Andrew Ryan – partner in our Dispute Resolution department – discusses Shareholder Disputes

Shareholder disputes are not unusual. Shareholders will often have different views and ideas about how the business should be run and this can often lead to conflict.

There are documents which you can put in place to govern how the company should be run and it is important to be aware of these documents and the provisions set out within them in the event of a dispute between the shareholders. The Articles of Association set out how the company should be run on a day to day basis. There may also be a shareholder agreement in place.

In the event of a dispute, the relevant documents should be considered to ensure that any decisions taken by the company are taken in accordance with the Articles of Association.

If the dispute has led to the relationship between the shareholders being irreconcilable, it might be proposed that the remaining shareholders buy out the unhappy shareholder. This will allow the unhappy shareholder to realise his investment in the company and for the company to carry on without the unhappy shareholder from attempting to block any decisions of the company. If the remaining shareholders are not willing to buy out the unhappy shareholder, it can be ordered by the Court under s994 Companies Act 2006.

Protection afforded by the s994 Companies Act 2006

S994 of the Companies Act 2006 allows a shareholder to apply to the court for relief where the affairs of the company are being conducted in a manner that is unfairly prejudicial to the shareholder’s interests and that an actual or proposed act or omission of the company is or would be so prejudicial. The following points should be considered before making a petition under s994:

(1)  The shareholder must be able to demonstrate both prejudice and unfairness before the court will make an order.

(2)  A shareholder can show unfair prejudice if she can show that the monetary value of her shares will decrease or has decreased as a result of a prejudicial act or omission. Unfair prejudice is not, however, limited to the financial value of the shares; it can also include damage to trust and confidence as a result of a breach of a fiduciary duty or the diluting a shareholder’s shareholdings by issuing shares with the intention of diluting a shareholder’s shareholding etc.

a. In Re Brenfield Squash Racquets Club Limited [1996] it was held that where the value of the shares had decreased, or was put in jeopardy of decreasing as a result of the act complained of, unfair prejudice could be found. Here, the Court ordered the majority shareholder to sell their shares to the petitioning minority shareholder at the request of the petitioning shareholder.

b. In Re Baumler (UK) Ltd [2004] it was held that a breakdown in the relationship of a quasi-partnership may amount to sufficient prejudice even if there is nothing more tangible caused by the prejudice.

c. Breaches of a company’s Articles of Association and shareholder agreements have also been held to amount to unfair prejudice, including the failure to hold annual general meetings, to provide accounts and to disclose interests in a transaction with the company (Re Woven Rugs [2010]).

d. In O’Neill v Phillips [1999], it was held that a breakdown of trust and confidence that had led to a deadlock but could not be attributed to any unfair prejudice will not entitle a petitioner to relief under s994, though it may justify the company being wound up.

(3)  The court will take an objective approach and should not consider morality when reaching their decision.

(4)  The shareholder must be worse off as a result of the complained conduct. If there is no detriment suffered by the shareholder, the petition will not be successful.

a. In Rock (Nominees) Ltd v RCO (Holdings) Plc [2004] a company sold its wholly owned subsidiary to a majority shareholder in breach of fiduciary duty. No prejudice was found because the sale took place at the best reasonable price and therefore the petitioner was no worse off as a result of the breach.

(5)  If the court is satisfied that the petition is well founded, one of the following orders may be made:

a. An order to regulate the conduct of the company in the future;

b. An order for the company to refrain from doing the act complained of;

c. An order for the company to do the act that the petitioner has complained that the company has omitted to do;

d. An order for the petitioning shareholder to be bought out by the remaining shareholders;

e. An order authorising civil proceedings to be brought in the name of and on behalf of the company;

f. An order for the company not to amend its articles, or any specified articles, without the leave of the court;

g. An order to wind the company up where it is just and equitable to do so.

If you are experiencing any problems with shareholders and need assistance from our Dispute Resolution team, please contact us on 0161 832 3304.

For more information about Andrew and his work, please click HERE.

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