Managing conflict of interest

Managing conflict of interest

Conflict of interest between shareholders, sometimes inbuilt in the affairs of a company, is a common phenomenon around the world. In order to ensure good corporate governance and balance competing interests between shareholders, different rules and regulations have been formulated through statutes and case laws. In Bangladesh, the laws relating to company affairs are governed by, inter alia, the Companies Act 1994 ("CA 1994").
Section 233 of the CA 1994 protects the interest of minority shareholders in Bangladesh. In simple terms, this provision states that any shareholder of a company, who holds one-tenth of the issued share capital (in case the company has a share capital) and not less than one-fifth of the number of persons registered as shareholders (in case the company does not have a share capital), can bring a legal action if: (a) the affairs of the company are being conducted in a manner prejudicial to one or more of its shareholders' interest, (b) the company is acting or is likely to act in a manner which discriminates or is likely to discriminate the interest of any shareholder, or (c) any resolution has been passed or is likely to be passed which discriminates or is likely to discriminate against the interest of one or more of the shareholders.
In order to bring any claim under Section 233 of the CA 1994, the minority shareholder must prove that the affairs of the company are or were being run in a prejudicial manner by the majority shareholders. Section 233 of the CA 1994 does not itself define the term 'prejudicial'. It is a broad concept developed through case laws incorporating different actions and omission which are likely to affect the interest of the minority shareholders. The concept of prejudice is flexible which enables the Companies Court to mould this concept according to the circumstances of the case.
There are many examples which may form the subject matter of a Section 233 case. However, the most common is when majority shareholders act in a way which deprives the minority shareholder of its share in the profits of the company. This may be done by the majority shareholders by keeping the minority shareholder in dark about the affairs of the company. This may also take place when the majority shareholders take a decision to divert funds from the company for their own benefit or use as opposed to returning the money in the form of dividend to the minority shareholders. Other such cases of prejudice may include profit reallocation, asset misuse, transfer pricing, selling services or a part of the company to other firms where the majority shareholders are the actual or beneficial owners. Although many cases related to Section 233 revolve around the fact that the minority shareholders have not received any dividend from the company, non-declaration of dividends, on its own, does not constitute prejudice unless it is proved that the minority shareholder has been deliberately discriminated. In a Bangladeshi case, the Companies Court held that Section 233 of the CA 1994 enables a shareholder to obtain a remedy where a company with sufficient profit persistently refuses to pay dividends to the minority shareholder.  
The next issue which is found in the majority of Section 233 cases is the issue of legitimate expectation. Whenever a person becomes a shareholder in a company, he/she will legitimately expect that he/she will participate in the management and affairs of the company and enjoy the proportionate share of the benefits accruing from the company. This legitimate expectation is protected by the laws of Bangladesh. So, any action by the shareholders in control, which results in a substantial deviation from this expectation may give rise to a Section 233 case. In a famous English case, it was held that if management participation was a legitimate expectation then its demise could rightly find a claim for unfair prejudice.
Misappropriation is a very common allegation in Bangladesh generally made against the majority shareholders. If the minority shareholders have been a victim of misappropriation, then it can rightly seek the protection of the Companies Court in order to protect their interests. Minority shareholder can successfully seek the protection of law if the majority shareholders have been endeavoring, whether directly or indirectly, to appropriate to themselves money, property or advantages which belongs to the company.
In order to successfully establish a Section 233 case, a minority shareholder must prove that the value of his shareholding in the company has been seriously diminished or jeopardised due to the actions of those persons who are in de facto control of the company. The conduct complained of should be burdensome, harsh and wrongful. A lack of probity and fair dealing in the affairs of a company to the prejudice of the minority shareholder may also constitute oppression and is likely to be the subject matter of a Section 233 case. Whatever the complaint by the minority shareholder, he/she has to prove a credible case before the Companies Court with substantial evidence. An unfounded allegation as to oppression and prejudice is liable to be rejected by the Companies Court. The test of prejudice is generally objective –there is no need to show any conscience knowledge on the part of the controlling shareholder that the conduct was unfair, or any other evidence of bad faith. It would be a question of whether a reasonable bystander would regard it as unfairly prejudicial.
Once proved, the minority shareholders may seek for a range of orders from the Companies Court. The Companies Court has ample discretion to decide the case and grant any remedy as it deems fit based on the particular situation. In some cases, the Court can make any just order (even beyond the relief sought for) in order to bring the affairs of the company to its right track and safeguard the interest of the minority shareholders. This power may include, inter alia, appointing a receiver to manage the company's affairs temporarily. However, generally, the remedy sought by the minority shareholders is a buy-out of their shares by the majority shareholders at a fair market value to be determined by independent auditors.
Many shareholders are generally not aware of their legal rights and duties. In fact, there is very little awareness about shareholders' rights and responsibilities. It is a common fact that upholding shareholder democracy is one of the fundamental aims of corporate governance. However, law is not enough to shield the interests of minority shareholders unless they themselves are pro-active and aware of their rights and responsibilities.



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