At Lupton Fawcett, our solicitors advise on all aspects of disputes between business owners, including shareholders of limited companies, members of companies limited by guarantee and members of limited liability partnerships.
What is a Shareholder Dispute?
Disputes between shareholders can arise for many reasons. Sometimes disputes can arise simply down to a clash of personalities, which seems to be especially prevalent where all the shareholders are held by member of the same family. More often than not, the background to these disputes can concern the day-to-day running of the business or problems surrounding a shareholder’s individual interests in the business. This can be in a number of ways, such as:
- The dividend policy adopted by the business
- The diversion of assets and/or opportunities away from the company
- The exclusion of the minority shareholder from having their say in the running of the business
- Acts by majority shareholders that prejudice the minority shareholders’ interests in the value of their shares in the business
- Providing a small claims – fixed fee service
The Companies Act 2006 contains various statutory provisions as to the remedies which prejudiced shareholders can exercise to try to regain control or to stop the errant shareholder(s) from pursuing their own agenda to the detriment of the business or the minority shareholders’ interests. The Companies Act provisions only apply to limited companies, plcs and LLPs. They do not apply to traditional partnership businesses.
We also have substantial experience of acting for companies, businesses and limited liability partnerships (LLPs) who face claims by minority shareholders.
At Lupton Fawcett, we are aware that such disputes can be complex and result in attention and money being diverted away from the running of the business. We strive to achieve an efficient, commercial and sensible settlement whether we are representing the majority or minority shareholder or the company. This includes:
- Analysing the current corporate constitution
- Identifying your objectives
- Working closely with our employment law department for advice on any employment aspects (e.g. shareholders who are also employees/directors)
- Working with our dispute resolution team should the matter become litigious
- Advising on the tax aspects of any settlement (e.g. where a shareholder’s interest is bought out)
If a settlement is not possible and a shareholder dispute has to be referred to the courts, we have the experience and specialist knowledge to ensure your best interests are maintained at all times.
What is ‘Unfair Prejudice’?
Section 994 of the Companies Act 2006 provides that:
“A member of the company may apply to the court by petition for an order…on the ground (a) that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of the members generally or of some part of its members (including at least himself), or (b) that an actual proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.“
There are two elements to the requirement of unfair prejudice, and both must be present to succeed in a claim:
- The conduct must be prejudicial in the sense of causing prejudice or harm to the relevant interest of the members or some part of the members of the company (shareholders).
- It must be unfair.
Test of Unfairness
The test as to what amounts to unfair prejudices is objective. It is accordingly unnecessary for the petitioner to show that the persons controlling the company have acted deliberately in bad faith, or with a conscious intent to treat the petitioner(s) unfairly.
Fairness is judged in the context of a commercial relationship, the contractual terms of which are set out in the articles of association of the company and in any shareholders’ agreement. The starting point is, therefore, to ask whether the conduct which the shareholder has complained about is in accordance with the articles and the powers that the shareholders have entrusted to the board.
The conduct must be unfairly prejudicial to the petitioner’s interest in their capacity as a member of the company (that is, as a shareholder), as opposed to any other interests which they might possess. However, the court takes a broad view of what might be regarded as their interests as a member of the company.
A member’s interest is not limited to his or her strict legal rights under the articles of association, but can extend to legitimate expectations arising from the nature of the company, as well as agreement and understandings between the parties.
Examples of Unfair Prejudice
Common examples of what may constitute unfairly prejudicial conduct are:
- Exclusion from management in circumstances where there is a legitimate expectation of participation
- Diversion of business to another company in which the majority shareholder holds and interest
- The awarding by the majority shareholder to themselves of excessive financial benefits
- Abuses of power and breaches of the articles of association
For example, the passing of a special resolution to alter the company’s articles may be unfairly prejudicial conduct if such alterations would affect the petitioner’s percentage shareholding, or the value of his or her shares. Also, repeated failures to hold annual general meetings, delaying accounts and depriving the member of the right to know the state of the company’s affairs may all be unfairly prejudicial to the member’s interests.
Resolving a Shareholder Dispute
A shareholder(s) who wish to bring a complaint of minority prejudice may do so by petitioning the court for a remedy. Section 996 of the Companies Act 2006 lists the particular types of orders which may be made by the court if it decides that there has been unfair prejudice. The powers that the court can call upon include:
- Regulating the conduct of the company’s affairs in the future
- Requesting the company to refrain from doing or continuing an act complained about, or to do an act about which the petitioner has complained that it has omitted to do
- Authorising civil proceedings to be brought in the name and on behalf of the company by such persons and on such terms as the court may direct
- Ordering the company not to make any, or any specified, alterations in its articles
- Ordering the purchase of the shares of any members of the company by other members or by the company itself and, in the case of the purchase by the company itself, the reduction of the company’s share capital accordingly
How Much Will It Cost?
Minority shareholder petitions that get all the way to a final court hearing can be very expensive. However, that is not to say that a shareholder, who feels he or she is being prejudiced by the decisions of the other shareholders, can do nothing. It is often the case that matters are settled at the pre-action stage by way of a detailed solicitor’s letter of claim or, if they are not, at some point fairly soon after the petition to the court is issued (for example, at a mediation). .
The outcome and the likely cost will largely depend upon the conduct of the parties and their approach to the complaint made. Certainly, where a prejudiced shareholder’s investment and return in a business is substantial, it would seem that taking action (even if that action proves costly) is to be favoured over doing nothing and seeing the potential value of their investment and role in the business being substantially diminished.
Contact Us for Help
We provide advice on shareholder disputes to clients around Yorkshire and beyond from our offices in Leeds, York and Sheffield. For an initial discussion about your case, contact us using the details on the enquiry form.