Minority shareholders do have rights. But, often a minority shareholder is over looked and opportunities to protect the minority investment are missed. Problems can be avoided if issues are flagged and addressed at the time of investment.
We specialise in minority shareholder rights, how to value the shares, tax, and useful strategies to deploy for a fair result in any negotiation.
Problems for minority shareholders we solve:
The Companies Act does give all shareholders certain rights. But, rights afforded to minority shareholders under the Companies Act is limited. However, minority shareholder rights can be enhanced by written agreement under the articles, and or a shareholders’ agreement. There is no limit on the extent of enhancement over and above the Companies Act that is possible. It is all a matter of knowing what rights you will need and what you can agree.
Minority shareholder rights
Assuming there is no shareholders’ agreement in place or a set of articles of association providing otherwise, the rights of shareholders set out under the Companies Act break down as follows.
Shareholding of 5% or more
- Able to require the circulation of a written resolution.
- Able to require the company to call a general meeting.
- Able to prevent the deemed re-appointment of an auditor.
Shareholding of 10%
- Able to call a poll vote at a general meeting.
- Able to require an audit.
Shareholding greater than 10%
- Able to block consent to short notice of a general meeting.
Shareholding greater than 25%
- Able to block a special resolution.
- Able to block compromise arrangement with members or a class of members.
Shareholding of 50%
- Able to block ordinary resolutions.
Shareholding greater than 50%
- Able to pass an ordinary resolution.
Shareholding of 75%
- Able to pass a special resolution.
- Able to approve compromise or arrangement with members or a class of members (also needs court sanction to be effective).
Shareholding greater than 90%
- Able to consent to short notice of a general meeting.
- Able to squeeze out minority shareholders where a takeover offer has been made.
- Right for minority shareholders to be bought out by a bidder making a takeover bid.
Impact of a shareholders’ agreement or tailored articles
Any of the above powers available under the Companies Act can be enhanced and or modified for any or all shareholders under the articles and or shareholders’ agreement. One way to achieve protection for minority shareholders is to create special classes of shares with enhanced rights.
Enhancing the rights for minority shareholders
When a dispute arises, it is often too late to amend the articles to cover minority shareholder rights. Amendment to any set of articles requires at least 75% of the shareholders to vote in favour of the amendment. In cases of dispute, it is fair to assume that the majority shareholders will not be willing to pass a resolution to assist a minority. This leaves the aggrieved shareholder with only the limited statutory rights.
Time and cost can be saved if protection is agreed via the articles or a shareholders’ agreement before the shares are acquired.
Often minorities suspect the business is not being managed properly but lack evidence. All claims need evidence. Controlling shareholders and directors will often refuse to voluntarily disclose evidence. Therefore, in practice, one of the most important provisions to include for a minority shareholder is the right to access financial records. The right to see financial data will not arise automatically under the Companies Act but can be created via the articles or shareholders agreement.
Linked in with access to financial records is the financial reporting. Sight of internal management accounts can be helpful and act as a warning to minority shareholders that management may not be as expected. Ultimately, it is the sight of financial records which can be most important.
Power of veto
Minority shareholders can with changes to the articles or shareholders agreement be given powers of veto. A power of veto can be used to block actions unless the minority consents. For example, a minority shareholder could be given the power to block:
- Business sales and mergers;
- Expenditure above prescribed limits;
- Winding up or voluntary liquidation;
- Large scale investment;
- New business avenues; and
- The sale of a substantial shareholding if similar terms are not offered to the minority.
Dispute resolution clauses
Shareholder problems can often be solved quickly and effectively if the shareholders’ agreement includes a dispute resolution clause. There are a variety of approaches to take. We will work with you to pick the right approach for your shareholding. Ideas often revolve around:
- Bringing in a third party (mediator/arbitrator) in an attempt to reach an amicable settlement if shareholders are in dispute;
- Including a right for a minority shareholder to have his shares bought out at “Fair value“; or
- Controlling the transfer of shares to avoid them being transferred into undesirable hands.
Companies do not always promote the interests of their minority shareholders. We do solve problems and advise shareholders on their rights. Often the threat of a claim is enough to resolve the issues. Very few of our cases end up in court.
Can a shareholder’s rights be waived?
The general rule is that rights can be waived but there must be proof. The best proof is an irrevocable and properly documented record.
Minority shareholder claims
There will usually be a variety of ideas to explore for a minority shareholder. Our job is to work out the minority shareholder rights and then to present them in a persuasive way. The core rights to explore are:
- The possibility of an unfair prejudice claim;
- Brining a claim against the director(s); or
- Winding up or voluntary liquidation.
