Company Law — Lecture 16

1. Company Law — Lecture 16 • Consequences of breach of duties • company’s remedies for breaches of officers’ common law duties • Relief from liability for breach of duty • relief given by the company (“ratification”) • insurance and indemnification

2. Company Law — Lecture 16 • Enforcement • the Financial Markets Authority Act 2011 (FMA Act) • FMA enforces provisions of “financial markets legislation” • Meaning of financial markets legislation is set out in Schedule 1 of the FMA Act • statutes listed in Part 1: enforceable by FMA • Financial Advisers Act 2008 • Financial Service Providers Act 2008 • Securities Act 1979 • Securities Markets Act 1988 • statutes listed in Part 2: enforceable by FMA to the extent that they apply to financial markets participants

3. The company’s civil remedies • Remedies for breaches of officers’ common law duties • injunction • eg to restrain proposed improper issue of shares • compensation or damages • account of profits • eg Regal (Hastings) (Lecture 15) • rescission of contract • constructive trust

4. Relief from liability for breach of duty • Relief given by the company — “ratification” • ordinary resolution of shareholders in general meeting can ratify some breaches of officers’ duties • s 177, Companies Act 1993 • Insurance and indemnification • insurance • here, insurance company pays any compensation/damages ordered against the director • premiums may be paid by the director or the company • s 162, Companies Act 1993 — the company can insure a director against • non-criminal liability • costs incurred in defending criminal proceedings where the director is acquitted • the purchase of insurance must be expressly authorised in the company’sconstitution • the cost must be fair

5. Relief from liability (cont) • Insurance and indemnification (cont) • indemnification • Steigrad v BFSL 2007 Ltd • s 162, Companies Act 1993 — a company cannot indemnify a director from • liability for any act carried out in his or her capacity, or • costs incurred in defending any claim against him or her • two exceptions to prohibition on indemnification • where a director succeeds in defending legal proceedings, the company can indemnify for costs • a company can indemnify a director against liability to another person • indemnity must be authorised by the constitution

6. Company Law – Lecture 16 (cont) • Shareholders’ remedies - overview • introduction to shareholders’ remedies • shareholders’ statutory remedies • oppression remedy • liquidation • statutory injunction • statutory right to inspect company books • shareholder’s personal action • shareholder’s derivative action

7. Introduction to shareholders’ remedies • Shareholders’ remedies may be available where directors have breached their duties • But sometimes shareholders can also obtain a remedy even though there has been no breach of directors’ duty • Shareholders have statutory and common law remedies • Why do minority shareholders need remedies? • directors and majority shareholders can use their power to harm minority shareholders • it is not always possible for a shareholder to sell his or her shares • this explains why the oppression remedy is most commonly sought by shareholders in small companies rather than public companies

8. Shareholders’ statutory remedies • Oppression remedy • Putting the company into liquidation • Statutory injunction • Statutory right to inspect company books

9. Oppression remedy — s 174 • Court can give a shareholder a remedy where • the conduct of the company’s affairs has been, or is likely to be, conducted in a manner that is oppressive to, unfairly discriminatory or unfairly prejudiced against a shareholder • What types of companies can the remedy apply to? • in theory, any company • in practice, most oppression actions are brought by shareholders of companies that have only a few shareholders • An oppression action under s 174 of the Companies Act 1993 may be brought by • a shareholder • a former shareholder, or • an entitled person

10. Oppression remedy (cont) • What are the tests? • Thomas v HW Thomas: Is the decision made by the director one that results in an unjust detriment to the interests of a shareholder or shareholders of the company? • it is not necessary for directors to have acted dishonestly or intended to harm the minority — it is a question of impact: is the conduct oppressive in effect? • whether a reasonable bystander would see the conduct as oppressive

11. Oppression remedy (cont) • Examples of oppressive conduct • diversion of business opportunities • improper exclusion from management • does the shareholder have a “reasonable expectation”? • unfairly restricting dividends • oppressive conduct of board meetings • autocratic exercise of power by a director • share issue for improper purpose • breaches of directors’ duties

12. Oppression remedy (cont) • What remedies can the court provide? • a range of remedies, eg • the company acquire the shareholder’s shares • the company pay compensation • regulating the company’s affairs • alter or add to the company’s constitution (if there is one) • appoint a receiver • direct rectification of the company records • put the company into liquidation

13. Court-ordered liquidation • Section 241, Companies Act 1993 • A shareholder can apply to court to have company put into liquidation where • just and equitable, or • the company or board has persistently failed to comply with the Companies Act, or • the company does not comply with s 10 (essential requirements of a company) • Just and equitable ground • deadlock • fraud or misconduct • failure of substratum • the reason for the company’s existence is no longer being pursued • breakdown in mutual trust

14. Statutory injunction — s 164 • Court order to stop someone breaching the Companies Act1993, the Financial Reporting Act 1993 or the company’s constitution • Who can apply? • the company, or • a director or shareholder of the company, or • an entitled person

15. Statutory right to information and to inspect books • Section 178, Companies Act 1993 — shareholder can apply to company for information • Section 179 • the court can appoint a person to inspect the records of the company • the inspection must be for a proper purpose

16. Shareholder’s personal action • Personal action = a legal action to enforce a personal right • How might a shareholder have a personal right? • from an express contract • between the shareholder and other shareholders, or • between the shareholder and the company (see Lecture 6) • How might a shareholder have a personal right? • from the Companies Act1993 • s 169 confers a personal right on shareholders to bring an action against the directors of a company for a breach of duty owed to the shareholders

17. Shareholder’s derivative action • What is a derivative action? • an action to enforce a right of the company • eg to enforce a breach of directors’ duties • even though a shareholder brings a derivative action, the action is not for the benefit of the shareholder — it’s for the company’s benefit • any remedies go to the company • Section 165 — the statutory derivative action • introduced into the Companies Act 1993 • supersedes common law actions • Who may apply? • a shareholder of the company or a director of the company

18. Shareholder’s derivative action (cont) • What are the criteria? • the court must be satisfied that • the company does not intend to bring proceedings or take the appropriate action in the existing proceedings, or • it is in the interests of the company that the conduct of the proceedings should not be left to the directors or to the shareholders as a whole