Greenhalgh v Arderne Cinemas Ltd (1946)
Lord Greene, in Greenhalgh v Arderne Cinemas Ltd held that there are exceptions to Foss v Harbottle, according to which the company is the claimant in the event wrongs are committed against it, Hicks & Goo (2008). The exceptions to the Foss v Harbottle include a derivative action, under which minority shareholders are permitted to bring claims on behalf of the company itself. This effectively laid ground for the emergency of remedies for minority shareholders in a company, which informed the Greenhalgh v Arderne Cinemas Ltd ruling.
The court determined that instead of minority shareholders who are entitled to legal remedies in the event of losing a controlling position, which effectively implies that their rights have been affected in due conduct of business, Cahn & Donald (2010). The judges were unable to establish that because of the transaction the rights were varied, arguing that they actually remained what they had always been, given the fact that minority shareholders still had a single vote for every share, Dornseifer (2005).
The petitioner had been a shareholder (minority) in the company (Ardene Cinemas Ltd), whose majority shareholder had opted to dispose of his control over the company. Ardene Cinemas Ltd had two classes of shares, valued at two and ten shillings respectively, with the ten-shilling share comprising of two-shilling subdivisions. Every two-shilling share had a single voting right, Smith (1999). While the company’s articles required that the company’s shares may not be sold to outsiders without the existing shareholders having the “first refusal” at a reasonable price determined according to the company’s articles, this article was duly changed in a special resolution, Greenhalgh v Arderne Cinemas Ltd. Subsequently, the majority shareholder sought to dispose off his shares for six shillings/share to an outsider, coupled with his resignation from the company’s board of directors. The petitioner’s assertion that the change of the company’s article was invalid and constituted a fraud perpetrated against minority shareholders was found to be lacking in substance, since the transaction did not actually impact the rights of the minority shareholders, other than the transfer of control to an outsider, Dornseifer (2005).
The exorbitant fee that the majority shareholder got in exchange for his shares did not constitute a fraud perpetrated against the minority shareholders, not least because the decision to alter the company’s articles did not amount to individual gains to the majority shareholders, which makes the alterations legally valid, The City Law School (2008). It is to be expected that a company’s articles may be changed, and such alterations do not amount to unfair discrimination, if they are conducted in line with the set bounds under the companies Act and under the company’s constitution. Alterations of articles may only be illegal if it leds to the discrimination between minority and majority shareholders, so that it gives the latter advantages deprived from the former, as contemplated in Sidebottom v Kershaw, Leese & Co. Ltd (1920).
Cumbrian Newspapers Group Ltd v CWHNP
Subsequent precedents have however, taken a subtly different approach to the findings in Greenhalgh v Arderne Cinemas Ltd. In Cumbrian Newspapers Group Ltd v Cumberland and Westmoreland Herald Newspaper and Printing Co Ltd (CWHNP), the court held that benefits and rights annexed to certain shares, including the rights to participate in the surplus assets on the closure of the company as well as dividend rights, Cahn & Donald (2010). The court determined that the rights of the company that had been closed down, as a shareholder in CWHNP was not open to variation unless it is with its consent owing to the fact that shares, at the time of conferment, were class rights one a single or more of the members or shareholders. Further, the court determined three basic special rights categories. These included (i) the individual’s constitutional rights, (ii) rights that are annexed as shares and (iii) the rights that are unattached to certain shares, while conferring benefits on given members. These could not be strictly categorized as annexed rights to certain shares, because the special rights of the closed company, CNG derive from the constitution. In addition, the classification of rights deriving from the constitution are also emphasized in Eley v Positive Government Security Life Assurance Co Ltd, despite the fact that they did not always exist this way, Cassidy (2006).
The benefits and rights that are not attached to the any shares, but are conferred on beneficiaries in their capacities as shareholders or members of a company are contemplated in Bushell v Faith. In order to enforce these latter rights, members of the company only require to have possession of some shares, with the exception of article 12, under which a minimum shareholding of 10% is necessary for enforcement, Dornseifer (2005). To this extend, this ruling differs from Greenhalgh v Arderne Cinemas Ltd (1946). It provides for the enforcement of rights derived from Greenhalgh’s ownership of rights within the company, as against the absolute gauge which ruled out any such possibility on the basis of the fact that the minority shareholders’ rights remained unaffected, and thus could not hold the transaction to be illegitimate.
