Newsletter 49

Monday 19 August 2024

Your weekly SQE Prep Quiz has arrived

Dear Subscriber,

I hope you had a great weekend. Please see below for the question, the answer to the previous question and associated resources. This is the web version of this newsletter.

Question: Emily, an elderly woman, is persuaded by her nephew, Robert, to transfer the ownership of her house to him. Robert tells Emily that it will be easier for him to take care of her if he owns the property. Emily, who relies heavily on Robert for daily care and has no close family members, feels pressured to agree to the transfer despite her reservations. She signs the necessary documents, transferring the house to Robert without receiving any independent legal advice. A few months later, Emily regrets her decision and seeks to challenge the validity of the transfer, claiming that she was unduly influenced by Robert. Which of the following legal principles or actions is most relevant in determining whether the transfer of the house can be set aside?

1. Emily must prove that Robert physically coerced her into signing the transfer documents.
2. Emily can claim that the transaction was made under duress and demand that the property be returned.
3. Emily must demonstrate that there was a relationship of trust and confidence between her and Robert, and that the transaction calls for an explanation.
4. Robert can argue that the transfer was a gift, and Emily has no right to challenge it once completed.
5. The transaction can only be set aside if Emily can show that Robert committed fraud in obtaining the property.

Study Material: For more on the topic of this week’s question see the video linked here and if you are looking for a relevant* title, see here.

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Answer and feedback to last week’s question: GreenEarth Ltd. is a company focused on renewable energy projects. The company recently held a shareholders’ meeting where a special resolution was proposed to amend the articles of association, allowing the company to enter into new ventures outside the renewable energy sector. A group of minority shareholders strongly opposed the amendment, arguing that it contradicts the company’s original mission and could expose the company to financial risks. Despite their objections, the resolution passed with the required majority. The minority shareholders are now considering legal action to challenge the amendment.

Which legal mechanism is available to the minority shareholders to challenge the amendment to the articles of association, and what must they prove to be successful?

1. A derivative action; they must prove that the directors breached their duties by proposing the amendment.
2. A petition for unfair prejudice under section 994 of the Companies Act 2006; they must prove that the amendment unfairly prejudices their interests as minority shareholders.
3. An application for judicial review; they must prove that the amendment was made in breach of public law principles.
4. An action for breach of contract; they must prove that the amendment violates the original terms of the shareholders’ agreement.
5. A claim for fraudulent misrepresentation; they must prove that the majority shareholders misled them about the purpose of the amendment.

Correct Answer: 2. A petition for unfair prejudice under section 994 of the Companies Act 2006; they must prove that the amendment unfairly prejudices their interests as minority shareholders. Feedback: The correct legal mechanism available to the minority shareholders is to file a petition for unfair prejudice under section 994 of the Companies Act 2006. To be successful, the minority shareholders must prove that the amendment to the articles of association is unfairly prejudicial to their interests. This could involve demonstrating that the amendment contradicts the company’s original mission or exposes the company to risks that were not agreed upon when they became shareholders, it is however unlikely to succeed on the facts as presented.

A derivative action (option 1) is typically used to address wrongs done to the company itself, often involving breaches of directors’ duties, rather than issues affecting minority shareholders directly. Judicial review (option 3) is a public law remedy and does not apply to private company matters. An action for breach of contract (option 4) would require evidence that the amendment violated a specific external agreement among shareholders, which is not indicated in this scenario. Fraudulent misrepresentation (option 5) would require proof that the majority shareholders intentionally misled the minority, which is not suggested by the facts of the case. Therefore, the most appropriate and relevant course of action for the minority shareholders is to petition for unfair prejudice under section 994, success prospects aside.

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All the best

Dr Ioannis Glinavos

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