Statutory exceptions to Foss V. Harbottle

The most important statutory exception is the right to petition against unfair prejudice.

Petition against unfair prejudice.

Any member of a company may apply to the court by petition on the ground that the affairs of the company are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or some part of its members.

The court can make any order on the petition.

It is important to identify what is meant by unfair prejudicial conduct and the nature of the interests of the members capable of unfair prejudice.

The nature of the members' interests The first reported decision on [1983] limited the right to petition to cases where the unfair prejudice affected a person in his capacity as a shareholder. In Re a Company [1986], Hoffman j said: 'In the case of a small private company in which two or three members have ventured their capital... on the footing that each will earn his living by working for the company as a director . . . [the] member's interests . . . may include a legitimate expectation that he will continue to be employed as a director and his dismissal from that office and exclusion from the management of the company may therefore be unfairly prejudicial to his interests as a member.' Relief has been obtained where the petitioner complained of removal from office amongst other things.

Successful actions have been brought in respect of breaches of fiduciary duties including conflict of interests, excessive remuneration and a rights issue regarded as an attempt to dilute the interest of a shareholder.

Just and equitable winding up

The court has a wide discretionary power to wind up a company on a petition presented by a member. The categories of complaint are unclear and Lord Wilberforce in the leading case of Ebrahimi v. Westbourne Galleries Ltd [1973] stressed that in his view the general words should not be reduced to the sum of particular instances.

In this case, the plaintiff had been in a partnership with N and they later formed a company to take over the business and became the only directors and shareholders, each holding 500 shares. When N's son joined the business, E and N transferred 100 shares to him and he became a director. Ebrahimi was removed from the board and petitioned for the just and equitable winding up. The House of Lords held that Ebrahimi and N had formed the company to perpetuate their previous partnership, and that E's exclusion was unjust.

Lord Wilberforce suggested that the remedy applied to a small private company where one or more of the following factors was present: (i) it should be an association formed or continued on the basis of a personal relationship, involving mutual confidence; (ii) there should be an agreement that all or some of the shareholders shall participate in the management of the business; and (iii) there should be restrictions on the transfer of the members' shares.

The equitable principles of Ebrahimi have been applied outside the framework of a winding up petition. Thus in Clemens v. Clemens Bros. Ltd [1976], the court set aside an issue of additional shares aimed at diluting the plaintiff’s holding.