Shareholder dispute case decisions

Shareholders sometimes petition the court for declarations or orders to protect their investments. We draw on relevant court decisions when developing strategies for our clients. The leading decisions set out below provide guidance for shareholders and company directors dealing with difficult situations.

Majority shareholder buys out minority shareholder

A leading case is Irvine & Ors v Irvine & Anor. A minority shareholder and director brought an unfair prejudice claim against the majority shareholder and director, alleging that he had been excluded from the company’s management, denied financial information and excluded from business decisions. The minority shareholder held just under 50% of the company’s shares.

The outcome for the minority shareholder

The court found that the company was a quasi-partnership, taking into account:

• The limited number of shareholders;
• Both shareholders’ roles as employees and directors.

The court’s conclusion meant that the majority shareholder was expected to act consistently with the relationship between the parties, including consulting the minority shareholder on decisions and providing relevant information.

The court ordered the majority shareholder to buy out the minority shareholder and directed that an expert value the shares. The valuation included a 30% minority discount, meaning the minority shareholder received 70% of the undiscounted value per share.

Dismissal and disqualification of a director

In Re Sevenoaks, the court considered the disqualification of a director following allegations that he had:

• Failed to prepare proper accounting records;
• Used company funds for personal benefit;
• Failed to submit required returns and accounts to Companies House; and
• Failed to submit the company’s corporation tax return.

Wider implications of the decision

Companies can reduce the risk of disputes by addressing director removal in their constitutional and contractual documents. Articles of association or a shareholders’ agreement may include provisions dealing with a director’s removal, subject to the applicable legal requirements.

A director’s service agreement can also provide for resignation from office when their employment terminates. Any power of attorney or other mechanism intended to facilitate resignation should be carefully drafted to ensure it is legally effective.

Unfair valuation of the shares

The following cases illustrate circumstances in which the court has considered whether a share valuation was unfair.

Inappropriate behaviour by the company which affects the value of the shares

In North Holdings Ltd v Southern Tropics Ltd, a dispute arose after relations between shareholders deteriorated. A minority shareholder sought a purchase of their shares and a determination of their value, alleging that directors had breached their fiduciary duties by using company assets to purchase shares from an existing shareholder.

The case illustrates that where directors breach their duties and diminish the value of the company, the resulting reduction in share value may be relevant when assessing whether a valuation is fair.

The method of valuation permits inappropriate minority shareholder discount

In Virdi v Abbey Leisure Ltd, the court considered whether a shareholder had acted unreasonably in refusing to accept a valuation by the company’s auditor under the articles, where the valuation might include an inappropriate minority discount. The case illustrates that a valuation mechanism in the articles may be challenged where its application would produce an unfair result.

Expert not independent

In Re Benfield Greig Group plc, the court considered concerns about the independence of an auditor valuing a former director’s shareholding, where the auditor had previously advised the company and had carried out an earlier valuation for tax purposes. The case highlights the importance of independence when selecting an expert to value shares.

We have also considered cases involving court injunctions for asset recovery, freezing orders and other court applications. We act for clients seeking injunctions or court orders to obtain information and protect assets, as well as those defending such applications.