If you are a minority shareholder in a business, it is important to understand what rights you have and how to protect your interests should the need arise. Our team have been advising minority shareholders since 2002. Let us help you too.
A shareholder’s interest in the company is defined primarily by the number and value of shares they hold, and therefore the percentage of the company that they own. This percentage might also be affected by the type or class of shares held, which may affect voting rights. Voting rights might also be affected if there is an underlying shareholder agreement and shares or voting rights are defined under that agreement.
Shareholder control & members meetings
Shareholders have limited control over the day to day running of a company. The running of the company and the decisions made are predominantly made by the directors.
Shareholders do however have the ability to affect some of the decisions of the company. For example, shareholders can affect certain decisions by holding a members’ meeting to pass resolutions on various matters including
- on the declaration of dividends;
- decisions affecting the structure of the company; or
- to remove a director.
To pass an ordinary resolution a majority vote is required in value of more than 50%. A special resolution requires voting of more than 75% of shareholders’ interests.
Whilst on a practical level the easiest way for minority shareholders to have a resolution passed is to collaborate with other shareholders and form a group of shareholders who are in favour of the same resolution, this is not always possible. As a result, minority shareholders might need to consider other options to resolve their difficulties.
Other solutions for minority shareholders
If a minority shareholder believes that their interests are being overridden and are in dispute with the company, they do have other ways to protect their interests. These include
1. Derivative claim
A director owes duties to the company when the company is solvent, and to creditors when the company reaches insolvency. These director duties are far reaching. Whilst the general duties are owed to the company rather than to individual members, it follows that the company must enforce those duties if a director is in breach.
If an individual shareholder believes that a director or directors have breached their director duties to the company, but the company doesn’t bring a claim, then the shareholders may be able to bring a derivative claim, (being a claim derived from the rights of the company), on behalf or instead of the company. Our experts can help you bring this type of claim.
2. Unfair prejudice claims
A shareholder can apply to the court on the grounds that the company’s affairs are being, or have been, conducted in a manner that is unfairly prejudicial to
• the interest of members generally, or
• to specific members.
It is often minority shareholders who will seek this type of relief from the court.
Sometimes a shareholder bringing an unfair prejudice petition may also apply for the just and equitable winding up of the company in addition or as an alternative. We deal with this in more detail below.
The basis of an unfair prejudice claim
An application can be brought if the affairs of the company have been conducted in a way that is unfairly prejudicial to its shareholders or some of them. The unfair prejudice petition should be brought against the particular director / directors that are alleged to have been guilty of unfair conduct, and also the company itself.
This action only be used if the company is solvent and the petitioner retains shares of value at the time of trial.
The claim must be a breach against the minority shareholders, not the majority (who have controlling voting powers that are unavailable to minority shareholders).
There are two types of unfair prejudice that can arise for a claim to be made:-
- there has been a material failure of the company to comply with the company’s constitutional documents (such as the Articles of Association), or directors have acted in breach of a contractual agreement, such as a shareholders agreement. Breaches by directors of fiduciary duties or any duties set out by legislation could also amount to unfair prejudice if it amounts to or involves conduct by the majority of the directors.
- the company has acted in an unfair or inequitable fashion in a way that is prejudicial to the minority shareholders. For example, exercising legal rights when they have promised not to do so, or using the company’s legal powers to which the minority have not agreed.
This second basis is used less frequently than the first, as it is less easy to prove that there was an equitable (or ‘fair’) arrangement with the parties that is not set out in company documentation.
Common behaviours giving rise to an unfair prejudice claim
- Directors paying themselves excessive remuneration while refusing to consider paying dividends. Note however that the prejudice must be prejudicial to the minority, not to the majority, of the company, so it must be that the minority are not provided with declared dividends
- directors refusing to pay dividends to minority shareholders
- directors improperly removing the company auditor
- new shares being allotted in bad faith or without complying with the rights of pre-emption which might benefit minority shareholders
- where the company amends the company’s articles which have a prejudicial effect on the minority shareholders.
However it is important to remember that the misconduct complained of must be both serious and relevant to justify court intervention.
Two elements of unfair prejudice must be present to succeed
There are two elements of unfair prejudice that must be present in order for a claim to succeed
- The conduct must have caused prejudicial harm to the relevant interests of the member or some part of the members of the company.
- It must be unfair.
What amounts to unfairness?
This is an objective test. It is not necessary to show bad faith or intentional prejudice. If objectively the court believes the conduct to be unfair, then a claim may succeed.
- Any breach of rights that are contained in a company’s constitutional documents, including the articles of association and any shareholders agreement will often go some way to proving unfairness.
- Conversely, if the conduct is allowed for in either of these documents then it is unlikely to succeed.
The rights that are breached do not have to be set out specifically in company documents although if they are, it makes an unfair prejudice claim more clear cut. It can be that a shareholders’ legitimate expectations have been breached. This might arise in a small business ‘quasi partnership’ arrangement, where the shareholders expect to take part in the control and management of the company but one or more directors prevents this.
Court remedies for unfair prejudice claims
The court has wide discretion as to what to do if it finds that there has been unfair prejudice. Some examples of relief granted are:-
- giving the petitioner the option to purchase majority shares at a fair price;
- giving permission to the petitioner to commence a derivative claim on behalf of the company;
- a claim for wrongful dismissal against a minority shareholder director or employee;
- require the company not to make any alterations to its articles without leave of the court;
- provide for the purchase of shares of members of the company in order to reduce the company’s capital.
The court can also ask the company to stop doing something, or to do something that has been omitted.
A minority shareholder may wish to sell their shares following a successful unfair prejudice claim because they don’t wish to have any further involvement in the company. The court order therefore might also include an order for the purchase of the minority shares by the company, based on market valuation and not discounted to reflect a minority interest.
Unfair prejudice claims are not particularly easy to win. Courts don’t like to interfere in the general running of a company unless there is very clear prejudice involved. It is for this reason that expert legal advice is recommended. Our team of shareholder dispute solicitors are here to help.
3. Just & Equitable winding up petition
A ‘just & equitable winding up petition‘ is a bespoke type of winding up petition that is designed to deal with a range of shareholder disputes in a company.
- If there has been a breakdown in mutual trust and confidence which is stopping the management of a company, a shareholder may petition to have the company wound up.
- It can form part of an unfair prejudice claim by a minority shareholder or brought in its own right. These are serious applications and whatever side you are on, our expert team is here to help.
4. Bringing a claim against a director in his/her personal capacity
It is sometimes possible to bring a claim against a director in his/her personal capacity for any harm caused to the company / shareholder. Whilst these types of claim are not common, it is something our team of experts can assist with.
5. Exit the company and sell shareholding
A minority shareholder can sell their shares and exit the company if they don’t like the direction that the company is going. The practical issues surrounding a shareholder exiting a company depends on the type of company involved. In a company listed on the stock exchange it is fairly straightforward. Shares can be listed for sale on the stock market. In a private company where there is no recognised share price, then a valuation would need to be made of the shares and a purchaser found.
A further complication is that a pre-emption right might be in place, which will be set out either in the Articles of Association or in a shareholders’ agreement which restricts the disposal of the shareholding in some way. Often this is so that existing shareholders must be offered the exiting shareholding first.
Contact us today to schedule a free consultation and let us guide you through the rights of a minority shareholder and also how to deal with an unfair prejudice claim.
Supportive and friendly with partner-led involvement, I would recommend Francis Wilks & Jones to anyone facing a similar situation.A shareholder who turned to us after discovering that his co-shareholder was profiting well from their business while he was being paid a pittance. We helped him find a way out of the business by selling his shares