Whilst most shareholders in small and medium businesses will hope the situation never arises, many shareholders (particularly minority shareholders) do find themselves being treated badly. A lot of them do not have shareholders’ agreements in place but there are ways to protect their position and steps that can be taken if negotiation fails.
In this article Richard Gore and Claire Boucher, both Partners at Temple Bright, discuss how shareholders can protect themselves from unreasonable behaviour by other shareholders and directors. They detail what the terminology relating to a company means and how shareholders can go about trying to protect their position.
The options
The availability and viability of all the options open to shareholders depends, in large part, by the contractual framework that exists among the parties and in particular the terms of the articles of association for the company and any shareholders’ agreement.
Shareholders are likely to have various remedies open to them, including the following:
- The exercise of voting power attaching to their shares, whose effect will depend on factors such as the size of a shareholder’s stake and the terms of the articles and of any shareholders’ agreement. (For instance, the shareholders holding over 50% of voting shares can remove directors, unless they are prevented from doing so by the terms of a shareholders’ agreement.)
- A claim under the company’s articles of association if there has been a breach.
- A claim under the shareholders’ agreement if there is one and there has been a breach.
- A claim in the name of the company (known as a derivative claim).
- An unfair prejudice petition where the conduct is prejudicial to the petitioning shareholder and their shareholding.
- A winding up petition sought on just and equitable grounds.
I focus on the last three which may not be commonly understood.
What is a derivative claim?
If a shareholder believes that a director is acting inappropriately in their duties to the company, it is possible to apply to the court for permission to bring a claim in the name of the company against the individual director.
Any remedy ordered by the court will be for the immediate benefit of the company, not the shareholder themselves.
Specialist legal advice should be obtained on the merits of taking this course of action but sometimes a shareholder will consider it the most cost-effective, and direct, way to force a director’s hand and return the company to its proper position.
What is an unfair prejudice petition?
Under section 994 of the Companies Act 2006, it is open to a shareholder to petition the court where it is alleged that the company’s affairs are being conducted in a manner which is unfairly prejudicial to all or some of its shareholders.
Common grounds for bringing an unfair prejudice petition include the following:
- Misappropriation of company assets.
- Mismanagement of company affairs.
- Failure to pay reasonable dividends or retaining dividend payments without justification.
- Improper allotment of shares.
- Failure to consult with or provide information to the shareholder.
The remedy is most often used by shareholders with a minority shareholding, but it can be used in circumstances where there is a “quasi partnership” (a company operating in effect as a partnership of individuals) or where there is a 50/50 shareholding.
In most cases, the aggrieved shareholder will want a buyout of their shares at fair value, but the court can exercise a wide range of options including ordering a buyout of the other shareholders and ordering changes in the management of the company.
To succeed, the shareholder will need to prove both that the conduct is prejudicial (causing some harm or prejudice to their interest as a shareholder) and that it is unfair (objectively assessed against the context of a commercial relationship). The court will consider the position objectively and consider whether a hypothetical reasonable bystander would regard the conduct as satisfying these criteria.
What is just and equitable winding up?
This is a “nuclear option” which can potentially arise where relationships have broken down to such an extent that the company cannot continue operating.
In those circumstances, a shareholder (assuming they have held their shares for more than 18 months) can apply to the court to wind the whole company up but will need to show, as a prerequisite to the petition being granted, that there will be assets available for distribution to the shareholders once the company has been wound up.
Grounds that a court may consider suitable to justify a winding up may include the issues listed above in support of an unfair prejudice petition.
However, winding up is not guaranteed as it is at the court’s discretion as to whether to order it. The court may be reluctant to wind up a company which is in a good financial position, particularly if the shareholder has other options open to them and/or an offer is made to buy the shareholder’s shares for fair value.
Conclusion
There is a range of options available to shareholders if they are concerned about how a company is being managed and the impact on the value of their shareholding or the level of their dividend income.
This is a complex area, and this article only touches on the options available. Each situation is different, being affected by a wide range of legal and practical factors.
Early involvement from a specialist dispute resolution lawyer will help identify viable remedies and should ideally promote an upfront discussion between the parties before matters escalate as far as the courts. The English courts advocate parties exploring alternative means of resolution, such as mediation, and these options can be explored at any stage in the process.
If you have any questions arising from this article or have any issues you wish to discuss, whatever stage these may be at, please contact either Richard Gore (richard.gore@templebright.com or 07916 160387) or Claire Boucher (claire.boucher@templebright.com or 07939 288777)
This article is not legal advice, which it may be sensible to obtain before you take any decisions or actions in the areas covered.
Claire Boucher – is a partner at Temple Bright. She handles Dispute Resolution matters with a focus on company disputes (including shareholder disputes, unfair prejudice petitions, breach of directors’ duties, breach of warranty claims, derivative actions and breach of joint venture and shareholder agreements) and disputes concerning allegations of civil fraud (including misrepresentation, conspiracy, unjust enrichment, dishonest assistance, knowing receipt, misappropriation of company funds, and breach of fiduciary duties). Claire has a particular specialism in crisis management work, including fraud and injunctions. She is experienced in dealing with interim applications, including search and disclosure orders, as well as dealing with complex asset recovery and enforcement of international judgments in England and Wales. Claire also advises and acts for clients on contractual dispute matters (including cross border commercial contract disputes), debt recovery, and applications under the Companies Act, including applications to amend filing errors or inaccuracies at Companies House, and company restorations.
Richard Gore – is a partner at Temple Bright. He handles Dispute Resolution matters across a wide range of commercial areas but with a particular focus on director and shareholder disputes, including breaches of fiduciary duties and unfair prejudice petitions. He also deals with contentious commercial landlord and tenant disputes. He is described in legal directories as “extremely practical, totally unflappable and deals with the pressures of litigation exceptionally well” and as someone with “the perfect balance of seriousness and commerciality. He wants first and foremost to resolve disputes but if you can’t, he’s ready to roll his sleeves up and fight. He’s a good person to work with.”