Shareholder rights and remedies are essential for any shareholder or business owner to understand, especially in potential conflict situations. Knowing where you stand and what to do can make a huge difference to sorting out any issues in a business. Our friendly team of experts can help.
Having a clear understanding of shareholder right and remedies is sensible for any business owner or shareholder.
Companies are run by directors and their powers are constrained by a legal framework and the company’s constitution. The constitution of a company is constructed by
- agreements between its owners (shareholders), most commonly a shareholders agreement; and
- the company’s articles of association.
Further protection for shareholders exists by means of directors’ duties, which are set out in statute (in the Companies Act 2006 and associated legislation) and in common law decisions made interpreting such statutory fiduciary duties.
Shareholders also have legal rights of action against other shareholders, whether they are directors or not, although these protections mainly exist to protect minority shareholders.
At Francis Wilks & Jones, our extensive experience of dealing with shareholder matters means that we can assist in finding the best and most economic route to obtaining an appropriate remedy for you as a shareholder.
A shareholder who owns 50% or less of a company is classified as a minority shareholder.
- where two shareholders both hold an equal shareholding of the entire company, and thus face a risk of deadlock (see below), then they will both be minority shareholders of their company;
- where instead there is a mix of minority and majority shareholders, then inevitably the minority shareholders will have less say in decision-making in terms of matters solely devolved to shareholders (including dividends, Director appointments and potentially changes to the company’s structure). Minority shareholders will not have any ability to orchestrate the removal of any part of the board without the support of other shareholders.
So what powers does a minority shareholder have?
- they do have a right to their interest in any dividends declared and paid by the company; and
- they have their right to reserve this interest in the event of the company seeking to issue or allocate further shares;
- they also have a right to acquire shares sought to be transferred or sold by other shareholders.
Additionally, should other shareholders (whether acting in their capacity of director or otherwise) act in a way which could potentially damage the minority shareholders’ interest in a company, then they have the statutory right to
- pursue a claim for unfair prejudice against the wrongdoer; or
- if the claim should be made by the company (for example a theft of company assets) then a shareholder may wish to consider proceedings in the company’s name (known as “derivative” proceedings).
A shareholder also has claims arising from their contract with the company, or alternatively rights arising either under or for a breach of a shareholders agreement.
Ultimately, a shareholder who remains prejudiced and who has no other remedy may also look at a winding-up of the company, provided it is solvent. This is of course the last option that should be considered but is frequently sought where all other options have run out.
A significant proportion of companies are owned and managed by the same individuals as both shareholders and directors.
- of these, it is extremely common for there to be two directors, owning 50% each and having an equal say at board level;
- the benefits of this arrangement are that they are both protected against the other’s actions, and both equally profit from their business venture (which they may have grown from nothing).
Whether business is going well or is not going well, the company’s success is largely determined by the relationship between its owner-managers. Even if a company is highly profitable, it is not uncommon that where relations sour then disputes arise, and what was a profitable and growing company (or even an established successful company) can soon be troubled.
- in some cases, one director may be in control of operations and one may be in control of the finances;
- one may claim the other is drawing more money or even that the other is redirecting business to a competing covenant (which potentially could be in breach of his/her statutory fiduciary duties as a director).
Regardless of the reasons, where such disputes arise there is often a deadlock in terms of any decision being made by the company. This could lead to directors both trying to run the company in disunited way and often will result in trading difficulties where the bank refuses to permit transactions whilst the company is in dispute (if only to protect its own position).
In such situations a resolution needs to ideally be negotiated between the directors and, if relations are really that sour (as they often are) then the ideal outcome will usually be for one party to exit, usually via a purchase of their interest usually by the other shareholder / director.
Where a shareholder is unable to address serious concerns as to the conduct of other shareholders / owner-managers via the company’s own constitution or corporate governance structure, then the only remedy may be to issue an unfair prejudice petition.
- ideally, such proceedings should only be considered where there are no alternatives and the parties have not been able to resolve their differences via a negotiated settlement;
- in such circumstances , the only way forward may be for proceedings under the Companies Act 2006 and petitioning the court to provide a remedy for losses arising as a result of the defendants’ alleged unfair prejudice.
Such proceedings are not to be lightly taken and should only follow the exhaustion of all other remedies, including negotiation. Our expert team can advise in these types of claims.
Valuing your shares and releasing this value
A shareholder of a private limited company cannot independently assess the value of his / her shares in the same way as is possible for a PLC. The valuation of a company is subjective and dependant on many factors.
- additionally, for minority shareholders, their interest in the company is not reflective of a business valuation of the whole;
- minority shareholders’ voting powers are less influential than those of a majority shareholder, and accordingly this diminished influence will affect the value of their interest.
Whether a company is being petitioned for winding-up, or there are ongoing unfair prejudice proceedings, the proceedings may lead to such shares being valued and the court (or the parties) deciding that an interest should be bought out.
Accordingly, an assessment of the value of your interest is an important prerequisite before deciding whether to issue any legal proceedings.
At Francis Wilks & Jones we cannot manage all risks that you and your business may face, but we are very experienced in the most common shareholder related issues, how to protect against them and how to resolve them before matters escalate to court proceedings or even business failure.