UK: English Courts Able To Move Quickly Where Shareholders’ Interests Put At Risk By Management

Facts
The Claimant, Mr Tarling, was a 60% shareholder in the Defendant, Mission Today Limited ("the company"), a company which transmitted religious television programmes through its satellite channel.

The company was in a perilous financial position.

There was only one director of the company (who was also a 10% shareholder) who appeared to be mismanaging the company’s affairs. The director did not retain the confidence of the company’s creditors, on whom the company depended for the transmission of its television programmes, and the creditors made it clear that unless new management was brought in and some arrangement was come to with them within a very short time period, they would cease the company’s transmission of its programmes and the company would be forced into liquidation.

Mr Tarling asked the director to convene an extraordinary general meeting for the purpose of considering appointing two new directors to the board, who were experienced in corporate recoveries. These individuals had been identified and had confirmed that they were ready to act if appointed.

The director made it clear that he would not convene an extraordinary general meeting and consequently Mr Tarling was faced with the prospect of himself requisitioning a meeting pursuant to section 368 Companies Act 1985. However, that process would take six weeks and by that time the company would have been forced into liquidation.

Accordingly, Mr Tarling issued a Part 8 claim, pursuant to which he sought an order of the court that an extraordinary general meeting of the company be convened pursuant to section 371 Companies Act 1985 for the purpose of considering and if thought fit passing resolutions appointing the individuals to the board.

Section 371
Section 371 provides:

• If for any reason it is impracticable to call a meeting of a company in any manner in which meetings of that company may be called, or to conduct the meeting in manner prescribed by the articles or this Act, the Court may, either of its own motion or on the application –

The Court has exercised its discretion under section 371 in circumstances where minority shareholders have exploited quorum provisions in the company’s articles to frustrate a majority shareholder’s exercise of his statutory right to remove directors at extraordinary general meetings. For example, in Opera Photographic Ltd (1989) 1WLR 634, the Applicant (a director) held 51% of the shares and 49% were held by the only other director. The quorum for meetings of directors or of shareholders was two. Disagreements arose between the Applicant and the other director and the Applicant convened a meeting pursuant to section 368 for the purpose of considering a resolution for the removal of the other director. However, the other director did not attend, so there was no quorum and the meeting could not proceed. Consequently, the Applicant issued an originating summons under section 371 seeking an order of the court to convene the meeting, at which one member would constitute a quorum for the purpose of considering the resolution for the removal of the other director. Mr Justice Morritt held that as the Applicant, as a 51% shareholder, had a statutory right to remove the other director, the other director should not be able to use the provisions in the company’s articles relating to quorum as, in effect, a power of veto over the Applicant’s statutory rights and that as a consequence an order should be made permitting the Applicant to requisition a meeting at which one member constituted a quorum.

This case followed a number of similar decisions of the court, the first of which was the decision of Wynn-Parry J in El Sombrero Ltd [1958] Ch 900 (a case concerned with the antecedent of section 371, namely section 135 Companies Act 1948).

However, the Court has been reluctant to extend the exercise of its discretion further and in particular has refused to exercise it to resolve a true deadlock between two 50% shareholders in a company (Ross -v- Telford [1998] 1BCLC 82) or to override the class rights of some of a company’s members (Harman -v- BML Group Ltd [1994] 1WLR 893).

The Judgment
Rimer J accepted that, bar section 371, Mr Tarling’s only alternative was to requisition an extraordinary general meeting himself pursuant to section 368 and that "that would take some weeks to achieve". He equally accepted that "this company is not one which can afford weeks. I cannot even really afford days". As was said by Wynn-Parry J in El Sombrero, "impracticable" does not mean "impossible" and the issue as to whether for the purposes of section 371 it is "impracticable to call a meeting" is merely whether in the particular circumstances of the case "the desired meeting of the company" could as a practicable matter be concluded.

In the instant case, the desired meeting of the company was a meeting convened for the purpose of considering appointing the individuals as directors. The only way in which Mr Tarling could call that meeting was by requisition under section 368, which would take six weeks. The meeting needed to be called in a matter of days. Consequently, Rimer J found that it was "impracticable to call a meeting of the company in any manner in which meetings of the company may be called because there is simply not time to do so".

Consequently, Rimer J ordered that Mr Tarling be at liberty to convene the meeting at one day’s notice and that one member of the company constitute a quorum.

This decision marks an unprecedented development in the exercise of the Court’s discretion under section 371. It provides a welcome demonstration that, in cases of real commercial necessity, the Court has the ability to move swiftly in response to an initiative by shareholders to correct the misdeeds of management.