Our Commercial Litigation Solicitors Look at How Some Directors are Using the Pandemic as an Excuse to Victimise Minority Shareholders, and What Action Can be Taken
It is not surprising that at this time of unprecedented upheaval that company Directors and Shareholders are under enormous pressure. This can and does result in conflict within a business. This is inevitable. However, there have been instances where Directors and Shareholders are using the Coronavirus Pandemic as an excuse to victimise and treat unfairly their co-Directors and Shareholders.
Not only are emotions running high in these circumstances, the complexities of the limited company structure exacerbate the difficulties for the individual. A party who is being treated unfairly and is trapped within the company, is likely to be a minority shareholder. As a minority shareholder they cannot pass Ordinary or Special Resolutions and effectively have little or no control over the company’s direction.
Andrew Wylde, one of our senior Commercial Litigation Solicitors at NDP looks at why this is happening and explains that in these circumstances, it is possible to make an application to court to resolve the situation.
Why is this Situation Arising?
Conflict within businesses happens all the time, however it is something we are seeing an increase in during the current coronavirus crisis, caused by a combination of factors:
- Financial pressure.
- Management pressure arising from the difficulties of managing a business in this current situation.
Such pressures lead to changes in behaviour and often makes the majority pick on the minority. The minority are the ones who the majority want to remove, often using bullying tactics to do so.
We have also seen and heard of examples where the majority can use the current situation simply as an excuse to get rid of someone they do not like.
Examples of this behaviour include:
- Raising sham disciplinary proceedings against a shareholder who is also an employee on the basis that they are not performing their role properly.
- Issuing shares ostensibly to raise funds in the current climate but with the real intention of diluting a minority’s shareholding.
What can a Shareholder do?
A minority shareholder (‘minority’ being defined as 50% or less of the shareholding) can Petition the court for the court to resolve the situation that they find themselves in.
The basis of the Petition is that the affairs of the company are being conducted in a manner that is unfairly prejudicial to the interests of shareholders, including the shareholder bringing the claim.
A claim for unfair prejudice is made under S994 of the Companies Act 2006. Once the court finds that the Petitioner is being unfairly prejudiced, it may make an appropriate order.
Examples of Unfairly Prejudicial Conduct
The types of conduct which are typically unfairly prejudicial include:
- Instigating disciplinary proceedings which are sham, with the sole purpose of dismissing the shareholder as an employee
- Breaches of Fiduciary Duty (Directors failing to act in accordance with the interests of the company).
- Misuse and misappropriation of company assets.
- Mismanagement of the company’s affairs provided this is simply not a disagreement as to how the business is being managed.
- Allotting further shares for the purpose of diluting a minority Shareholder’s shareholding.
The Types of Order the Court can Make
Orders which the Court can make include:
- Ordering the purchase of the Petitioner’s shares at a price and terms to be determined by the court.
- Requiring the company to refrain from, or to carry out, an act including amendments to the Articles of Association.
- Authorising proceedings to be commenced in the name of the company.
- Ordering that the company be wound-up on the grounds that to do so is just and equitable.
In most cases, the Petitioner’s shares are purchased by the other shareholders.
Certain companies are treated by the courts as quasi-partnerships.
A quasi-partnership can exist where the shareholders also run the business and the monies paid for the shares are not simply an investment. In effect, if the business was not a limited company, it would be a partnership between several individuals working together to make a profit.
Consequences of a Quasi-Partnership
If the Court feels that the business is effectively a quasi-partnership, then it can:
- Give effect to informal agreements and understanding between the shareholders which had been relied upon by the shareholders, even if they would not otherwise have binding legal force.
- Acts or omissions that are inconsistent with the parties’ relationship, understandings and agreements may constitute unfairly prejudicial conduct even though such actions or omissions are expressly permitted by the company’s constitution.
In effect, where a court finds a quasi-partnership exists, it has far wider powers to find that certain acts or omissions are unfairly prejudicial and are more willing to intervene in the dispute.
A significant number of private limited companies are quasi-partnerships.
Valuation of the Shares
Valuation is determined on the basis of expert evidence produced by the Petitioner and Respondent. In most cases, both the Petitioner and the Respondent serve an expert’s report, which is submitted to the court.
The court will determine the market value of the shares after consideration of both expert reports.
- The aggrieved party issues a Petition at court.
- There is an initial hearing.
- Evidence is exchange on both sides.
- A final hearing takes place at which the court decides how to deal with the parties and their shareholdings.
Our Commercial Litigation Solicitors Conclude
If you (or a client) have a small shareholding in a company and are being victimised or in some other way treated unfairly, you may feel as if you are trapped and have nowhere to turn. This is especially true at present. However, there are ways of protecting your position. One of the most effective is to ask the court to intervene and make an order under S 994 of the Companies Act 2006.