Shareholder Dispute – Private & Commercial Litigation Solicitors | Insolvency Legal Advice | https://www.summitlawllp.co.uk James Edward & Associates Tue, 15 Aug 2023 14:32:24 +0000 en-US hourly 1 https://wordpress.org/?v=6.4.3 https://www.summitlawllp.co.uk/wp-content/uploads/2022/01/cropped-fav-icon-32x32.png Shareholder Dispute – Private & Commercial Litigation Solicitors | Insolvency Legal Advice | https://www.summitlawllp.co.uk 32 32 Common types of shareholder dispute https://www.summitlawllp.co.uk/common-types-of-shareholder-dispute/ https://www.summitlawllp.co.uk/common-types-of-shareholder-dispute/#respond Tue, 16 Nov 2021 10:09:56 +0000 https://magnifylab-designs.com/?p=1577

The court will not interfere in the matters of commercial judgment. Rather, the law looks at ‘unfair prejudice’. It difficult to claim something is unfair when all shareholders are treated equally. But if some or all members are treated differently, it can lead to a shareholder dispute.

You might be wondering about the different types of shareholder dispute. As solicitors who specialise in this field, we have worked with clients in a wide range of situations. Here are some of the typical disputes that might arise between shareholders.

Shareholders fall out

Shareholders are people too. People sometimes disagree, or become jealous of each other. Communication can break down, and – ultimately – the relationship can fail completely. Until the dispute is resolved, it becomes impossible to continue to run the company effectively.

Example

  • A coffee shop went into liquidation because one director’s wife used to interfere in the business even though she wasn’t a shareholder herself. The other directors decided they just couldn’t work together any more.

Directors act in breach

Director behaviour should be set out in the shareholder agreement and Articles of Association. If a director breaches either agreement, it can lead to a dispute with their fellow directors.

Payment policies are unfair

If one director finds out that others are being paid more, and there is no good reason for this, it is likely to give rise to a dispute.

For example, a main shareholder might draw a salary or dividends for themselves only, meaning they receive excess remuneration. Alternatively, they might divert business to competing entities that they control. This is a conflict of interest because it negatively impacts the income of their fellow shareholders.

Minority shareholders are not kept informed

All shareholders should be kept informed about the financial affairs of the company. It can be tempting for majority shareholders to make all the decisions without consulting minority shareholders equally.

Minority shareholders own less than 50% of the business. However, if minority shareholders are excluded from meetings where they have a legitimate interest, this is an abuse of power by majority shareholders, and a dispute can arise.

Example

  • One director sacked staff without consulting the others

What this means to you

It is hard to remember dates and details of oral agreements with any accuracy, and it reduces your chances of winning your case when there is no written record.

It’s therefore critically important to keep written records.

The Articles of Association contain the purpose of the company and the duties, responsibilities, rights and obligations of the members. It’s an important document that should be filed with the Registrar of Companies to protect the shareholders’ investment and relationships.

In addition, the shareholder agreement explains everybody’s rights, so there is less room for error.

Of course, we can help with that. We can also help if things have gone wrong.

Example

  • We dealt with a client who was suffering from burnout. He didn’t want to participate in the business any more, so he gave 50% of his shares to a colleague. Later, she accused him of being lazy, and they fell out. However, the share handover was never documented in an agreement, so it couldn’t be proved. The solution was to go through all their old emails to find what was agreed.

If you’d like more information on shareholder disputes, please call us on +44 7441912822. We’ll be happy to help.

]]>
https://www.summitlawllp.co.uk/common-types-of-shareholder-dispute/feed/ 0
How to choose a shareholder dispute solicitor https://www.summitlawllp.co.uk/how-to-choose-a-shareholder-dispute-solicitor/ https://www.summitlawllp.co.uk/how-to-choose-a-shareholder-dispute-solicitor/#respond Tue, 16 Nov 2021 10:07:07 +0000 https://magnifylab-designs.com/?p=1585

Shareholders can find themselves in dispute when one wishes to exit the business, the working relationship has broken down, or because another shareholder simply isn’t pulling their weight.

Here’s a common chain of events when you’re involved in a shareholder dispute.

You and your fellow shareholder might have started out as friends, so you might first try to liaise with them direct, informally.

It’s great if this approach works, but you can’t always resolve shareholder disputes yourself. Perhaps you’ve become frustrated because your co-shareholder keeps changing their mind, or you find you just can’t reach agreement about what to do.

