Minority Shareholders: Rights and Remedies under the Maltese Companies Act

Company decisions are generally made based on the principle of majority rule, where the preference of the majority determines the company’s direction. However, unchecked majority power can result in the minority being unfairly treated or excluded. To address this, legal provisions and judicial intervention have been developed to safeguard minority interests.

The Maltese Companies Act, Chapter 387 of the Laws of Malta (the “Act”) provides important protections for minority shareholders. One of the most significant protections is the unfair prejudice remedy under Article 402 of the Act (the “Article”).

SCOPE OF ARTICLE 402

Essentially, the clause allows a member of a company to seek a remedy where the:

(i) The affairs of the company have been, or are being, or are likely to be conducted in a manner that is, or that any act or omission of the company have been or are or are likely to be, oppressive, unfairly discriminatory against, or unfairly prejudicial, to a member or members; or

The term “company affairs” broadly includes activities such as dividend policies, voting rights, and board decisions affecting shareholders. The wording of the Article clearly allows for claims concerning past, ongoing, or anticipated conduct.

The terms “oppressive,” “unfairly discriminatory” and “unfairly prejudicial” are not expressly defined by law. Their application is heavily dependant on the specific circumstances of each particular case.

An important point in favour of the complainant is that the conduct, acts or omission subject to an action under the Article need not be directed specifically at the complainant – it is sufficient if the conduct is oppressive, unfairly discriminatory, or unfairly prejudicial to any shareholder or group of shareholders.

There is no legal requirement for the complainant to establish all three elements. However, it is necessary to prove at least one of them. If none are established, no remedy may be granted.

1.1 Oppressive

Oppression generally refers to conduct that is burdensome, harsh, wrongful, or an abuse of power. While a distinct concept in theory, oppression often overlaps with unfair prejudice. In practice, cases that claim oppressive behaviour could often be based on unfair prejudice, with oppression often being given a broader interpretation.

1.2 Unfairly discriminatory

The law protects against unfairly discriminatory conduct, acts, or omissions. However, it is important to note that not all forms of discrimination are prohibited under Article 402. Protection is granted only where the treatment is both discriminatory and unfair.

Different treatment of shareholders does not automatically amount to discrimination, as it may sometimes be justified. In this context, discrimination refers to unequal treatment of shareholders in similar positions, without valid reason, causing harm.

1.3 Unfairly prejudicial

Similarly, for an action based on the element of unfairly prejudicial to succeed, the complainant must prove that such conduct, acts or omissions are both unfair and prejudicial.

The test for unfairness is objective, with no requirement to show the majority’s bad faith or intent to harm. Additionally, the prejudice must be real and substantial, and the focus lies on the effect the conduct, act or omission has on the complainant’s interest as a shareholder.

Examples include delayed or inadequate dividends, disproportionate financial benefits to certain members (such as excessive director remuneration), and dilution of shareholdings.

(2) in a manner that is contrary to the interests of the members as a whole

An additional ground for relief under Article 402 arises when the company’s conduct, acts, or omissions are contrary to the interests of the shareholders as a whole. In such cases, the shareholder initiating the action may act in a representative capacity on behalf of all shareholders.

The wording of the provision suggests that, in this context, it is not necessary to prove oppression, unfair prejudice, or unfair discrimination. t is sufficient for the complainant to show that the conduct, act, or omission undermines the collective interests of the shareholders, which in itself provides a basis for the court to grant an appropriate remedy to safeguard those collective interests.

WHO MAY BRING AN ACTION BEFORE THE COURT UNDER ARTICLE 402?

An action under Article 402 may be brought by any member of the company, with “member” generally referring to a shareholder. A shareholder may initiate proceedings regardless of the number of shares held. Holding a single share is sufficient to confer this right.

Interestingly, Article 402 does not explicitly limit this remedy to minority shareholders, implying that majority shareholders may also rely on it if justified by the circumstances.

AGAINST WHOM IS AN ACTION UNDER ARTICLE 402 FILED?

The choice of defendant in an Article 402 action depends on the specifics of the case and the nature of the remedy sought.

Usually, the defendants are those responsible for the challenged conduct, acts, or omissions. These often include majority shareholders and managing directors acting on behalf of the company. However, this is not always the case since control may also be exercised by shadow directors, provisional administrators, liquidators, or official receivers, who can also be defendants depending on the case.

AVAILABLE REMEDIES

Once the court is satisfied that the complainant has established one or more grounds under Article 402(1), it may grant appropriate remedies.

Article 402(3) specifically lists remedies that the court may order, including:

• regulating the conduct of the company’s affairs in the future;
• restricting or forbidding the carrying out of any proposed act;
• requiring the company to do an act which the applicant has complained it has omitted to do;
• providing for the purchase of the shares of any members of the company by other members of the company or by the company itself;
• directing the company to institute, defend, continue or discontinue court proceedings, or authorising a member or members of the company to institute defend, continue or discontinue court proceedings in the name and on behalf of the company;
• providing for the payment of compensation by such person as may have been found by the court responsible for loss or damage suffered as a result of the act or omission complained of, to the person suffering the said loss or damage;
• dissolving the company and providing for its consequential winding up;
• order requiring company to make, or not to make, amendments to its memorandum or articles under article 402 (5).

The list of remedies is exhaustive. This means that, while the court may consider any legitimate complaint brought under Article 402, it is strictly limited to granting only those remedies expressly provided by the law. The court does not have discretion to award remedies beyond those set out in law.

When seeking relief, the complainant has several options. They may specify a particular remedy they wish the court to grant and, if deemed inadequate, the court shall propose alternative remedies. Alternatively, the complainant may leave the choice of remedy entirely to the court’s discretion.

CONCLUDING REMARKS

While the majority rule in company matters may seem straightforward and practical, there is room for abuse of power. The remedy of unfair prejudice serves as an effective and accessible form of protection, particularly for minority shareholders, who may otherwise be vulnerable under majority control.