4.4.5.4.1 Exclusion from management

Between 1994 and 1995, 67.3 per cent of 156 cases under s. 459 (now s. 994) at the high court in London were in this category.1 As explained in the US part, exclusion itself will not necessarily be unfair.2 In fact, a shareholder's legitimate expectations will not have been defeated if he is excluded from the management by law or by the company's constitution, because company law allows the exercise of one's legal rights to prejudice his associates by removing them from the board.3 In a quasi partnership, however, where the relationship is not purely commercial, but "something more" exists, equitable considerations generally see it as unfair prejudicial if a shareholder employee is excluded from the management even if he is lawfully removed from his directorship. The reasoning in this category has already been expanded: an action under a power valid in law or in a constitution may not be valid in equity in a close company.

But if the terras of exclusion are provided in the agreement and relevant issues relating to the repurchase of shares have also been agreed upon, then the exclusion is not unfairly prejudicial because in this case, the legitimate expectation is no longer a secured participation in the management but a faithful enforcement of the negotiated exit terras (unless the terras prove to be prejudicial).4 In a corporate quasi-partnership, therefore, the exclusion of one quasi-partner from the management does not ipso facto entitle him to a successful petition under s. 994. But as stressed, s. 994 requires a case by case examination.

Another issue to mention is that if a minority shareholder has by his own conduct fundamentally breached his obligations under the agreements and breached the trust and confidence of other shareholders, or there is evidence that he has put the future of the company in jeopardy, other shareholders will be entitled to remove him from the board of directors. We have seen that this is the same in America.5 In Woolwich v. Milne, the court agreed with the defendants that by systematically bullying two employees, the minority shareholder P had breached the duty to act in the best interests of the company, and had betrayed other members' trust and confidence in him The court therefore considered his removal from the board justified and further clarified: "fairness had to be judged using an objective test and had it not been for his own conduct, P's removal would have been unfair." And in Grace vs. Biagioli, a shareholder/ director was removed from the board because he put himself in a conflicting position by seeking to buy a competing company. Both the Chancery Court and the Court of Appeal found that his removal as a director was justified, in spite of the history of the relations between the parties.6

Nevertheless, as also discussed in the US part, not every employee with shares is supposed to be treated as a shareholder employee, for instance, if the shares are received through any incentive schemes for employees. So not everyone's expectations should be taken into account if the relationship is a purely commercial one in the business.

In O'Neill,7 in the beginring, Mr O'Neill was "simply an employee who happened to have been given some shares." There was no agreement or implicit grounds for legitimate expectations which could be held by 0. So if 0 had claimed any unfairness onder s. 994 at that time, his petition could not have been established. Over time, however, the relationship between 0 and P had changed. O's efforts made him a genuine working member of the company, for example, he invested his own profits in the company by leaving part of it in the Joan account and he guaranteed the company's bank account and mortgaged his own house in support and so on. All these facts supported the fact that he had changed from an employee who happened to receive shares to a shareholder director in the business and was capable of enforcing equitable restraints upon the conduct of the majority shareholder.8 His claim was judged in such contexts.

In sum, cases should be analysed with regard to the special circumstances in every case and light should be shed on the differences between shareholder directors and other employees who have received some shares.