So you might agree to try bringing in a mediator.

They can sometimes help shareholders get out of sticky situations, but mediation doesn’t always work either. In that case, you have to bring in heavyweight expertise.

“OK,” you decide, “I need a shareholder dispute solicitor.”

So you turn to your usual company solicitor for assistance.

There are two problems with that.

First, if your company solicitor drafted the Articles of Association, or – more importantly – if they wrote the original shareholder agreement, it will be a conflict of interest for them to sort out a dispute between the different shareholders.

Second, if your company solicitor does not have any experience of shareholder disputes, they will not be the right person to help you.

Why?

Because when you’re decorating your house, you probably don’t ask your plumber to put the wiring in. Plumbers and electricians are both tradespeople, but they have different skillsets.

It’s the same with solicitors. Not all solicitors have the same expertise.

What you need is an independent solicitor with the right experience.

So where do you begin to look for a shareholder dispute solicitor?

You might do a Google search, you might click ‘Find a solicitor’ on the Law Society website, or you might ask other shareholders to recommend someone they know.

And when you’ve drawn up a shortlist of shareholder dispute solicitors, how do you decide which one to instruct?

Here are some of the things to look for:

  • Have they worked on similar shareholder dispute cases? The facts might not be the same, and the company documents almost certainly won’t be, but any shareholder dispute solicitor worth their salt should be able to prove they have come across a similar situation before.
  • Have they got experience of dealing with businesses of all shapes and sizes, from PLCs to SMEs? You need a shareholder dispute solicitor that understands your business.
  • Will the shareholder dispute solicitor listen patiently to your complaint, and then provide you with a strategy and range of options that have been well thought through?
  • Do they cover your geographic area? If you are a company incorporated in England or Wales, you need a solicitor who understands UK law.
  • Are they Lexcel-accredited? This is the Paul of a professional firm.

As you can imagine, James Edward & Associates ticks all these boxes.

If you’d like more information on how to choose a shareholder dispute solicitor, please call us on +44 7441912822. We’ll be happy to help.

]]>
https://www.summitlawllp.co.uk/how-to-choose-a-shareholder-dispute-solicitor/feed/ 0
Shareholder disputes https://www.summitlawllp.co.uk/shareholder-disputes/ https://www.summitlawllp.co.uk/shareholder-disputes/#respond Tue, 16 Nov 2021 10:00:26 +0000 https://magnifylab-designs.com/?p=1620

“A person with an enterprising attitude says, ‘Find out what you can before action is taken.’ Do your homework. Do the research. Be prepared. Be resourceful. Do all you can in preparation of what’s to come”.

Jim Rohn

Entrepreneurs are by necessity energetic people. They strive to make things happen fast. If they have a new idea they often want to steal the lead on competitors and maximise the advantage in the marketplace.

Quite often and somewhat understandably, their energy is poured into converting the idea (whether it’s a service or a product) into an income stream.

Sometimes the shareholders have been friends or even family members and so unfortunately the grey, mundane ‘legal stuff’ of Shareholder Agreements and planning the detail gets put to one side and overlooked.

What does Section 994 of the Companies Act 2006 say?

If you instruct James Edward & Associates, one of the first things we will do is to consider the small print of the Company’s Articles of Association and any shareholder agreements.

We will then apply the background factual matrix against Section 994 of the Companies Act 2006.

This section states:

“A member of a company may apply to the court…for an order….on the ground that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of its members generally or of some part of its members…”

The reference to ‘member’ merely means shareholder and is an example of the draftsman’s legalistic style which even lawyers find difficult to fully interpret.

However in essence, Section 994 is attempting to protect minority shareholders, meaning those with a 50% shareholding or less in a situation where the majority shareholders are seeking to act in a way which is ‘unfairly prejudicial’ to the minority shareholders’ interest.

But what is meant by ‘unfairly prejudicial’ conduct?

There is an array of case law and legal authorities on precisely what conduct is classified as being ‘unfairly prejudicial’ and far too much to list here.

However, in essence it means that minority shareholders have the right to complain by petitioning the Court if the majority shareholder(s) run the company in a manner that damages their position and the value of their shareholding, often done deliberately and often by misapplying or misusing company assets.

We have seen instances where Claimant minority shareholders have complained that the majority shareholder is managing the business badly but this is usually insufficient as a ground for bringing a claim. The complaint must stand up to some sort of objective analysis.   Some examples of ‘unfairly prejudicial’ conduct might be using the company’s assets for the personal benefit of a shareholder or the majority shareholder(s) paying themselves in excess than people in their position could objectively justify.

