SCHOOL OF LAW

COMPANY LAW II

CORPORATE GOVERNANCE -
ADDITIONAL MATTERS
MR. KENNETH N.O. GHARTEY
24/25 MAY 2021
 Preliminary Scenario One
• Winneba Agriculture Company Limited was incorporated
on the 4th May 2015.
• It has five shareholders as follows:
– Ms. Mongson – 80,000 shares
– Mr. Asante – 6000 shares
– Ms. Edusei – 5000 shares
– Mr. Donkor – 9000 shares
• What would corporate decision-making, by the members in
general meeting to approve both ordinary and special
resolution, look like?
 Preliminary Scenario Two
• Percy Entertainment Limited was incorporated on the 24 June 2000.
• It has six shareholders as follows:
– Mr. John Percy – 40,000 shares
– Mrs. Ama Percy – 25,000 shares
– Ms. Akua Percy – 15,000 shares
– Mr. Frempong – 10,000 shares
– Ms. Nimo-Baffour – 5,000 shares
– Mr. Kwakye – 5,000 shares
• What would corporate decision-making by the members in general
meeting look like if all members of the Percy family decide to co-
operate in voting on resolutions?
 Topic Highlights
• Proper Plaintiff Rule The Rule in Foss v Harbottle
• Majority Rule
• The Derivative Claim
– The Derivative Claim under Common Law
– The Statutory Derivative Claim
• Representative Actions
• Minority Protection
– Injunction or declaration in event of illegal or irregular activity
– Oppressive Conduct
• Remedies
 I. Proper Plaintiff Rule
• Directors owe their duties to the company
– S. 191 (Act 992) - ‘A director of a company stands in a fiduciary
relationship towards the company and shall observe the utmost
good faith towards the company in a transaction with it or on its
behalf.’
• ‘It is a basic premise of any legal arrangement that only a
person who has a legal right can enforce that right’.
• This applies to companies as well.

Based on Kershaw (2012) , Chap. 15

 I. Proper Plaintiff Rule
• When wrong is done to a company therefore, it is the company
that acquires the right to enforce its remedies in light of the
wrong.
• The company is the therefore the proper [legal] person to sue
• The proper plaintiff rule – also called the rule in Foss v
Harbottle (1843).
• Which constituency is best placed to enforce the rights of the
company on the company’s behalf?
– The Board?
– The Members generally?
– A selection of the Members however selected?
Based on Kershaw (2012), Chap. 15
 I. Proper Plaintiff Rule
• Is the Board best placed to enforce the rights of the
company?
– Note the Board’s familiarity with the broader aspects of the businesses’ plans,
future prospects, distractions to management and employees of such litigation,
opportunity costs etc
• Are members better equipped to enforce the company’s
rights?
– Are they sufficiently knowledgeable about the day to day running of the
company?
– Do they sufficiently care?
– Remember rational apathy and the collective action problem
– What if the wrongdoer has influence over how the members in general
meeting are to vote?
Based on Kershaw (2012), Chap. 15
 II. Majority Rule
• Are the matters complained by the minority capable of
being confirmed or ratified by the majority in a general
meeting?
– Whilst the Court may be declaring the acts complained of to be void
at the suit of the present Plaintiffs, who in fact may be the only
proprietors who disapprove of them, the governing body of
proprietors may defeat the decree by lawfully resolving upon the
confirmation of the very acts which are the subject of the suit. The
very fact that the governing body of proprietors assembled at the
special general meeting may so bind even a reluctant minority is
decisive to shew that the frame of this suit cannot be sustained
whilst that body retains its functions.” – Wigram VC, Foss v
Harbottle, 2 Hare 203-204
 II. Majority Rule
• “Accordingly, for alleged wrongful acts or decisions by the
directors which the company can rectify or ratify through its
internal governance structures, the court would not intervene
at the instance of complaining minorities.”
• “The rule in Foss v Harbottle is therefore twofold:
– (a) that the proper plaintiff in actions alleging a wrong done to the
company is the company itself (“the proper plaintiff rule”); and
– (b) that if the alleged wrong is a matter which the company may
lawfully settle by itself, or in the case of an irregularity ratify or
rectify through its own internal governance structures, then no
individual member may bring an action (“the majority rule”).”

Nyinevi & Adjei-Bediako (2015-17) KNUST LJ 36

 II. Majority Rule
• Are Nyinevi and Adjei-Bediako right when they
claim that “That properly construed, the Companies
Act should be seen to have abolished the rule in
Foss v Harbottle, or watered it down to the extent
that it is practically as good as dead”?
 III. The Derivative Claim
• Board conflicts and the possibility of mistrust when the
wrong to the company proceeds from within the Board
itself
– A risk of reciprocal ‘back scratching’?
• What if the decision to litigate is taken away from the
Board and given to a merely rubber-stamping general
meeting?

Based on Kershaw (2012), Chap. 15

 III. The Derivative Claim
• Is it safer to perhaps give the power to litigate [sue] to a
smaller group of shareholders however selected?
– Note that these shareholders DO NOT thereby gain the
right to act as the company
– The right to act as the company is via a resolution of the
Board and a decision by members in general meeting.

