The basic position in a private company is that the will of the majority prevails but there are limits and where those limits are exceeded the courts have a wide discretion to make orders designed to put a successful claimant in the position they would have been but for the unfairly prejudicial conduct of those controlling the company.
In some ways a minority shareholder may benefit from making such a claim and obtaining an order for the purchase of his shares because where the company is a “quasi partnership” as many small companies are classified in this way and where this occurs the shares of the claimant will not be valued on discounted basis ( usually 20%) but on their full net asset value
Accordingly and not surprisingly having regard to the number of informally set up small companies in the UK ( by which I mean companies where shares are issued without a specific agreement on how the parties will run, control, work in and dispose of the business ) the circumstances most commonly experienced in practice are where such “ quasi partnership “ companies are involved. It seems to me that in the absence of some very clear agreements to the contrary or heavily unbalanced shareholdings ( say 76 /24 ) most small enterprises will be regarded as quasi partnerships and the distinction between such entities and others is important because the expectation to be involved in management, dividend receipt or employment may be greater in such companies and crucially the court will, when dealing with a quasi partnership order in the event of a successful petition under Section 994 and ordering a purchase of the petitioners shares, order that the shares be bought out at the full i.e. non discounted price.
Common examples of unfairly prejudicial conduct are;
- Majority taking financial benefits such as transferring the business to the majority thus depriving the minority of their profit share
- Whilst there is no automatic right to involvement in management it is often the case that there is an informal agreement that the shareholders will be so involved and removal from the board is a common basis for a petition
- Excessive remuneration and little or no dividend but this can be difficult to establish as shareholders in small quasi partnership companies have no automatic right to dividends and if one shareholder is active in the business and another not proper remuneration may well be appropriate.
- Serious mismanagement could found a petition but there is a dearth of authority on how bad it needs to be. Ordinary commercial misjudgments are probably not enough on their own. Criminal conduct in management could be sufficient
- Preventing a shareholder from selling shares to the highest bidder may be prejudicial
Remedies available are largely provided by section 996 of the Companies Act 2006 expresses a wide discretion to the court whilst the act in addition expressly refers to
- Requiring the company to amend or refrain from amending its constitution
- Authorising the bringing of a claim in the name of the company
- Requiring the company to refrain from doing an act e.g. disposal of an asset
- Ordering the purchase of all or some of the shares in the company- as said above this will in quasi partnership companies be at the non discounted asset value and where past unfairly prejudicial conduct has depressed the net asset value the valuation will assume that such conduct had not occurred
A further but drastic and rarely helpful remedy is a winding up on the ground that it is “just and equitable” to do so. This remedy should if at all possible be avoided as it is slow, unlikely to realise full going concern value, carries high attendant legal and liquidation costs
According whilst the courts are in general reluctant to interfere in normal commercial activity at this level or to second guess how a company should be run there is a line in the sand where they will intervene in the manner referred to above and any minority shareholder going into business should seek to protect their position by a shareholders agreement and any majority shareholder who issues minority shares to a non essential party should ensure that the minority acknowledge the balance of power at the outset of the joint enterprise embarked on.
For further information on shareholder agreements and company disputes contact Chris Dixon at Kenneth Elliott and Rowe on 01708 757575 or email firstname.lastname@example.org