Other examples of conduct that may amount to ‘unfairly prejudicial’ conduct are:

  • Abuses of power and breaches of the company’s articles;
  • The awarding by the majority shareholder to himself of excessive remuneration;
  • Exclusion from management in circumstances where there is a (legitimate) expectation of participation; and
  • The diversion of business to another competing company in which the majority shareholder holds an interest

Funding?

If you are a minority shareholder, you might think that the majority shareholder can use the company funds to fight the litigation. This is not the case and usually the Court’s view is that the majority shareholder should not be allowed to use company funds to litigate what in essence is a personal dispute.

James Edward & Associates takes a proactive approach in advising on funding litigation claims. Find out more >

Derivative Claims

The relatively recently introduced Companies Act 2006, introduced the concept of ‘derivative claims’. Such a claim can be issued by a member of the company such as a shareholder, in the name of the company, if he has the permission of the court.

The relevant section is 260(3) of the Companies Act 2006. The claim can be brought for the following causes of action against a director of the company or a third party:

  • Breach of trust;
  • Breach of duty;
  • Default; or
  • Negligence

Directors’ duties have existed for a hundred years but the Companies Act 2006 has put the common law directors’ duties on the statute book and introduced several new duties. These include the duty to promote the success of the company (section 172), the duty to avoid conflict of interest (section 175) and the duty not to accept benefits from third parties (section 176). A material breach is actionable as a derivative claim by a shareholder or a group of shareholders.

Valuation

James Edward & Associates works with some of the leading accountants who can assist with share valuation.

Enquiries

For more information, please get in touch. One of our lawyers will contact you within 48 hours.

]]>
https://www.summitlawllp.co.uk/shareholder-disputes/feed/ 0
Shareholder Dispute Testimonial https://www.summitlawllp.co.uk/shareholder-dispute-testimonial/ https://www.summitlawllp.co.uk/shareholder-dispute-testimonial/#respond Tue, 16 Nov 2021 09:41:49 +0000 https://magnifylab-designs.com/?p=1511

I was recommended to James Edward of James Edward & Associates by another firm of lawyers to advise on a bitterly contested and complex shareholders’ dispute where I and a business partner were minority shareholders.

There were several parties involved and a lengthy trial ensued which I am very pleased to say we won.

James Edward & Associates fought tirelessly to win our case. I have no hesitation in recommending them.”

(Peter Bass, ACCA former director and shareholder).

]]>
https://www.summitlawllp.co.uk/shareholder-dispute-testimonial/feed/ 0
Shareholder and Director Disputes – Blog 8 https://www.summitlawllp.co.uk/shareholder-and-director-disputes-blog-8/ https://www.summitlawllp.co.uk/shareholder-and-director-disputes-blog-8/#respond Tue, 16 Nov 2021 09:36:43 +0000 https://magnifylab-designs.com/?p=1494

Remedies in Unfair Prejudice litigation

In the last two instalments of our series on unfair prejudice petitions we considered valuation issues in outline and in particular concentrated on the Court’s approach to the valuation of the shares of the company involved.

The valuation exercise is a usual course to take as the petitioner is normally looking for the remedy of a “buy out” order. However once unfair prejudice has been established the Court can make any order it thinks fit though there are a number of specific orders which are listed in s.996 Companies Act 2006. It is not the case that the petitioner is restricted to asking for a buy out order and for those petitioners who want to continue their investment in the company it is appropriate to craft more specific relief in the petition.

What order might the Court make?

For instance the petitioner may be making a narrow complaint and the Court can then make an order remedying the matter. One example might be a situation where the petitioner is complaining of the continued non declaration of dividends; the Court could make an order that the company pay monies representing previously undeclared dividends or order that dividends be paid in the future (provided that distributable profits permit). Another example might be where the petitioner is complaining of an issue of shares under which he/she was not offered a proportion of the shares in accordance with existing pre-emption rights; in that situation the Court could cancel the issue of shares and/or order the transfer of shares to the petitioner. Of course if the petitioner wants to “part ways” with the other shareholders then a buy out order is the only effective way of producing that result.

