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The “tunnelling” of corporate wealth by controlling shareholders has attracted much
academic attention, especially after the 1997-1998 crisis.1 One way to deal with the
controlling shareholder opportunism https://www.51lunwen.org/ is to subject their conducts to court review. In the
UK, controlling shareholders’ conducts might be challenged in court in three types of
actions: a derivative action for breach of directors’ duty,2 a common law action for
abuse of majority power, or a statutory action for unfair prejudice. This paper is focused
on the substantive standards adopted by the UK courts when they deal with these
controlling shareholder-related cases. Section 2 to 4 will discuss the three types of
actions respectively, followed by a comparative section of the substantive standards
used in each action concerning the fair use of controlling power. By conclusion, the
author argues that the standard set by the UK judiciary for the substantive fairness of
controlling shareholders’ conducts is “no non-proportional distribution.”
II. Directors’ Duty and Derivative Action
The separation of ownership and control is seen as one of the basic features of modern
companies.3 While the shareholders are said to be the owners of the corporation, the
power to manage the corporation is delegated to the board of directors.4 Under most
circumstances, therefore, controlling shareholders dominate the company through their
This paper is based on a section in my Ph.D. thesis. My research is concerned with the role of court
review in dealing with controlling shareholders opportunism in public companies. The research is limited
to the setting of public company as a going concern.
1 Simon Johnson et al., “Tunnelling” (available at https://papers.ssrn.com.paper.taf?abstract_id=204868),
p2. Simeon Djankov et al., “The Law and Economics of Self-Dealing”(available at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=864645), p1.
2 The derivative action was originally a common law action, but later was substituted by Companies Act
2006 with a statutory derivative action. See the section on derivative actions below.
3 Reinier R. Kraakman et al., The Anatomy of Corporate Law, Oxford Univ. Press, 2004, pp11-14.
4 Id., pp33-34.
control over the board of directors.5 The regulation of controlling shareholders is thus
closely related with the regulation of directors.6
The legal framework of regulating directors’ conducts can be used both directly and
indirectly in the regulation of controlling shareholder conducts. The direct approach is
to identify a controlling shareholder as a shadow director, then subject him/her to
certain duties owed by a de jure director; the indirect approach is to hold the de jure
directors liable for breach of their duties if they defer to the will of the controlling
shareholder and further the controlling shareholder’s interest at the cost of the company.
Directors’ Duty
Directors have a fiduciary duty to act in good faith for the best interests of the
company,7 which has been interpreted by the British case law to mean the interests of
the shareholders as a group.8 The fiduciary duty has several facets. Subjectively, they
must act with good faith belief that their conduct is in the best interest of the corporation;
and objectively, they should act with proper purpose, must not fetter their discretion,
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