Shareholder disputes -deadlock, minority shareholder rights, unfair prejudice.

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 Unfair prejudice 

What action can be taken based on unfair prejudice?

It is difficult and expensive under the Companies Act 2006 for a minority shareholder to take formal court action, but the threat of such an application, and skillful negotiation can deliver results. The types of conduct which might be considered by a Court are fairly wide ranging and include many of the examples given above which, if proven, can clearly be unfairly prejudicial to minority shareholders.

If a court considers that there has been unfair prejudice, it can make a range of Orders including that the company must be wound up, but the most common remedy, over and above possibly awarding legal costs of the action, will be an Order that the company or majority shareholder(s) purchase the minority shares at a “fair value” to be independently valued.

Remedies for unfair prejudice

The courts have wide discretion in this area and orders can include :-

  • Damages
  • An order that shares be sold to the minority shareholder(s)
  • Articles of association be amended.

 Contact us either to ensure that shareholders rights are properly clarified and contractually agreed at the outset, for help with amending articles or advice as to ways to avoid a dispute in future or for advice and assistance in the case of a shareholder dispute. 

 Shareholder deadlock dispute resolution 

With small companies it is very common for there to be 2 founders and shareholders, and for understandable reasons, typically there will be a 50:50 ownership of shares. However, as a company grows, this brings with it key strategic and operational decisions and a 50:50 arrangement will also often mean that if there is a difference of opinion.

If unresolved, the company will not move forward and bitterness can develop very quickly. A good shareholder agreement will generally include a formula for dealing with deadlock, which, as a last resort, may result in a mechanism and a formula for resolution or even for one party to buy the other out.

If your shareholders agreement is silent and there is deadlock, possibilities can include :-

  • Mediation
  • Interim agreement – some form, of interim agreement whereby some issues are left unresolved (but perhaps with a timetable or plan to try and resolve those) but agreement is at least reached to enable the company to continue trading so as to avoid a situation where everyone loses.
  • Buyout -one party buys the other shareholder out in which case issues are likely to include valuation, restrictive covenants, possible deferred payments amongst others.
  • Shareholder agreement – either varying existing agreement or where there is no agreement, negotiating one to deal with the problems and/or disagreements.
  • Step aside from day to day running of company – the shareholders agree to step aside in terms of running the company and let someone else do it and just act as owners – unlikely with the smallest of companies.
  • Court – the worst case scenario where one party starts court proceedings and ultimately, the court has to decide the issues. This could even mean that the company is wound up.

 Derivative claims 

It is an expensive and time consuming process to bring a derivative claim and it is important for shareholders who wish to do so to be in possession of all of the relevant facts prior to applying to the court. If you need help or advice, we are experienced in this area – contact Debbie Serota.

First, it is important to note that any relief that is being sought must be on behalf of the company itself and not on behalf of the individual member. If the member wishes to seek relief on behalf of its self there are different routes it could follow such as bringing a claim under section 994 of the 2006 Act, depending of course on the particular circumstances.

If a shareholder wishes to bring a claim (under section 261 and section 262) they must first seek the courts permission to do so and must follow a two stage process :-

  • They must file sufficient information with the court to prove on the face of it that they in fact have an entitlement to bring such a claim; and
  • if the court does not dismiss this matter then the member will need to satisfy the court that a derivative action is appropriate in the circumstances.

If the court accepts the above then the member will be entitled to bring such a claim before the court. The reason for this two stage process is to ensure that the member is serious about bringing a claim and indeed has the right to do so and is not just using it for example to threaten a director.

The 2006 Act sets out specific scenarios in which they must reject the application:

  • that a person acting to promote the success of the company would not continue the claim; and
  • if the claim is based on something which hasn’t yet happened but which has has been authorised by the company; and
  • where the complaint relates to an issue which has already arisen but was authorised or ratified by the company after it occurred.

Section 260 sets out the causes of action under which such a claim can be made, namely breach of duty, negligence, default or breach of trust. The action may be against a director, another person or both. The law now provides that a cause of action may arise prior to a person being a member of the company.

A court is required to take into account the views of other shareholders whether they are interested or not in the matter, this may well make it more difficult for a shareholder to start a claim if it is against the views of the majority of the shareholders, although ultimately it is the courts discretion whether or not such a claim can proceed.

If you need legal advice on a shareholder dispute, please do get on touch.

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