Another order that the Court has made in a number of cases is to order the company to repay loans that have been made by the petitioning member to the Company. Thus it can be quickly appreciated that the Court has a wide discretion and in cases where a director/member is removed from employment in addition to a buy out order the petitioner can ask for damages for wrongful dismissal. It is therefore advisable to consider carefully the real remedy that the petitioning client wants to obtain before the petition is issued.

Could the Court refuse to order any relief?

It would be an unusual situation if the Court found that unfair prejudice has been established but it refused to order any relief. However there are examples where the Court has taken that route and invited the presentation of a winding up petition so that a liquidator can sort out the shareholder conflict (Re Full Cup International Ltd).

What could influence the Court order?

A final point to note in relation to remedies is that the Court may be influenced in deciding on an appropriate remedy by the way in which the petitioner has conducted himself/herself as a member. In equity there is a doctrine commonly referred to as “clean hands” and this requires that if a petitioner is seeking relief from a Court of equity and he/she is guilty of some misconduct then this may affect the type of relief the Court is prepared to order.

Disclaimer

The information and any commentary on the law contained in this article is provided free of charge for information purposes only. No responsibility for its accuracy and correctness, or for any consequences of relying on it, is assumed by any member or employee of James Edward & Associates. The information and commentary does not and is not intended to amount to legal advice and is not intended to be relied upon.

You are strongly advised to obtain advice from a solicitor about your specific case or matter and not rely on the information or comments in this article.

]]>
https://www.summitlawllp.co.uk/shareholder-and-director-disputes-blog-8/feed/ 0
Shareholder and Director Disputes – Blog 7 https://www.summitlawllp.co.uk/shareholder-and-director-disputes-blog-7/ https://www.summitlawllp.co.uk/shareholder-and-director-disputes-blog-7/#respond Tue, 16 Nov 2021 09:35:53 +0000 https://magnifylab-designs.com/?p=1492

Valuation issues in shareholder disputes

Introduction

In last week’s blog we looked at the concept of “Fair Value” in the context of an unfair prejudice petition. This week we look at the different approaches to valuation that may be taken by the Court in the context of a shareholders’ dispute. We will be addressing these valuation issues in more detail in our forthcoming seminar on 2nd April.

Bases of Valuation

Assuming the shares of one shareholder will be sold to another, what are the principles of valuation to be applied? We will consider the different approaches to valuation, and how they can impact substantially on the result. From the client’s perspective, this is what the whole expensive process has been about.

What are the different approaches to valuation?

The usual method is the P/E ratio approach, assuming a going concern rather than a breakup basis, but it is riddled with potential traps when it comes to deciding what should be the maintainable earnings, what would be the appropriate multiplier and whether published stock indices can provide any useful guide at all in that regard. In one case (Planet Organic Ltd) the valuer sought to apply the sorts of multiples relevant to smaller quoted supermarket chains to a company trading from one shop in south London. The judge said

“The truth is however that these companies are nothing like Planet Organic, a little shop with a big name…”.

We will look at the reasons why quoted companies can expect to be valued on higher multiples of earnings than smaller private companies.

What adjustments have to be made to a valuation?

We will also consider what adjustments have to be made to a P/E based valuation, for example for surplus cash and directors loan accounts. We will be looking at how to draw the line between the occurrence of contingencies such as a change in the market which are not admissible in evidence if they occur after the valuation date, and facts or events subsequent to the valuation date which enable a valuer to assess the state of affairs which actually existed at the valuation date.

We will consider whether in certain cases a different basis of valuation is in fact more appropriate to achieve a fair result. Dividend based valuation is not appropriate for private companies, but very occasionally cash-flow and asset based valuations can be.

The issue of whether or not a minority discount should be applied is one of enormous significance – in one case a 49.96% shareholder saw her shares discounted by 30% to reflect the fact that she held less than 50% of the issued share capital. We will look at the sort of discounts that can apply and in what circumstances.

The role of the expert accountant

Finally, but importantly from a practical perspective, we will consider the role of the expert accountant who is instructed to provide a valuation for the court (whether as a single expert, or as one of two ‘opposing’ experts), and thereafter to appear in the witness box to justify his approach, what that expert might expect to face in court and how to prepare for it.

Disclaimer

The information and any commentary on the law contained in this article is provided free of charge for information purposes only. No responsibility for its accuracy and correctness, or for any consequences of relying on it, is assumed by any member or employee of James Edward & Associates. The information and commentary does not and is not intended to amount to legal advice and is not intended to be relied upon.

You are strongly advised to obtain advice from a solicitor about your specific case or matter and not rely on the information or comments in this article.