Based on Kershaw (2012), Chap. 15

 III. The Derivative Claim
• These shareholders are given a right to bring action to enforce
the company’s rights on behalf of the company
• Such an action is known as derivative action
• ‘Such an action derives from the company’s rights and it is
designed to enforce the company’s rights, but it does not arise
as a result of a company decision to bring litigation’., p. 592
• Rational apathy problems may persist even when shareholders
are tasked to bring derivative claims
– Extent of legal fees
– Company indemnification of expenses

Based on Kershaw (2012), Chap. 15

 III. The Derivative Claim
• An important question
• Will a derivative action promote the commercial success of
a company?
– What if the shareholder or group of shareholders given that
opportunity to bring a derivative claim brings a suit that is not in
the real interest of the company? – ‘nuisance’ or ‘strike’ suits
– What if the shareholder or shareholder group takes a myopic view
of the company

Based on Kershaw (2012), Chap. 15

 III. The Derivative Claim
• The Derivative Claim under the Common Law
• Foss v Harbottle (1843) 2 Hare 462
– 1. The company is the proper plaintiff in action relating to a wrong done
to the company
– 2. If the shareholders in general meeting can ratify the wrongful acts
committed against the company, then no shareholder may bring a
derivative claim on behalf of the company
• Wigram V-C: ‘If a case should arise of injury to a corporation by some
of its members for which no adequate remedy remained, except
that of a suit by individual corporators in their private characters …
the claims of justice will be found superior to any difficulties arising
out of technical rules …’
Based on Kershaw (2012), Chap. 15
 III. The Derivative Claim
• Validation of Proper Plaintiff Rule
– Appenteng v Bank of West Africa and Others [1961] GLR 196, [1972] 1 GLR 153,
CA
• The [so-called] Exceptions to the Proper Plaintiff Rule
• Edwards v Halliwell [1950] 2 All ER 1064, Jenkins LJ
– ‘Where the act complained of is wholly ultra vires’
– Where the act complained of is a case of ‘a fraud on the minority’ and the
wrongdoers are themselves in charge of the company
• Estmanco v GLC [1982] 1 WLR 2, Megarry VC
– Where the act complained of is one ‘which could [only] validly be done or
sanctioned, not by a simple majority of the members… but only by some special
majority ….’

Based on Kershaw (2012), Chap. 15

 III. The Derivative Claim
• The Statutory Derivative Claim
– Framework: ss. 201-204, Act 992
– The first formal provision of a statutory derivative claim
• Section 201 (1) - ‘…the Court may, on the application of a
member or a director of a company, grant leave to that member
or director to
– Bring proceedings in the name and on behalf of the company or
subsidiary of the company; or
– Intervene in proceedings to which the company or any related company
is a party for the purpose of continuing, defending or discontinuing the
proceedings on behalf of the company or a subsidiary of the company,
as the case may be.
 III. The Derivative Claim
• Considerations by Court in granting leave to bring
statutory derivative claim – s. 201(3)
– “ … only where the Court is satisfied that either
– (a) the company or related company does not intend to bring,
diligently continue or defend, or discontinue, the proceedings, as
the case may be; or
– (b) it is in the interests of the company or a subsidiary of the
company that the conduct of the proceedings should not be left to
the directors or to the determination of the members as a whole.
 III. The Derivative Claim
• The costs of derivative action – s.202
– “…The Court shall … order that the whole or part of the
reasonable costs of bringing or intervening in the proceedings …
shall be met by the company unless the Court considers that it
would be unjust or inequitable for the company to bear those
costs.”
• Powers of Court where leave is granted- s. 203
– “…at any time, make any order it considers fit in relation to
proceedings brought by a member or a director or in which a
member or director intervenes….”
 IV. Representative Actions
• Under the repealed Companies Act, 1963 (Act 179)
provision was made
– For bringing Representative actions – section 324, Act 179
– For members to apply for injunction to restrain the company for
illegal or irregular conduct – section 217, Act 179
• It used to be a useful question therefore whether the
representative action under s. 324, Act 179 was the
equivalent of a statutory derivative claim?
– The inclusion of framework for bringing derivative claims under
section 201-204, Act 992 puts the matter to rest.
 IV. Representative Actions
• Where under a section of Act 992 it is provided that if legal
proceedings are instituted by a person, that person shall
sue in a representative capacity on behalf of that person
and any member of a class, … – section 205, Act 992

