In Staray Capital Ltd v Cha  UKPC 43, a recent decision of the Privy Council on appeal from the BVI, the majority shareholder (who wanted, as he put it, to “clean up” the company) removed the minority shareholder, Mr Cha, as a director, and then also procured and passed a resolution to amend the Articles by the introduction of a compulsory share redemption mechanism – which was immediately activated against Mr Cha on the basis that he had acquired his shareholding by “material misrepresentation”.
Mr Cha challenged both the establishment of the mechanism and its invocation, and prevailed on the latter (at trial, in the Court of Appeal and in the Privy Council) – with the result that he keeps his shares. As to the former, the powers conferred on majorities to bind minorities are circumscribed: they must be exercised bona fide in the interests of the company. Bad faith will therefore undermine their exercise; but the court will only interfere in the majority’s view of what is in the interests of the company if no reasonable person would consider it to be such.
Although critical of the majority shareholder, the trial judge did not go as far as to find bad faith; and he found that a compulsory redemption mechanism (for value) where shares had been acquired by material misrepresentation was a provision which a reasonable shareholder could consider to be to the company’s benefit. The conclusion therefore became rather theoretical; and indeed there are very few cases in which such a challenge has succeeded.
However, the background facts doubtless assisted Mr Cha’s second ground of challenge: that the service of the redemption notice pursuant to the new Article was invalid because there had been no misrepresentation in respect of the acquisition of shares, or at least none which was material (to the company).
It was necessary for the operation of the compulsory redemption provision itself to be circumscribed otherwise the entire provision would be much more likely to be impeached as being one which no reasonable shareholder could entertain: if, for example, it had provided for redemption at the whim of the company (effectively the majority shareholder). This was not a company where it was necessary to redeem a shareholder for regulatory reasons: for example, a shareholder who is not considered a fit and proper person threatening a company’s broadcasting licence.
Although it was found that there had been misrepresentations, the trial judge found that none were material. This was a finding which proved unassailable on appeal, especially when the Privy Council stressed that materiality had to be judged in its particular context in the Article and the circumstances of the particular company.
Matthew Collings QC and Harneys acted for the successful minority shareholder, Mr Cha.
This article has been republished from www.harneysoffshorelitigation.com