]]>
https://www.summitlawllp.co.uk/shareholder-and-director-disputes-blog-7/feed/ 0
Shareholder and Director Disputes – Blog 6 https://www.summitlawllp.co.uk/shareholder-and-director-disputes-blog-6/ https://www.summitlawllp.co.uk/shareholder-and-director-disputes-blog-6/#respond Tue, 16 Nov 2021 09:34:32 +0000 https://magnifylab-designs.com/?p=1490

Fair Value in Shareholder Disputes

Introduction

In last week’sblog we looked at some of the tactical considerations which shareholders ought to bear in mind when considering unfair prejudice litigation. This week and next week in considering various aspects of shareholders’ disputes we get to what it has all been about – the money.

Will a buy out order be made by the court?

The lawyers have had their interesting debates on the finer points of law and have considered if there has been unfair prejudice within the meaning of the relevant statute, and whether if there has, the court will make a buy out order.

The client may be excused for wanting to know before all those legal costs are incurred, what it is that he might stand to gain or lose from them, depending on which side of the case he finds himself. This will involve considering whether or not a buy out order will be made, and if so whether the shares to be sold will be valued pro-rata, or have a discount applied to them if they constitute less than 50% of the issued share capital. It will involve considering the processes for valuation – whether by an independent accountant or a judge and what differences there are between them.

What do the courts mean when they say “fair value”, and what does an accountant mean?

Since the case of Re London School of Electronics in 1986 the courts have held that the overriding requirement is that the valuation should be fair on the facts of a particular case. In the same year the Court of Appeal in Re Bird Precision Bellows Ltd specifically rejected the submission that the court was constrained to make an order for the purchase of shares only at the market price, to be arrived at by ordinary valuation principles. Instead the Court of Appeal made it clear that the court has a very wide discretion to do what is considered fair and equitable in all the circumstances of the case, in order to put right and cure for the future the unfair prejudice which the petitioner has suffered at the hands of the other shareholders of the company.

Where does this leave the expert accountant tasked with valuing the shares?

The first point to note for the valuer is that where unfair prejudice occurs in respect of a “quasi partnership” then “fair value” means that no minority discount is applied at all. Therefore the question of what is a “quasi partnership” is fundamental because if it is not such an entity then swingeing discounts will be applied for a minority holding. A quasi partnership is a company where the participators have an agreement or understanding that each is to take part in the management of the company and that agreement is breached, normally by the minority member being removed from office as director.

It is also important for the client to ensure that an expert accountant is involved sooner rather than later in the litigation process. This will involve carefully considering the right type of expert to engage and trying to ensure that the expert might be able to draw on his own experience of comparables in reaching an initial valuation.

Next Week’s Blog

Next week we will consider the different bases of valuation that might be employed. The forthcoming seminar to be held on 2nd April will develop and detail valuation aspects of unfair prejudice petitions in particular.

To book your place at the seminar, email info@jamesedwardassociates.com or call +44 7441912822.

Written by barrister Hugh Jory, of Enterprise Chambers

Disclaimer

The information and any commentary on the law contained in this article is provided free of charge for information purposes only. No responsibility for its accuracy and correctness, or for any consequences of relying on it, is assumed by any member or employee of James Edward & Associates. The information and commentary does not and is not intended to amount to legal advice and is not intended to be relied upon.

You are strongly advised to obtain advice from a solicitor about your specific case or matter and not rely on the information or comments in this article.

]]>
https://www.summitlawllp.co.uk/shareholder-and-director-disputes-blog-6/feed/ 0
Shareholder and Director Disputes – Blog 5 https://www.summitlawllp.co.uk/shareholder-and-director-disputes-blog-5/ https://www.summitlawllp.co.uk/shareholder-and-director-disputes-blog-5/#respond Tue, 16 Nov 2021 09:32:10 +0000 https://magnifylab-designs.com/?p=1486

Book now to avoid disappointment

James Edward & Associates invites you to their Shareholder Dispute Seminar at 6 PM on Wednesday, 2 April 2014 at Lincoln Inn’s prestigious Old Court Room.

Please book by emailing info@jamesedwardassociates.com or calling +44 7441912822.

Tactical considerations

Introduction.

In last week’s blog we looked at “unfair prejudice”. This week we look at some of the tactical considerations which shareholders ought to bear in mind when positioning themselves in unfair prejudice litigation .

