How to enforce minority shareholder rights

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How to enforce minority shareholder rights

Minority shareholders can enforce their rights e.g force the company winding up or regulate company affairs, when a major shareholder abuses their position. 

Here we describe cases that demonstrate the choices and possibilities that minority shareholders enjoy. We also describe how we would have avoided costly litigation.

Force majority shareholder to acquire minority shareholding

This example is the case of Irvine & Ors v Irvine & Anor. Here a minority shareholder brought an action against the majority shareholder for the sale of the minority’s shareholding. The minority shareholder, also a director,  held just under 50% of the company’s shares.

The minority shareholder claimed he was excluded from managing the company’s affairs. He was not given financial information, nor details of ordinary business decisions.

The court decision

The court agreed with the the minority shareholder. The court stated the company was a quasi-partnership, due to

  • The limited number of shareholders;
  • Both shareholders being employees and company directors.

The court’s quasi-partnership conclusion is important. The majority shareholder:

  • Should have acted as if the minority shareholder was a business partner;
  • Was obliged to consult on decisions and provide information.

The court ordered the majority shareholder to buy out the minority shareholder.  The court instructed an expert to value the minority’s shares. The experts’ valuation would include a 30% discount to reflect the minority shareholding., i.e. the minority shareholder received 70% of the share’s fair value.

Implications of this decision

Note, courts have determined that other company decisions are unfair prejudicial conduct, e.g:

  • A profitable company refusing to pay a dividend;
  • Issuing shares to individuals “connected” with the majority shareholders, e.g. family members;
  • The majority shareholder’s mismanagement of the company’s finances;
  • The majority shareholders’ excessive remuneration.

Force majority shareholder to sell holding to minority shareholders

In the case of Re Company 1987, the minority shareholders took action against the majority shareholder.  The minority shareholders contended the majority shareholder did not:

  • Act in the best interests of the company;
  • Understand the extent of their wrongdoing,
    • which was further evidence that they were unfit to continue; and
  • Consider the interests of the company’s members as a whole.

The minority shareholders claimed the majority shareholder’s unfair and prejudicial conduct affected all the company’s members. The majority shareholder was unfit to be involved in the company’s affairs, due to breaches of trust and directors’ duties.

The court’s decision

The court ordered the minority shareholders to acquire the majority shareholders’ shares. The court instructed an expert to commission an independent valuation. The court gave the minority shareholders time to raise sufficient funds.

The court said this order was unusual.  However, it was necessary given the facts, and the majority shareholder’s disregard for other shareholder’s interests. The court also forced the majority shareholder to resign his directorship.

Wider implications of the decision

The power to block decisions is commonly called  “veto rights”. We frequently enshrine these rights in bespoke  articles or shareholders’ agreements.

Veto rights prevent the majority shareholders making decisions without the minority shareholder’s prior written approval.  These rights can extend to decisions made by majority shareholders in their capacity as directors, e.g. the:

  • Issue of shares or equity securities,
    • Without first offering the issue to existing shareholders;
  • Directors appointments;
  • Employee hiring/dismissal;
  • New debt finance;
  • Sale or purchase of company assets.

Note that “off the shelf” company documents usually do not adequately protect minority shareholders.

Force company winding up

In the case of Re Brand & Harding Limited, the company’s management was deadlocked. The company’s shareholders could not pass any shareholder resolutions. The directors could not meet to hold a board meeting.

One shareholder petitioned the court to wind up the company. This was on the grounds that the company was deadlocked.  This shareholder alleged a complete breakdown in trust and confidence between the parties.

Thus, argued the shareholder, this breakdown justified a court order to wind up the company. Note, this shareholder had partially caused the deadlock.  Later the court found he had stolen company money.

The court’s decision

Notwithstanding the petitioner’s misconduct, the court ordered the company to be wound up on just and equitable grounds.

Wider implications of the decision

Our shareholders agreements often include deadlock provisions, that usually avoid expensive litigation. We include clauses that:

  • Issue voting shares to an external independent adviser;
  • Appoint a non-executive director; or
  • Agree to mediation.

Sometimes our deadlock clauses include buyout provisions, e.g.:

Russian roulette buyout

Here, shareholder 1 serves notice on shareholder 2. The notice states shareholder 1’s price for selling its entire shareholding to shareholder 2. Shareholder 2 can either buy the shareholding or sell its shareholding to shareholder 1 at that same price.

Texas shoot out buyout

Here, each shareholder submits a “sealed bid” to the company’s accountant, or other expert. The shareholder that submits the highest bid purchases the company at that price.

Regulate the company’s affairs

In the case of Cook v Deeks, the company’s directors obtained, for themselves, a contract which the company could have performed. If the company performed the contract, the company earnt profits, rather than each director.  The shareholders claimed against the directors for breach of duty and breach of trust.

The court decision

The court stated the company was entitled to the contract’s profits. The directors held the benefit of the contract on trust for the company.

Wider implications of the decision

This issue could have been easily avoided, had the company’s articles of association contained appropriate provisions.  Although shareholders have some statutory rights, these rights don’t provide adequate protection.  When we draft the articles, often we:

  • Entitle shareholders who own a certain percentage of shares to appoint themselves as a director.
  • Ensure any director who is “conflicted” can vote on the matter.

Disqualify a director

In the case of Re Sevenoaks, the court ordered a director’s dismissal and disqualification. The minority shareholders claimed the director had:

  • Not prepared proper accounting records;
  • Used company funds for his own personal benefit;
  • Failed to send the required returns and accounts to Companies House; and
  • Failed to submit the company’s corporation tax return.

The director was forced to resign, immediately.

Wider implications of the decision

Again, it would have been easy to avoid this issue.  We would have included provisions in the company’s articles that entitle minority shareholders to appoint/dismiss a director. Usually this right is subject to a threshold, e.g. 30% of the company’s members.

Often, our employment contracts include provisions that ensure if a director’s employment terminates, the director automatically resigns the directorship.

Summary

Minority shareholders have many solutions to combat a director’s wrongdoing, or a majority shareholder’s abuse of the company. Normally, we procure a settlement, to avoid costs and save time. Nevertheless, we often achieve appropriate remedies through the courts.