Private Limited companies are owned by the members, these shareholders are there at the beginning when everything is hunky dory, and perhaps lodge significant funds, but if overtime these initial members are side-lined or a dispute arises between the members what can the shareholder do.
This blog post gives a bite sized overview of the three methods which shareholders may use to enforce their rights, namely (1) the presentation of an unfair prejudice petition under section 994 CA 2006; (UP) (2) the bringing of a derivative action under section 260 CA 2006 (DA) and (3) the presentation of a petition for the winding up of the company on just and equitable grounds under section 122 (1) (g) IA 1986. (WUP)
For an (UP) Claim, the members (Shareholders) of a company and persons to whom shares have been transferred (voluntarily or by operation of law) who are not yet registered as members (section 994(1) (2), CA 2006) including where they hold shares as nominees or trustees for others. Or the Secretary of State for Business, Innovation and Skills on the basis of investigations or reports (section 995, CA 2006).
For a (DA) the members of a company and persons to whom shares have been transferred (voluntarily or by operation of law) who are not yet registered as a member including where they hold shares as nominees or trustees for others (section 260(5), CA 2006).No minimum number of shares need be held but the size of the shareholding is
relevant to the court’s decision whether or not to permit a derivative claim to be brought.
For a (WUP) the list is considerably larger than the other two options and includes; The company; The directors (pursuant to a board resolution passed by a majority or unanimously absent such a resolution); Prospective or contingent creditors; and shareholders and others liable to contribute to the assets of a company who satisfy the requirements of section 124, IA 1986.
For an (UP) claim a shareholder may bring a claim for the following issues; Actual or proposed acts or omissions of the company which constitute the conduct of the company’s affairs in a manner that is unfairly prejudicial to the petitioner’s interests as a member including:
- Breaches of fiduciary duty on the part of the company’s directors prejudicing the interests of members
- Mismanagement which is serious having regard to the scale of financial loss arising and the frequency and duration of the relevant acts and omissions
- Improper failures to pay dividends/payment of excessive remuneration
- Breaches of the articles/ shareholder’s agreements
- Exclusion from management or failure to provide information in the context of a quasi-partnership or where the understandings or agreements between the parties render such conduct inequitable.
For a (DA) claim, then the claims are all causes of action which may be available to the company against directors, third parties as well as directors and third parties together arising from acts or omissions constituting negligence, default, breach of duty and/or breach of trust by a director or shadow director of the company (section 260(3), CA 2006).
When considering a (WUP) then a potential claim revolves around the circumstances rendering it just and equitable for the company to be wound up, the categories of which are not closed but include:
- Loss of substratum rendering the carrying out of the purpose for which the company was incorporated impossible and the sole remaining activity of the company is the getting in of
its assets and winding up of its affairs
- Deadlock which was not contemplated by the shareholder’s when the company was incorporated (compare with deadlock built into the articles to protect one or more shareholder’s)
- Justifiable loss of confidence in management arising from mismanagement which is serious (for example want of probity or fraud) or confounds proper and legitimate expectations
- Exclusion from management or failure to provide information in the context of a quasipartnership or where the understandings or agreements between the parties render such conduct inequitable.
The relief available to the shareholder claiming under an ‘Unfair Prejudice’ (UP) cause of action would be such order as the court thinks fit to remedy any unfair prejudice, taking into account the interests of other shareholders and creditors, including:
- Ordering the purchase/sale of the petitioner’s shares at a price and on terms to be determined by the court
- Regulating the conduct of the company’s affairs for the future
- Requiring the company to refrain from, or to carry out, an act including amendments to the articles of association
- Authorising proceedings to be commenced in the name of the company (even where the requirements for a derivative action are not satisfied) (section 996, CA 2006).
Raising a (DA) claim is slightly more complex and the relief available includes Permission from the court; to bring or continue a claim on behalf of the company commenced by the applicant (section 263, CA 2006); to continue a claim commenced by the company or by another member in a manner amounting to an abuse of process which has not been prosecuted diligently where it is appropriate for the applicant member to continue the claim (sections 262 and 264, CA 2006);
However, such permission may be limited (for example until disclosure) or conditional (for example no compromise or discontinuance without permission of the court). The court may also order the member pursuing the derivative claim to be indemnified for costs where: It would have been reasonable for the company’s directors to have pursued the claim; The derivative claimant’s only interest in the claim is as a shareholder; or All benefit from the action will accrue to the company.
For a ‘Winding-Up Petition’ (WUP) claim the relief is the court ordering the “Winding up of the company.”
For an (UP) claim then the seriousness of the unfairly prejudicial conduct identified by the applicant and the interests of other shareholders and creditors, and the insolvency of the company, which will preclude the bringing of a petition unless such insolvency was occasioned by the unfairly prejudicial conduct or the petitioner is prejudiced other than by losing the value of his shareholding in some other capacity connected with his status as a shareholder.
When considering a ‘Derivative Action’ (DA) claim A court must refuse permission to bring or continue a derivative claim where a person acting to promote the success of the company would not seek to continue the claim or the proposed or past act or omission is capable of authorisation/ratification and has been authorised by the company before it occurred or subsequently ratified (section 263(2), CA 2006).
A court may grant or refuse permission to bring or continue a derivative claim taking into account; The applicant’s good faith; The importance that a person acting to promote the success of the company would attach to the claim; The likelihood of authorisation or ratification; Whether the company has decided not to pursue the claim; Whether a personal remedy is available to the member seeking to pursue a derivative claim; The views of members of the company who have no personal direct or indirect interest in the claim (sections 263(3) to (4), CA 2006)
When considering a (WUP) claim the court will consider the seriousness of the just and equitable grounds identified by the applicant and the interests of other shareholders and creditors. Whether it is preferable for there to be an orderly winding down of the company’s affairs.
Nothing is ever simple and straightforward when considering the application of the law, and an (UP) claim is no exception to this truism, and the following problems may be encountered with the claim, namely; a refusal by the petitioner of a fair offer to purchase his shares; Express provision for an exit route in
the company’s articles of association or in a shareholder agreement.; Misconduct on the part of the petitioner; Delay in presenting the petition and/or acquiescence in the alleged unfairly prejudicial conduct.
For a (DA) claim, the bars to prosecuting the claim include the fact that the bringing or defending the claim is not in the best interests of the company; and that the actions complained of have been authorised or subsequently ratified by the company.
With a (WUP) claim the claim will not continue where the is an absence of any tangible benefit to the petitioner of the making of a winding up order (for example, the insolvency of the company in the context of a shareholder’s petition); or the availability of an alternative remedy which the petitioner unreasonably refuses to pursue.
Whilst there are inherent protection for a shareholder, built into the Companies Legislation, they are perhaps of little practical consequence to the majority of shareholders, and this point alone prescribes the necessity of having a clear and well drafted shareholders agreement, which incorporates appropriate dispute resolution procedures.
Acknowledgement: Thomson Reuters online resource Practical Law
NOT LEGAL ADVICE: Information provided in this Blog, is for information purposes only. It is not and should not be taken as legal advice. You should not relay on or take or fail to take any action based upon this information. Never disregard taking legal advice or delay in seeking legal advice because of something you have read in this blog, or on this website. Ian Randall is an Attorney & Counsellor at Law (NY), with 25 years of Corporate and Commercial experience in several jurisdictions. To see how Owllegal could help you, please visit; www.owllegal.org or email Ian Directly, his email address is firstname.lastname@example.org.