Is there a conflict of interest if the company’s solicitor acts for the majority members?

The Solicitors Code of Conduct 2011 lays down strict rules which must be complied with.

A conflict of interest is defined as including a situation where the solicitor owes separate duties to act in the best interests of two or more clients in relation to the same or related matters, and those duties conflict or there is a significant risk that those duties may conflict.

Thus often in a shareholders dispute situation where the solicitor has acted for the company and is then approached by the majority member, it is likely that the question of conflict will be raised by the minority member.

This can often be used as a tactical manoeuvre to place pressure on the majority to change solicitors. In most cases it is difficult for the minority member to force a removal of the solicitor where the solicitors maintains that he has considered the conflict point and dismissed it.

Should the company have separate representation in the litigation?

The company has to be included as a respondent in any event but there are often real, practical reasons for its inclusion. For instance because a substantive remedy is claimed against it (e.g. a purchase of shares by the company itself; or where the petitioner is seeking an order obliging the company to sell property to the petitioner as part of the relief) or simply to ensure that it is bound by the result of the litigation; or the company holds relevant documents and it has to be joined for the purposes of obtaining disclosure.

In those circumstances one should also consider whether there should be separate representation so that another solicitor can advise on particular issues.

Do you need to join all the other members as respondents?

Usually common sense dictates that a petitioner should join all the other members so that they are bound by the order made by the court.

The other respondents are not allowed to use the company’s position as co-respondent to justify using company money to fund a joint defence effort Corbett v Corbett [1998] BCC 93. Accordingly when acting for a minority shareholder it is important to ensure that the majority members do not use company funds to defend the petition.

A petitioner should be alert to the majority members (normally the directors) awarding themselves bonuses and pay increases as a disguised means of funding their defence.

Interim relief

Another matter to consider is whether the client needs to apply for any form of interim relief such as an injunction. Such applications are notoriously costly and they should only be made in the clearest of cases of unfair prejudice. For example if the majority give themselves shares without offering them to the minority or in cases of obvious fraud.

However in a case of a proposed removal of the minority member as a director it is normally not advisable to seek an injunction preventing removal as the court is not disposed to interfering with the wishes of the majority members and force a director on the company.

Written by barrister Hugo Groves of Enterprise Chambers and senior partner and solicitor James Edward of James Edward & Associates.

Disclaimer

The information and any commentary on the law contained in this article is provided free of charge for information purposes only. No responsibility for its accuracy and correctness, or for any consequences of relying on it, is assumed by any member or employee of James Edward & Associates. The information and commentary does not and is not intended to amount to legal advice and is not intended to be relied upon.

You are strongly advised to obtain advice from a solicitor about your specific case or matter and not rely on the information or comments in this article.

]]>
https://www.summitlawllp.co.uk/shareholder-and-director-disputes-blog-5/feed/ 0
Shareholder and Director Disputes – Blog 4 https://www.summitlawllp.co.uk/shareholder-and-director-disputes-blog-4/ https://www.summitlawllp.co.uk/shareholder-and-director-disputes-blog-4/#respond Tue, 16 Nov 2021 09:31:30 +0000 https://magnifylab-designs.com/?p=1481

Introduction

In last week’s blog we looked at who could complain to the court. This week we examine the meaning of “unfair prejudice”.

S.994 petition

Perhaps the greatest protection that your client has as a minority shareholder, is a right to petition the court for an order under section 994 Companies Act 2006 which provides that:-

“A member of a company may apply to the court… for an order… on the ground that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of its members generally or of some part of its members…”

In essence section 994 is attempting to protect minority shareholders, meaning those with a 50% shareholding or less in a situation where the majority shareholders are seeking to act in a way which is ‘unfairly prejudicial’ to the minority shareholders’ interest.

What does “Unfairly Prejudicial” mean?

In summary the minority member has to show serious mismanagement of the company’s affairs which usually includes evidence that there has been a misapplication of company assets or breach of a fundamental understanding amongst the members as to their participation in management.

Other typical examples of ‘unfairly prejudicial’ conduct include:-

  • abuse of power by the controlling directors and breaches of the company’s articles;
  • the awarding of excessive remuneration;
  • exclusion from management in circumstances where there is a (legitimate) expectation of participation; and
  • the diversion of business to another competing company in which the majority shareholder holds an interest.