• Instances in which a Representative Action may be

brought under Act 992 -1
– In an action by a member or an officer to enforce an obligation
owed under the Corporate Constitution– s. 29(3), Act 992
– Illegal return or distribution of any of its assets to shareholders –
s. 72(3), Act 992
 IV. Representative Actions
• Instances in which a representative Action may be
brought under Act 992 cont’d
– Concerning the legality of a dividend payment – s. 72(4), Act 992
– Legal proceedings are brought by a debenture holder to enforce
the security of a series of debentures – s. 89(4)
– Legal proceedings to enforce liabilities for breach of directors’
duties owed under section 199– s. 200(1)(a), Act 992
– Proceedings to restrain a threatened breach of a duty under
sections 190 to 192– s. 200 (1)(b), Act 992
– Proceedings to recover from a director of the company a property
of the company – s. 200 (1)(c), Act 992
 V. Minority Protection
• The controlling shareholder agency problem
– The agency problem between shareholders
– Where controlling shareholders use their control and
influence in ways that benefit themselves but which are
detrimental to the minority shareholders’ interests
– Private benefits of control or controlling shareholder
agency costs

Based on Kershaw (2012), Chap. 16

 V. Minority Protection
• Examples of exercise of power by the controlling
shareholder
– Using voting power to alter terms of the Corporate Constitution
– Changing the understanding that minority shareholders have
about their role in the running of the company
– Excessive director remuneration
– Related party transactions [that transfer value to the controlling
shareholder]
– Altering the control relationships in the company/transferring
value to the controlling shareholder through share issues
– Forced sale of the minority shareholder’s shares
Based on Kershaw (2012), Chap. 16
 V. Minority Protection
• Regulating Controlling Shareholders - Companies Act,
2019 Approach
– Protection Against Illegal or Oppressive Action
+
– Use of the Powers of Inspections and Investigation of
Companies
 V. Minority Protection
• Part R, Protection Against Illegal or Oppressive Action
– 218. Injunction or declaration in the event of illegal or irregular
activity
– 219. Remedy against oppression
– 220. Member requiring company to purchase shares –
Complusory Buy-Out provisions
• Sections 221-227 are the framework
 V. Minority Protection
• Part S: Inspections and Investigations of Companies
– 228. Enquiries by Registrar
– 229. Appointment of inspector under order of the Court
– 230. Appointment of inspector on special resolution of the company
– 231. Power to carry investigations into the affairs of associated companies
– 232. Production of documents and evidence
– 233. Report of inspectors
– 234. Proceedings after investigations
– 235. Expenses of investigations
– 236. Request for info on persons interested in shares or debentures
– 237. Exemption from disclosure be legal practitioners and their clients and
bankers and their customers
 V. Minority Protection
• Injunction or declaration in the event of illegal or irregular
activity – s. 218, Act 992
– (1) The Court on the application of a member may by injunction
restrain the company,
– (a) from doing an act or entering into a transaction which is illegal
or beyond the power or capacity of the company or which
infringes a provision of the constitution of the company, or
– (b) from acting on a resolution not properly passed in accordance
with this Act or the constitution of the company, and may declare
that act, transaction or resolution already done, entered into, or
passed to be void.
 V. Minority Protection
• Injunction or declaration in the event of illegal or irregular
activity – s. 218, Act 992 – cont’d
• Additional points to note
– The power to bring an injunction does not derogate from powers
to a person dealing with the company – s. 218(2)
– Right to bring an application for injunction or declaration under s.
218 does not limit the right to bring proceedings to enforce
liabilities (under s. 200) or to apply to court for a remedy against
oppressive conduct (under s. 219) – s. 218(4)
– A court may require the applicant to give security for the costs of
the company – s. 218 (5)
 V. Minority Protection
• Remedy against oppression – s. 219, Act 992
• (1) A member or debenture holder of a company or the Registrar
after investigations (s.234), may apply to the Court for an order
– (a) that the affairs of the company are being conducted or the
powers of the directors are being exercised in a manner
oppressive to one or more of the members or debenture holders
or in disregard of the proper interests …, or
– (b) an act of the company has been done or is threatened or that
a resolution … has been passed or is proposed which unfairly
discriminates against, or is otherwise unfairly prejudicial to, one or
more of the members or debenture holders.
 V. Minority Protection
• There is often close connection between director[s] abuse of
power, controlling shareholder agency problems and oppressive
conduct as defined under s. 219 (Act 992)
• These are not always the same. The source of the oppression
differs and it is not always attributable to a controlling
shareholder’s direct or indirect exercise of power for personal
benefit.
• An action or injunction or declaration against illegal conduct
and an action for a remedy against oppressive conduct are
THEREFORE NOT only in respect of the controlling shareholder
agency problem.
 VII. Remedies
• In the event of illegal or irregular activity
– Injunction – s. 218 (1), Act 992
– Declaration – s. 218(1), Act 992
• In the event of oppression – s. 219 (2), Act 992
– (a) direct or prohibit an act or cancel or vary a transaction or resolution;
or
– (b) regulate the conduct of the company’s affairs in future; or
– (c) provide for the purchase of the shares or debentures of any
members or debenture holders of the company by other members or
debenture holders of the company or by the company itself and in the
case of purchase of shares by the company without regard to the
limitations imposed by sections 59 to 63 other than subsections, (5) and
(6) of section 59.
•
 References
• Companies Act, 992 (Act 992)
• Companies Act, 1963 (Act 179) - Repealed
• D Kershaw, Company Law in Context (2nd edn, 2012, OUP)