majority rule, minority protection and investigation of companies

The principle of corporate sovereignty is that is that if an actionable wrong has been done to the company whether arising from statute, contract, tort or the fiduciary position of the party in breach, the company is the proper person to seek a remedy for the breach. This rule was laid down in the case of Foss v. Harbottle. It has been adopted in Section 341 of the Companies and Allied Matters Act. The rule of corporate sovereignty is of two principles:

• a. The company will ultimately be the plaintiff to sue in respect of wrong done to the company.
• b. The court will not intervene in the management where the irregularity complained of is within the scope of powers of the majority shareholders to remedy by means of an ordinary resolution.

The exceptions to the rule of corporate sovereignty are that a member of a company may by injunction or a declaration restrain the company from the following:

• a. Entering into a transaction which is illegal or ultra vires. Parke v. Daily News (1962) All ER 929, Hogg v. Cramphorn (1967) Ch. 254, Section 343(a) CAMA, 2020.
• b. Purporting to do by ordinary resolution any act which by its articles or the Companies and Allied Matters Act required to be done by special resolution. Edwards v. Halliwell (1950) 2 All ER 1064, Section 343 (b) CAMA, 2020.
• c. Any act or omission affecting the applicant’s individual rights as a member. Pender v. Lushington (1877) Ch. D 670, Section 343 (c) CAMA, 2020.
• d. Committing fraud on either the company or the minority shareholders where the directors fail to take appropriate action to redress the wrong done. Cooks v. Deeks (1916) A.C 554, Section 343 (e) CAMA, 2020.
• e. Where a company meeting cannot be called in time to be of practical use in redressing a wrong done to the company or to minority shareholders. Section 343 (e) CAMA, 2020.
• f. Where the directors are likely to derive a profit or benefit, or have profited or benefited from their negligence or from their breach of duty. Section 343 (f) CAMA, 2020.
• g. Any other act or omission, where the interest of justice so demands. Section 343 (g) CAMA, 2020.

The various ways which minority protection can be constituted are as follows:

• a. Members’ direct action: This could either be a personal action or a representative action.
• 1. Personal action: Personal action is one instituted by an individual in his personal name against the company and or its controlling members. A personal action does not arise where a member seeks to redress a personal wrong to him in his personal capacity. It is solely to enforce a personal right. Where a member institutes a personal action to enforce a right due to him personally, or a representative action on behalf of himself and other affected members to enforce any right due to them, he r they are entitled to damages for any loss incurred on account of the breach of that right and declaration or injunction to restrain the company or the directors from doing a particular act. Section 344(1) (2) CAMA 2020.
• 2. Representative action: A representative action is one in which an individual or group of individuals sue for himself or themselves as representatives of a larger group of persons on allegation of a breach of a right common to them. Representative action thus involves the plaintiff suing for and on behalf of himself and other shareholders of the company other than the defendants. Section 344 CAMA, 2020.
• b. Derivative action: Derivative action is one which the plaintiff’s right of action is from that of the company. The basic feature and uniqueness of this domain of action is that it is an action which the company, alone, ordinarily is empowered to maintain. Section 346 CAMA, 2020.

According to Order 2 Rule 1 of the Companies Proceeding Rule, for an applicant to bring an application for derivative action, the following must be done by the applicant:

• a. The applicant must be qualified, that is, the applicant must be a registered or beneficial holder or a former registered or beneficial holder of a security of the company.
• b. The applicant must apply to the Federal High Court for leave to bring derivative action in the name of the company or to intervene in an action or defend or discontinuing the action on behalf of the company.
• c. The application must be by originating summons supported by verifying affidavit and written address.

The court must be satisfied of the following before it can grant an application for leave to bring a derivative action:

• a. The court must be satisfied that the wrong doers are the directors who are in control and will not take necessary action.
• b. The court must be satisfied that it appears to be in the best interest of the company that the action be brought, prosecuted, defended or discontinued.
• c. The court must be satisfied that the applicant has notified the directors of his intention to apply to court.
• d. The court must be satisfied that the applicant is acting in good faith.

In the event that the court is satisfied with the application for leave to bring a derivative action, the court will make the following orders:

• a. Authorize the applicant or any other person to control the conduct the action.
• b. Give directions for the conduct of the action.
• c. Direct that any amount adjudged payable by a defendant in the action is paid, in whole or in part, directly to former and present security holders of the company instead of to the company.
• d. Require the company to pay reasonable legal fees incurred by the applicant in connection with the proceedings. Section 347 (2) CAMA, 2020.

According to Section 358 (2) of the Companies and Allied Matters Act, the circumstances that may warrant an application for the investigation of a company include the following:

• a. The affairs of the company are being or have been conducted with the intent to defraud its creditors or the creditors of any other person, or in a manner which is unfairly prejudicial to some part of its members.
• b. Any actual or proposes act or omission of the company including an act or omission on its behalf is or would be so prejudicial, or that the company was formed for any fraudulent or unlawful purpose.
• c. Persons concerned with the company’s formation or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards it or towards its members.
• d. The members of the company have not been given all the information with respect to its affairs which they might reasonably expect.

The procedure for the investigation of a company is as follows:

• a. Application is made by those entitled to do so.
• b. The Corporate Affairs Commission then appoints competent inspectors to investigate the affairs of a company and to report on them. Akinsaya v. Alatishe, Section 357(1) CAMA 2020. The appointment may be made:
• 1. In the case of a company having a share capital on the application of members holding at least one tenth of the class of shares issued.
• 2. In the case of a company not having a share capital, on the application of at least one tenth in the number of the persons on the company’s register of members.
• 3. In any other case, on the application of the company.
• c. The inspector thereafter must prepare an inspectors report. The following are the consequences of the report.

The consequences of the investigation of a company are set forth below:

• a. The Corporate Affairs Commission can institute civil proceedings against the company based on the inspector’s report. Section 364 CAMA, 2020.
• b. If crime is committed, then Corporate Affairs Commission is to inform Attorney-General of Federation to prosecute. Section 365 CAMA, 2020.
• c. The Corporate Affairs Commission can petition for the winding up of the company. Section 366 CAMA, 2020.
• d. The Inspector’s report may be tendered in evidence as an expert opinion. Section 368 CAMA, 2020.

The Corporate Affairs Commission will appoint inspectors to investigate the ownership of a company where it appears that there is good reason to do so. It may appoint one or more competent inspectors to investigate and report on the membership of any company, and otherwise with respect to the company, for the purpose of determining the true persons who are or have been financially interested in the success or failure, real or apparent of the company or able to control or materially to influence the policy of the company. Section 369 CAMA, 2020.