Q: How can a minority shareholder get out of a company if the majority shareholders refuse to respond to any communication?
May 12 2009
Answered by: Clive Lewis Ask a question
If a dispute arises between shareholders, the company’s articles of association should be consulted to ascertain the procedure laid down for disputes. If the articles provide no answer, the next most important legal principle for any shareholder to understand is section 994 of the Companies Act 2006. The most relevant part of the provision states that:
A member of a company may apply to the court by petition for an order under this Part on the ground:
(a) that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or
(b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.
What the section seeks to do is protect minority shareholders (those with a 50 per cent shareholding or less) in circumstances where the majority shareholders seek to act in a way which is ‘unfairly prejudicial’ to their interests. What conduct is classed as ‘unfairly prejudicial’ is a moot point, but in very general terms it means that minority shareholders have a right to complain to the court if the majority shareholder(s) run the company in a manner that damages their position and the worth of their shareholding, often done deliberately and often by misapplying or misusing company assets.
But the complaint cannot be vague or trivial (e.g. ‘they’re managing the business badly’) and must stand up to some objective analysis. Examples of ‘unfairly prejudicial’ conduct include using company assets or money for the personal benefit of a shareholder or the majority shareholder(s) paying themselves far more than people in their position could objectively justify.
Court orders protecting shareholders
Any complaint alleging that a minority shareholder has been ‘unfairly prejudiced’ is a lawsuit brought against the other shareholders in their personal capacity. Where ‘unfair prejudice’ can be established, the Companies Act provides that the court ‘may make such an order as it thinks fit’. Although this means the court has very wide powers to make almost any order, by far the most common order made by the court is an order that one or more of the shareholders should purchase the shareholding of the other shareholder(s). Normally, the court will order that the majority shareholders must purchase the shareholding of the minority shareholder(s) at a ‘fair value’.
Take legal advice about this remedy (and other potential remedies) and how much it is likely to cost. This will largely depend on the circumstances of the case.
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