In addition, Cumbrian Newspapers Group Ltd v CWHNP (1986) provide realizes the difficulty of leaving class rights dependent on special resolution majorities during general meetings, unless such are attached to the majority shareholding, Dornseifer (2005). This would fail to cater for the abrogation or variation of special rights allowed by the company’s articles or the memorandum of understanding to class members, which applies to rights annexed to specific shareholding and those deriving as benefits to members. In this respect, this ruling equally challenges the legal and practical implications of rendering the general resolution alteration of articles that affects class rights, which were held as impeachable under Greenhalgh v Arderne Cinemas Ltd (1946).
The variations in class rights remains one of the most intricate areas in commercial/company law, laden with equally intricate judicial nuances and legal technicalities. Greenhalgh v Arderne Cinemas Ltd (1946) provided a helpful working definition, asserting that class itself was not technical, it is impossible to put policy or shareholders in the same class, in the event their rights or claims diverge, Degenhardt (2010). It is possible to attach rights to a class of shares, conferring a right to be paid off ahead of other shareholders/policyholders in liquidation, or to receive a preferential dividend. However, the most important principle is that changes in the rights attached to certain class of shares is governed by a special regime. This means that completely different class permission is necessary as way of affording legal protection to the special right holders. The rules governing special rights are under section 125 to 27 of the 1985 Companies Act, and in order to understand them, it is crucial to understand the exact meaning of variation. Not all acts of a company, which affect the interests of share classes represents a variation of the rights of that class of shares, White v The Bristol Aeroplane Co Ltd (1953). A bonus issue for instance, may not impact the right of preference shareholders, but these rights can be exposed by business practice, in the event of new preference stocks, relating to the rights enjoyment but not the actual rights, Degenhardt (2010). This is evidenced in Re John Smith’s Tadcaster Brewery Company Ltd (1953).
The conventional view of rights as attached to the class of shares as against to the persons that own those shares, is espoused in Greenhalgh v Arderne Cinemas Ltd (1946). In an even older precedent, Elly v Positive Government Security Life Assurance Co (1876), the company’s articles conferred the company solicitor’s rights on a company shareholder, with the right be interpreted as a class right, but it was a personal right, which was attached to the shareholder, Bourne (1998). This precedent provides a clear example of rights, which emerged in Cumbrian Newspapers Group Ltd v CWHNP (1986), which had not been recognized in Greenhalgh v Arderne Cinemas Ltd (1946), and thus providing grounds for contesting the ruling in the latter. This rule has however, not uniformly applied as evidenced in Fisher v Easthaven Ltd (1964), in which the unit holders (shareholders) in home unit company were considered to have a contractual relationship with the company, with a duty imposed on the company to refrain from altering its articles, if any such alteration leads to the abrogation of their rights. This once more, treats the rights of the unit holders as class rights, Degenhardt (2010).
Cumbrian Newspapers Group Ltd v CWHNP also benefited from the new Companies Act (1985). It provides under section 125-127 that rights other the constitutional rights amounted to class rights as defined under the Act, and that there was a definite legislative intention to specifically protect the rights that are annexed as shares as well as those that are unattached to certain shares, but confer benefits to holders, The National Archives (1985). As Justice Scott observed, the wide interpretation of the phrase “rights attached to any class of shares” would inevitably imply that shares can be categorized any class upon disposal or acquisition by an individual. In this case, the right of appointing the director had been invested in the petitioner, provided he had a 10% shareholding, implying that the rights were attached to the plaintiff, contingent on his ownership of shares as against the case in which the actual shares as is required under section 125, The City Law School (2008). This once more provides grounds for contesting the ruling in Greenhalgh v Arderne Cinemas Ltd (1946).