As explained below, many of the remedies are difficult if not impossible for a minority shareholder to win on. That is why agreeing terms before investment is so important.
A factual analysis of the shareholders’ rights
The best avenue will often depend upon the facts and provisions in existing corporate documentation such as the articles, any shareholders agreement and the director’s service agreements, if any. We have acted for many companies where there is no corporate documentation in place, or it is outdated. We find solutions to work around the problems that this throws up.
Unfair prejudice petition
Shareholders can present an unfair prejudice petition. The minority shareholder must show an actual or proposed act or omission of the company which would or has unfairly prejudiced the shareholder. Examples include:
- Breaches of a director’s fiduciary duty to the company;
- Mismanagement which is serious to the financial loss arising from the act or omission;
- Improper failures on behalf of the directors;
- Breaches of a shareholders’ agreement and/or company articles; and
- Exclusion from management or failure to provide information.
Minority shareholders rights: showing prejudice and unfairness
Both prejudice and unfairness must be shown for relief to be granted. Reduction in the economic value of shares can show prejudicial conduct. As to unfairness, the courts have not provided a definition. Rather, the courts assess unfairness on an understanding of the commercial relationship from an objective point of a view, it is determined on a case by case basis to ascertain whether any minority shareholders rights have been interfered with.
Misconduct of the shareholder bringing a claim may mean that prejudicial acts or omissions are not considered unfair. Any delay in seeking redress may also count against the shareholder trying to show unfairness. However, these rules are not inflexible and certainly not shut to challenge.
Unfair prejudice: the court’s discretion
If prejudicial and unfair conduct is proven, the courts have a wide range of discretionary powers.
- The court can order the purchase or sale of the petitioner’s shares at a price determined by the court; or
- The court can regulate the company’s affairs in the future; or
- Require the company to undertake an act or omit from taking action on a specific matter complained of; or
- Authorise proceedings to be commenced under the derivative claim route.
Claim against a director(s)
Claims brought by shareholders against the directors, known as derivative claims, are notoriously complex. The claim against the director is intended to address the classic problem for a shareholder where the board of directors refuse to act.
There is no minimum holding requirement to bring a derivative claim, although the court will take this into account when deciding whether or not the claim should proceed, i.e. whether the majority would seek to exercise the action to enforce a minority shareholders rights.
Of the three court applications, this is the most drastic. As such, the courts have prepared strict guidance on its use.
The company, its directors, its shareholders or creditors can apply for the company to be wound up where it is just and equitable to do so. This right stems from the Insolvency Act 1986. Where a company is wound up, its creditors are paid off and the surplus, if any, is returned to the company’s shareholders.
Under the Companies Act, 75% of shareholders must vote in favour of a winding up. This means that a minority shareholder cannot stop the process. To get around this risk, many minority shareholders include winding up or voluntary liquidation as a matter requiring their approval.
When will the court wind a company up?
The courts have provided various examples of when it is just and equitable for a company to be wound up, including but not limited to the following:
- Deadlock which was not contemplated by the shareholders – this is often the case in a company with two equal shareholders as ordinary resolutions cannot be passed – a fundamental for any company’s survival. In cases of deadlock, the shareholders are often the two directors of the company and also employees; this is where our employment expertise compliments our corporate knowledge and dispute resolution tactics. Again, bespoke corporate documentation can cover for deadlock situations. “Off the shelf” documents should be avoided as they only serve to rack up litigation costs.
- Justifiable loss of confidence in management arising from serious company mismanagement on behalf of the directors – for example fraud or excessive director remuneration.
- Exclusion from management or failure to provide information in the context of a quasi-partnership or where an agreement renders such conduct inequitable.
Recent experience in resolving problems for minority shareholders
The vast majority of our matters settle without the need for court action. We achieve results by negotiation and sometimes mediation which is usually the best outcome. Having said that, sometimes, in order to achieve results we do threaten action and issue claims. Examples of our recent instructions include:
- Acting for a minority shareholder seeking to wind up a digital media company following a breakdown in management/deadlock. We presented the petition for the company’s winding up and then successfully resolved the dispute, using the petition as leverage for successful negotiations.
- Review of corporate documents before a shareholder invested to acquire a 10% stake. Making suggestions to lessen the risk attaching to the shareholding.
- Drafting new articles and a shareholders’ agreement for a business wishing to attract a number of small investors via crowd funding.
- Acting for a shareholder seeking to wind up a company following loss of substratum rendering the carrying out of the purpose for which the company was incorporated impossible.