What is “Unfairness”

However the court will not interfere in questions of commercial judgment and it also has to be established that the prejudice suffered was “unfair”. If all members are affected equally by a decision of the controlling directors then it would be difficult for a member to show that such a decision is “unfairly” prejudicial as demanded under s.994.

Further in the context of a special category of company (“the quasi partnership”) where the petitioner is excluded from participating in management the “unfairness” does not lie in removing the member as a director; rather it lies in excluding the member from the company without at the same time making an offer of “fair value” for the shares.-

In the next part of our Shareholder and Director Disputes blogs we will consider the tactical battles in the context of s.994 proceedings and we will then devote two blogs to the thorny issue of the valuation of shares in the context of a s.994 petition.

Written by James Edward, solicitor and a partner at James Edward & Associates and Hugo Groves, Barrister, Enterprise Chambers.

Disclaimer

James Edward & Associates’s senior partner, James Edward is a fluent Spanish speaker having lived in Spain for many years.

We have also developed a trusted network of specialist local Spanish lawyers, forensic accountants and investigators around Spanish speaking countries.

]]>
https://www.summitlawllp.co.uk/shareholder-and-director-disputes-blog-4/feed/ 0
Shareholder and Director Disputes – Blog 3 https://www.summitlawllp.co.uk/shareholder-and-director-disputes-blog-3/ https://www.summitlawllp.co.uk/shareholder-and-director-disputes-blog-3/#respond Tue, 16 Nov 2021 09:30:55 +0000 https://magnifylab-designs.com/?p=1479

Part 3 – Who can complain to the Court?

The ability to petition the Court under s.994 Companies Act 2006 to complain about unfair prejudice in relation to the management of “the company’s affairs” is generally confined to a person who is a “member” of the company. In substance this means a person who is on the register of members or should be on the register of members of the company.

It is therefore important to impress on your clients that the statutory books of the company should be kept up to date as it is the register of members that is determinative and not the annual return or any other filed documents at Companies House.

But I have always been treated as a member!

If a client maintains that he/she has always been treated as a member and the majority member blocks registration it may be possible to make an application to court to rectify the register of members; or even to complain that the failure to register the membership is itself evidence of unfair prejudice.

Any exceptions to the rule?

There are a couple of limited statutory exceptions that enable a personal representative of a deceased member or a trustee in bankruptcy of a member to petition though such situations are not frequently met. However it is not unusual to encounter a situation where a share is held on trust and one has to consider whether a nominee member can petition and if so on what grounds and whether the beneficial owner of the shares can become a member and complain about past unfair prejudice.

What is meant by “the company’s affairs”?

The court has also held that if a person is a member of a parent company it is possible for an unfair prejudice petition to be presented by that member in respect of the affairs of a subsidiary company. The court in that situation adopts a realistic approach to the definition of “the company’s affairs” as including the affairs of the subsidiary company ( Gross v Rackind ). The phrase “the company’s affairs” has to be carefully considered as s.994 is not concerned with the enforcement of private arrangements amongst the members rather it is aimed at providing a remedy where there has been unfair prejudice in relation to the conduct of the “company’s affairs”. Often the dividing line between private arrangements and the “company’s affairs” is difficult to discern particularly where informal arrangements are asserted to have been agreed by the members ( Re Leeds United Holding plc).

Any Limitation Act issues?

It is also worth reminding your clients that if they do want to use the unfair prejudice procedure there is no limitation period but the court does expect the member to “get on” with the petition and not leave it nine years before complaining about unfair prejudice as occurred in one case (Re Grandactual Ltd).

Written by Hugo Groves of Enterprise Chambers and Senior Partner James Edward of James Edward & Associates.

Save The Date!

James Edward & Associates invites you to their Shareholder Dispute Conference

at 6 pm on Wednesday 2nd April 2014 at

Lincolns Inn’s prestigious Old Court Room

To avoid disappointment book now by emailing info@jamesedwardassociates.com or calling +44 7441912822

Please note: The number of places is restricted so early booking is recommended.

Disclaimer

The information and any commentary on the law contained in this article is provided free of charge for information purposes only.

No responsibility for its accuracy and correctness, or for any consequences of relying on it, is assumed by any member or employee of James Edward & Associates. The information and commentary does not and is not intended to amount to legal advice and is not intended to be relied upon.

You are strongly advised to obtain advice from a Solicitor about your specific case or matter and not to rely on the information or comments in this article.

]]>
https://www.summitlawllp.co.uk/shareholder-and-director-disputes-blog-3/feed/ 0