Shareholder disputes
“A person with an enterprising attitude says, ‘Find out what you can before action is taken.’ Do your homework. Do the research. Be prepared. Be resourceful. Do all you can in preparation of what’s to come”.
Jim Rohn
Entrepreneurs are by necessity energetic people. They strive to make things happen fast. If they have a new idea they often want to steal the lead on competitors and maximise the advantage in the marketplace.
Quite often and somewhat understandably, their energy is poured into converting the idea (whether it’s a service or a product) into an income stream.
Sometimes the shareholders have been friends or even family members and so unfortunately the grey, mundane ‘legal stuff’ of Shareholder Agreements and planning the detail gets put to one side and overlooked.
What does Section 994 of the Companies Act 2006 say?
If you instruct Summit Law LLP, one of the first things we will do is to consider the small print of the Company’s Articles of Association and any shareholder agreements.
We will then apply the background factual matrix against Section 994 of the Companies Act 2006.
This section states:
“A member of a company may apply to the court…for an order….on the ground that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of its members generally or of some part of its members…”
The reference to ‘member’ merely means shareholder and is an example of the draftsman’s legalistic style which even lawyers find difficult to fully interpret.
However in essence, Section 994 is attempting to protect minority shareholders, meaning those with a 50% shareholding or less in a situation where the majority shareholders are seeking to act in a way which is ‘unfairly prejudicial’ to the minority shareholders’ interest.
But what is meant by ‘unfairly prejudicial’ conduct?
There is an array of case law and legal authorities on precisely what conduct is classified as being ‘unfairly prejudicial’ and far too much to list here.
However, in essence it means that minority shareholders have the right to complain by petitioning the Court if the majority shareholder(s) run the company in a manner that damages their position and the value of their shareholding, often done deliberately and often by misapplying or misusing company assets.
We have seen instances where Claimant minority shareholders have complained that the majority shareholder is managing the business badly but this is usually insufficient as a ground for bringing a claim. The complaint must stand up to some sort of objective analysis. Some examples of ‘unfairly prejudicial’ conduct might be using the company’s assets for the personal benefit of a shareholder or the majority shareholder(s) paying themselves in excess than people in their position could objectively justify.
Other examples of conduct that may amount to ‘unfairly prejudicial’ conduct are:
- Abuses of power and breaches of the company’s articles;
- The awarding by the majority shareholder to himself of excessive remuneration;
- Exclusion from management in circumstances where there is a (legitimate) expectation of participation; and
- The diversion of business to another competing company in which the majority shareholder holds an interest
Funding?
If you are a minority shareholder, you might think that the majority shareholder can use the company funds to fight the litigation. This is not the case and usually the Court’s view is that the majority shareholder should not be allowed to use company funds to litigate what in essence is a personal dispute.
Summit Law LLP takes a proactive approach in advising on funding litigation claims. Find out more >
Derivative Claims
The relatively recently introduced Companies Act 2006, introduced the concept of ‘derivative claims’. Such a claim can be issued by a member of the company such as a shareholder, in the name of the company, if he has the permission of the court.
The relevant section is 260(3) of the Companies Act 2006. The claim can be brought for the following causes of action against a director of the company or a third party:
- Breach of trust;
- Breach of duty;
- Default; or
- Negligence
Directors’ duties have existed for a hundred years but the Companies Act 2006 has put the common law directors’ duties on the statute book and introduced several new duties. These include the duty to promote the success of the company (section 172), the duty to avoid conflict of interest (section 175) and the duty not to accept benefits from third parties (section 176). A material breach is actionable as a derivative claim by a shareholder or a group of shareholders.
Valuation
Summit Law LLP works with some of the leading accountants who can assist with share valuation.
Enquiries
For more information, please get in touch. One of our lawyers will contact you within 48 hours.