Enforcing the rights of minority shareholders

Advice  |   17 March 2016

If a disagreement arises between the directors and the shareholders, or between groups of shareholders, it is good to know that there are routes of redress under the Companies Act that can be followed, even if you are in the minority.

If a disagreement arises between the directors and the shareholders, or between groups of shareholders, it is good to know that there are routes of redress under the Companies Act that can be followed, even if you are in the minority.

For example, if the shareholders are concerned about the performance of the company, conduct of the directors or unfair distribution of dividends, they may be entitled to apply to court and ask it to step in and take action on their behalf. The court could make a director stand down, wind up the company or make it take specific steps.

“Ultimately, a company belongs to its shareholders,” explains Robert Goddard, company law solicitor at Thackray Williams. “The rights of a shareholder will depend on the class of share they hold.”

‘Ordinary shares’ carry the following three main rights:

  • one vote at the Annual General Meeting per share;
  • a right to receive a dividend in an equal amount as all other shareholders of the same class if and when a dividend is declared; and
  • a right to a share of the company’s assets if the company is wound up.

Complaints by minority shareholders

If you are unhappy with something that has been confirmed or ratified by the majority, then the court will not interfere with that position. In other words, the majority shareholders can do what they want by exercising their voting powers, and the minority shareholders cannot force the majority to change their position.

The rationale behind this rule is that individual shareholders have no right to sue for wrongs done to a company, be it by the directors or anyone else. The only entity with a right of action is the company itself. The decision of the majority of the shareholders will constitute the opinion of the company as far as the courts are concerned. As such, the view of the majority will be enforced.

Action a minority shareholder can take

Where the relevant act or omission complained of involves the ‘negligence, default, breach of duty, or breach of trust by a director of the company,’ minority shareholders can in certain circumstances force the company to take legal action against the director.

Clearly, these terms are legalistic and their application needs to be considered carefully on the facts of each case. There is a special procedure for making a claim. You will need the court’s permission and you must provide the court with enough evidence to substantiate the claim. If the court decides that that there is insufficient evidence, it can dismiss your application.

Despite the stringent conditions, this option provides strong protection for minority shareholders against potential abuses by a company director.

Unfair prejudice to the minority

The second potential route available to minority shareholders to protect their position is to apply for an order of the court on the ground that the actual or proposed conduct of the company is ‘unfairly prejudicial’ to the interests of members, or some part of them.

The courts have a wide variety of powers if an unfair prejudice claim succeeds. It can:

  • prevent the company from doing something;
  • require the company to purchase shares from the member in question; and
  • regulate the conduct of the company’s affairs in the future.

There are two key elements that must be established for the legal action to succeed: the conduct must be prejudicial to the members, or some group of them, and the conduct must be unfair. It is not necessary to show that anyone is acting in bad faith or with the intention of causing prejudice.

The availability of these options can provide minority shareholders with significant bargaining power. Also, do not forget that the shareholders have one of the most important controls of all, namely, the power to remove directors from office.

Winding up the company

If deemed to be ‘just and equitable’ to do so, minority shareholders (as well as majority shareholders) may petition the court to wind up the company. However, this is an extreme remedy that is unlikely to be in the interests of minority shareholders, given the break-up of assets without taking goodwill into consideration, the length of time it takes, the cost of the liquidator, and the fact that company debts may fall due straight away.

For more information on shareholders’ rights or any other company law matter, contact Robert Goddard

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.