Fair shares: the rights of minority shareholders
17th January, 2013
The position of a minority shareholder is not an envious one and can ultimately be perilous should problems arise. The law is not generally sympathetic to investors and offers little remedy as it considers them ultimately responsible for a decision which has put them in that position.
However the recent case of Maidment v Attwood has provided a timely reminder that where all else has failed there may be possible solutions through the courts.
As always the most important message is that when entering into any kind of deal investors should be mindful of how they are going to exit. Ideally this will be in an amicable fashion but if necessary in adverse circumstances.
What happened?
Mr Maidment was a minority shareholder in a company, Tobian Properties Limited. He took no part in the running of the business and did not pay close attention to the company’s accounts. The company subsequently got into financial difficulties and the director put it into a creditor’s voluntary liquidation.
Mr Maidment raisied a claim for unfair prejudice claiming that, amongst other things, the director had paid himself too much and that assets of the company had been used by or sold to a company controlled by the director for below their true value.
At the first hearing the claim was rejected on the grounds that there had not been any unfairly prejudicial treatment since every action of the company had been discoverable by Mr Maidment. In effect the court held that a shareholder could not complain if their own lack of diligence had prevented them taking any action to resolve the situation.
Mr Maidment appealed and, fortunately for him, the Court of Appeal agreed with him that the director had breached his duty to act in the best interests of the company and that in doing so had unfairly prejudiced Mr Maidment’s shareholding.
What does this mean for minority and majority shareholders?
Minority shareholders will take heart from the Court of Appeal’s decision that there is no requirement for investors to spend their time diligently observing their investments or risk losing their right to seek redress.
However, the fact remains that any cause of action must be proven to be both unfair and prejudicial which could prove a difficult hurdle to overcome if a director can show that the interests of the company were at the heart of a decision. It is therefore always more appropriate to ensure wherever possible that alternative arrangements are in place.
Conversely directors and majority shareholders may well be more mindful to think twice before taking decisions which they consider could be the subject of a claim. Ultimately, even successfully defending a claim will take time and money which could be better spent on business operations.
How can minority shareholders protect their investment?
Well drafted articles of association and a solid shareholders agreement will always prove invaluable and will usually provide the best mechanism for any investor looking to protect themselves.
Unfortunately all too often the reality of how disputes will be dealt with and how ultimately one will exit the investment are not contemplated at the outset of a commercial relationship. Consequently, far too often too little consideration is given to these factors.
Is there an alternative?
The Companies Act 2006 (“Act”) provides a mechanism for minority shareholders to petition the court where the affairs of the company are conducted in a manner which unfairly prejudices their shareholding.
Under these provisions the court has a general power to make such orders as it sees fit. However generally the remedy sought and granted will fall within a range of defined categories which range from an order to compel the company to take certain action or to refrain from taking certain action. The court can also order the purchase of shares by other members or indeed by the company.
How can Ward Hadaway help?
Disputes can affect any business and, as with most problems, prevention is better than a cure. Our multi-disciplined teams can assist in all aspects of corporate investment whatever your involvement in a company. Putting in place bespoke agreements between investors can provide a cost-effective mechanism for resolving disputes quickly.
Alternatively, if you are running a business and are concerned that the difficult decisions you are making could leave you vulnerable to claims from minority shareholders then our teams can help you make decisions in confidence.
Where disputes do occur we are experienced in providing bespoke advice so that disputes can be settled in a cost effective and commercially sensitive manner.
Contact our teams about:
- Company formations
- Shareholders agreements
- Company disputes
- Corporate advice
For further details on any of the issues raised in this briefing, please get in touch.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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