There is however, a number of grounds that may be problematic in contesting the Greenhalgh v Arderne Cinemas Ltd (1946) ruling. Under section 125(8) and 127(6) of the Companies Act (1985), references to class rights variation must be read to include abrogation references. Other than this, and under section 127(7), alterations of the company’s articles that results in the variation of the class rights as had been the case in Greenhalgh v Arderne Cinemas Ltd (1946), shall be decided on the basis of cases on variation and its nature, Cassidy (2006). A complaint from existing shareholders in White v Bristol Aeroplane Co, claiming that issuing further shares would have the effect of reducing the total voting power invested in the preference shares, which effectively implied that the class rights had been varied, was rejected, Sealy & Worthington (2007). The court held that voting rights are conferred by articles or by resolution, and may not be affected except in the case of a sanction by the shareholders or other members on who such rights are invested. The issue as to whether a variation of class rights or an abrogation has occurred due to capital reductions, where the company resolves in a general meeting resolves, by special resolution to reduce capital does not amount to an abrogation, Goulding (1999). In Re Chatterley v Whitfield Collieries Ltd, the court established that provided on capital reduction, the shareholders that receive prior repayments of capital during a wind up are the first to be cancelled and repaid on a reduction of capital.
Effect of s.994 Companies Act (2006) on the Greenhalgh v Arderne Cinemas Ltd.
Section 994 provides that a company shareholder may petition the court for an order defined under the part if the company’s affairs have been, or are being conducted in ways that unfairly prejudice the interests of members in general, or some part of the company’s members, including at least the applicant. Similarly, if the proposed or actual omission or act of a company, including those on its behalf results in, or may result in similar prejudice of some, or all the members’ interests, The National Archives (2006). Effectively, Mr. Greenhalgh is entitled under the act to petition the court to set aside the transaction that would see the shares transferred to an outside party. In addition, the plaintiff is equally entitled to petition the court to sanction the special resolution changes to the company’s articles, which effectively facilitated the transaction about which Mr. Greenhalgh is aggrieved, Hartmann (2009). However, while this legal protection is available, the ability of the plaintiff to proof that his, and other minority shareholders’ interests are being prejudiced by the special resolution changes of the articles, coupled by the transfer of shares to a third party and the resignation of the seller from the board of directors is questionable, Bourne, (1998).
The finding in Greenhalgh v Arderne Cinemas Ltd that the rights of the minority shareholders remained unaffected by the transaction, and there is no reason to belief that the changes in the articles was intended to prejudice the interests of the minority shareholders, Kershaw (2009). In addition, protections extended under the section also apply under section 994(2) to individuals who are not members of the company, but to whom the company shares are transmitted or transferred to through the operation of the law as is applicable to a company member, Smith (1999). Effectively, it is impossible to argue that the incoming shareholder gained rights which had been initially invested in the minority shareholders. The voting rights remained regardless of the price at which the shares had been disposed off, and the power that the minority shareholders held in the company remained exactly as had been without the departure of the former shareholder. Section 994 seeks to protect against class variations that prejudice the interests of some or all the members of the company, and the transaction in question, does not amount to a class variation. In the case of Greenhalgh v Arderne Cinemas Ltd, the articles do not set out that the consent of minority shareholders is necessary to facilitate the transaction by which Mr. Greenhalgh is aggrieved, such as in the case of Re Northern Engineering Industries Ltd (1994), which would effectively result in the petitioner seeking satisfaction for the failure of his consent.
There is no claim on the part of the petitioner that the requirement in the articles providing for shares to be offered to the existing shareholders had been flouted, Smith (1999). By implication therefore, the benefits arising from the fact that Mr. Greenhalgh was a member of the company, to purchase the shares at a reasonable price, because there is no evidence that Mr. Greenhalgh or any other existing shareholders was interested in purchasing the said shares. Additionally, other than the requirement that the existing shareholders be offered the first refusal, there is no other provision in the company’s articles that would place restrictions on the transfer of shares. Without these restrictions, the company’s shares remain freely transferable, House of Fraser plc v ACGE Investments Ltd.
Remedies have always existed for minority shareholders, whose interests are prejudiced during the conduct of the company’s affairs, arising from the use of the voting power of the majority. However, the access to these remedies is complicated by the intricate legal and practical interpretations of whether or not the prejudicial majority action resulted in the variation of the class rights invested in the minority shareholders or any other class of shareholders. With time, general rules have emerged in the interpretation of class variations that have moved away from Greenhalgh v Arderne Cinemas Ltd, to include rights that are unattached to shareholding to those arising from…