Shareholder Disputes

Although directors have day to day control of a company, shareholders (by way of majority vote) hold the ultimate power and can by way of majority vote dismiss directors and can appoint a new board of directors. Whilst, this is all very well, disputes can arise where an unhappy shareholder is not supported by the majority of the shareholders and is in turn classified a “minority shareholder”. It is at this point, minority shareholders will need to consider one of the following remedies:

1. A personal claim.
2. A derivative claim.
3. Just and Equitable Winding up.
4. Unfair Prejudice – statutory remedy.

Shareholders have some personal right which include:

1. The right to enforce rights conferred by the Company’s Articles of Association.
2. The right to object to the improper alteration of the Articles of Association.
3. The right to bring an action to prevent a proposed ultra vires transaction (i.e. a transaction that is outside the power of the company or its directors).

If there is a shareholder agreement in place, then shareholders may have remedies under this agreement which are enforceable against the signatories of the agreement.

However, if these remedies do not assist, a shareholder may need to consider another remedy.

A derivative claim is where a claim is brought by the shareholders in the name of the company. The shareholders’ right to claim derives from the company’s right to claim. In order to bring a derivative claim, claimants need to meet a two stage process. The first stage is to obtain the permission of the court to bring such a claim. To succeed at this stage, the claimant will need to show that they have a potential claim. The second stage involves the court considering a variety of factors which are set out in Section 172 of the Companies Act 2006.

Under Section 122(1)(g) of the Insolvency Act 1986, a company may be wound up by the court if, “the court is of the opinion that it is just and equitable that the company should be wound up”.  A shareholder is entitled to apply for such a winding up where there is sufficient interest in doing so. When assessing what amounts to “just and equitable”, the courts consider each case on their own merits. However, cases where winding up orders have been made include the following:

1. A minority shareholder was wrongly excluded from management.
2. The majority shareholders have consistently ignored the rights of the minority shareholders. 
3. Directors have awarded them excessive remuneration whilst refusing to pay dividends to shareholders. 

It should be noted:

1. There is a requirement in most cases that shareholders before making a claim have held their shares for at least 18 months.
2. This is an equitable remedy and therefore, a court has discretion as to whether to make such an order. 
3. A claimant should have “clean hands”, in other words, if the claimant is partially the cause of the problems, it is unlikely a court will make an order.
4. Where there is another alternative remedy which can be considered more suitable for the shareholder, it is unlikely such an order will be made.

A powerful remedy for aggrieved minority shareholders is found in Section 995 of the Companies Act 2006.

A shareholder may petition the court where the affairs of the company are being conducted in a manner that is unfairly prejudicial to all or part of its members. 

Cases where unfair prejudice has been found include:

1. A failure to consult the claimant or to provide information.
2. Unlawfully taking company business or assets.
3. Mismanagement of internal company affairs.
4. The failure to pay reasonable dividends.
5. Improper allotment of shares.

It should be noted:

1. Conduct must be both “unfair” and “prejudicial” to succeed with this remedy. 
2. The court has wide discretion under Section 996 of the Companies Act 2006 and there are a number of possible orders a court may make including an order for the shares of any party to be purchased by another party or the company itself or the purchase of the claimant’s shares by the wrongdoer.

Minority shareholder disputes can be complex and disputes are won and lost based on tactical decisions. Our solicitors can assist you with:

1. Exploring the merits to a claiming or defending minority shareholder action.
2. Partaking in mediation or ADR to try and resolve the matter. 
3. Drafting pre-action correspondence to set out the legal and factual position.
4. If necessary, robustly support you through the court proceedings.

https://www.legislation.gov.uk/ukpga/2006/46/contents