Companies must be wary of unhappy shareholders

By Katarina Morgan

Associate Solicitor

11 May 2023

Article Insights

If a shareholder in a registered company holds less than 50% of the shares, they are classed as a minority shareholder and are also known as members of the company.

Given the pressure on companies to perform in the current economic climate, shareholders may not be aware of the way the company is being run, but what rights do they have and what can they do about it?

Unfair prejudice petition

One typical solution pursued by minority shareholders is to pursue an unfair prejudice petition, which is a statutory remedy under section 994 of the Companies Act 2006.

It entitles a member to petition to the Court for an order that the company’s affairs have been conducted in an unfairly prejudicial manner to the interest of the members, or that an act or proposed act or omission of the company is or would be prejudicial.

Typical complaints include not making dividends to certain shareholders (where dividends should be paid), deliberately reducing the value of the company, or directors acting in breach of their duties. These claims are made by minority shareholders.

When considering the merits of a claim of unfair prejudice the petitioning shareholder is not required to show somebody acted in bad faith or intended to cause prejudice. The courts will regard the prejudice as unfair if they believe any reasonable person would deem it unfair.

Fairness will be assessed in the context of a commercial relationship, defined by the contractual terms detailed in the company’s Articles of Association and in any shareholders agreement. If the conduct the shareholder is complaining about is in line with the Articles and the powers entrusted to the board, there will be little merit in bringing a claim.

In short, we should regard unfair prejudice petitions as corporate divorces. They will most commonly involve the aggrieved minority shareholder selling their shareholding, either to another shareholder or back to the company. Sometimes, the member may buy the other party’s shares.

Another remedy that the Court could order is that of equitable compensation, which will see monies paid to the company or directly to the petitioner.

Declaratory relief is also another outcome of these petitions, which refers to orders regarding the company’s affairs that require them or prevent them from undertaking a particular act.

Derivative claims

Part 11 and section 260 of the Companies Act 2006 permits a shareholder to bring a claim on behalf of the company against its directors, usually for breach of directors’ duties, breach of trust and/or negligence.

Permission is required by the Court to enable a member to bring these claims because the director(s) is/are regarded as the ‘brains’ of the company and therefore a preliminary application to the Court for permission to bring these claims will be.

The remedies sought for these claims are those the company would have against its director(s) and depends on what claims are actually brought.

These types of claims are not always the right ones to bring, typically because you need the Court’s permission to bring the claim on behalf of the company and although they are considered possible options, they are rarely pursued.

Breach of shareholders’ agreement

There is no requirement for shareholders to have an agreement in place and in some instances, this can work to the advantage of a claimant shareholder.

However, when there is a shareholders’ agreement, if one party has breached the terms of that agreement, then an aggrieved shareholder will have the right to bring a claim. These types of claims are contractual and will usually result in contractual remedies, including damages and injunctions.

Rights under the Companies Act 2006

A member may commence proceedings against the director(s) of a company to enforce their rights under the Companies Act 2006. This could include claims for varying shareholder class rights, rectification of members’ register and takeovers.

Just and equitable winding up

This is a petition a member can present to the Court to wind the company up on the basis of just and equitable grounds. This option is commonly used as a threat in unfair prejudice petitions because if pursued successfully, the company will be wound up and cease to exist.

These petitions are often used when a member has been excluded from management (where they can establish this, such as a shareholder who is also a director), there is a deadlock in progressing with the company’s affairs or there is a failure to carry out the company’s objectives.

Although an option for shareholders, this move is regarded as somewhat draconian. If a director has also acted in breach of their duties, it could potentially put them in a difficult position with any later appointed liquidator, as they could pursue claims against the director. Director disqualification proceedings could also be pursued against the wrongdoing director.

Each of the above claims are dependent on the individual circumstances and some will have more chance of success than others.

The costs associated with bringing such claims requires each one to be analysed and assessed carefully before being pursued, with the help of experienced legal advice, from lawyers well-versed in the intricacies of such company matters.

If you require advice on the matters discussed in this article please contact one of our experienced solicitors in our Commercial Litigation Department via email or phone: 01582 731161.

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