alteration of the articles is for the benefit of the company, but it will not be for the benefit of the company if no reasonable person would consider it to be such;
  3. the mere fact that the amendment adversely affects, and even if it is intended to adversely affect, one or more minority shareholders and benefit others does not, of itself, invalidate the amendment if the amendment is made in good faith in the interests of the company; and
  4. the burden is on the person impugning the validity of the amendment of the articles to satisfy the court that there are grounds for doing so.

In the Staray case, the court found that in making the amendments to the articles, the majority shareholder had acted in a manner which he believed was beneficial to the company, and that this view was not so oppressive or extravagant that no reasonable person could hold it. The fairness of the mechanism may be important here, and the amended articles provided that the redemption price payable would be fair market value, determined by a third party, without applying any minority discount. The fact that the intention of the amendments was to "clean up" the company by removing the minority shareholder did not affect this.

This suggests that if a genuine purpose for an amendment can be identified, which could reasonably be said to be for the benefit of the company, it may be possible to introduce compulsory acquisition powers, such as a drag-along mechanism or compulsory redemption, which are potentially prejudicial to the interests of minority shareholders, without their consent. It is notable that the court focused on the interests of the company and not the majority shareholder in assessing whether the amendment was open to challenge.

From the perspective of a minority shareholder, this case shows the importance of entrenching their rights in a shareholders' agreement which cannot be amended without the consent of the shareholder. Such an agreement could provide that the majority shareholder cannot amend the articles of the company without the consent of the minority shareholder.

This case did not consider the duties of directors, as opposed to shareholders, in relation to amendments to the articles. However, in Re Charterhouse Capital Ltd it was noted that the directors' duties needed to be considered separately to those of the shareholders. Each director should be cautious about being involved in these matters in this capacity, as they have a more stringent statutory duty to act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. This is a subjective test, but where any director is concerned that by backing the proposed amendments he could be in breach of this requirement, it may be preferable for the shareholder resolutions to amend the constitution to be requisitioned by the shareholders rather than proposed by the board.

It is also worth noting that in the Staray case, although the amendments to the constitution were held to be valid, the exercise of the new power was successfully challenged by the minority shareholder, as it was held that the minority shareholder had not, from the point of view of the company, made material representations in the course of acquiring his shares.