COMMERCIAL DISPUTE RESOLUTION AND LITIGATION

The Statutory Provisions of the Companies Act 2006

So, you are a shareholder in a company and you feel that your interests as a shareholder are being walked over by other shareholders. What are your options and what are the pitfalls and beartraps?

The Statutory Provisions of the Companies Act 2006

A Statute is an Act passed by the UK Parliament and given Royal Assent by the reigning monarch. The Act we are looking at here is the Companies Act 2006 and the particular part of it is section 994. Those who have seen and done this type of thing will know the section as providing a section 459 Petition. Section 459 was the relevant provision in the earlier Companies Act 1985.

Section 994

“A [shareholder] of a 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 [shareholders] generally or of some part of its members (including at least himself), or
(b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.”:
So, what does ‘unfair’ mean? In other words, when will a court look at the conduct complained of and call it ‘unfair’?

The first thing the court does is look at the governing documents of the company; its articles of association. If the articles provide for a course of conduct and embarks on that course of conduct at the behest of the shareholders, then this conduct will not be unfair. Likewise, if a shareholder’ agreement is in place, the court will look at this too.

Second, the court will not be interested in motive. The question of good or bad faith will not trouble the court. The court will take an objective view. It will set up a hypothetical ‘reasonable man / woman’ and ask that person if they would believe the conduct complained of to be unfair.

The court will not intervene if the articles are breached or the conduct complained of is de minimis (trivial).
The most obvious example is where dividends are declared for one class of shareholder and not to another where this differentiation is not objectively justified.

The court takes a broad view

The behaviour must hurt the interests of the shareholder as a shareholder, and not, say, as an officer of the company. That being said, the examples where the conduct has caused the court to intervene has been surprisingly broad.

The language of the section directs the court to look at what is fair and what is not. The court can look at the totality of the circumstances which might give rise to a legitimate expectation on the part of shareholders.

So, the court can look outside the Articles and Shareholders’ Agreement(s). The court can look at the nature of the company and what it was set up to do. The court can look at correspondence and a course of dealing from which it may infer a tacit understanding.

Some examples

Having just argued that the court can consider a wide range of circumstances, I am now going to set out some limited, concrete and fairly common examples where the court will intervene:

  • Where the majority shareholders move business away from the company to a company where that majority owns shares
  • Removal or blocking from management in circumstances where the shareholder has a reasonable right to participate
  • Where the majority give themselves more money from the company than they give the minority
  • Major/ important breaches of the Articles of Association
  • Using a majority shareholding of over 75% of the company to pass a special resolution removing rights from the minority

A word of caution

Courts don’t like to get involved for minor problems. The minority will be expected to show that they have been seriously prejudiced in breach of some tangible understanding or agreement.

What will the court do if the minority succeed

The powers listed in 996(2) are order to:

  • Regulate behaviour of the company’s affairs in the future
  • Prevent to force a company to do a specific thing
  • Make a company party to proceedings on such terms as the court may think just; useful because the company then bears the costs of the litigation
  • Require the company to make changes to its Articles
  • The majority to purchase the shares of the minority

Beartrap one

Of these, the usual order is the order that the minority shares be purchased by those who caused the unfair prejudice. This is why I say be careful. If, as a minority, you want the conduct to end but you don’t want to sell your shares, take care, you may win the battle and lose the war.

The first thing to do is value the shares. The most usual methods are a multiplier of the annual profits or turnover. However, where the company holds significant assets and little or no income, the better method may be the Net Asset Value – say the company is a property owning company, it is unlikely to have much income, but will have assets .

Rarely, a court will order that the majority shareholder sells their shares to the Petitioner, although this is considerably less common.

Beartrap two:  Privilege

Take note. Normally when you write to your lawyer, it is privileged. The court and the other side will not look at it. BUT, in section 994 petitions, communications between the lawyer and the company will not necessarily be privileged. So, if you are acting for a company party to an Unfair Prejudice action, take heed what you write.

If you feel that your rights as a shareholder have been prejudiced, give me a call or email me. 01483467433 Jonathan.compton@dmhstallard.com.

Jonathan Compton
LLB LLM Solicitor Barrister MCIArb
Litigation Partner, DMH Stallard LLP.

About the authors


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Jonathan Compton

Partner

Specialist in commercial disputes, banking and finance, regulatory and anti-trust/competition law.

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