18 January 2023

Minority Shareholder Rights

Under the Companies Act the right of minority shareholders to partake in the management and decision-making of a company are limited. This is usually because majority shareholders will hold sufficient share capital to make decisions unilaterally, including the composition of the board. Of course, it is possible to create additional rights as a matter of contract through a shareholders’ agreement.

In light of their comparatively weaker position, it is important that minority shareholders are aware of the actions which they can take under the Companies Act 2006 (the “CA 2006”) and the Insolvency (Northern Ireland) Order 1989 (the “Insolvency Order”) to protect their position and the company. The key actions which can be taken are outlined below.

An ‘Unfairly Prejudicial Conduct’ claim under section 994 of the CA 2006.

This type of action most commonly arises when majority shareholders, who are also directors, use their power to further their own interests to the detriment of a minority shareholder.

To make a successful claim for unfair prejudice, it must first be established that the action relates to the running of the company and affects the minority shareholder in their capacity as such. The next requirement is that the conduct must be unfair and prejudicial to the shareholder bringing the claim. If the unfairly prejudicial conduct only affects a certain class of shareholders, the shareholder bringing the claim must be among those affected.

The CA 2006 does not provide examples or an exhaustive list of what constitutes unfairly prejudicial conduct. Examples of what has been held by the courts to be unfairly prejudicial conduct include:

  1. Actions which are proven to reduce the value of the shareholder’s shares;
  2. Excluding the shareholder from the management of the company in instances where they have a legitimate expectation of being involved;
  3. Awarding excessive bonuses to directors while not declaring a dividend to the shareholders; or
  4. Failing to comply with the company’s articles of association or any shareholders’ agreement which is in place.

In the event of a finding of unfairly prejudicial conduct, the court has a wide discretion as to what remedy to award. The court will commonly require the party which has committed the wrongdoing to purchase the shareholder’s shares. The price for the purchase of the shares will often be the value of the shares prior to the unfairly prejudicial conduct. The oppressed minority shareholder should act quickly because the courts are unlikely to uphold a claim if the shareholder has allowed the conduct to continue for a sustained period of time.

A ‘Derivative Action’ claim under section 260 of the CA 2006.

A derivative action claim is brought by a shareholder on behalf of the company based on a breach of a director’s duties to the company. The CA 2006 outlines several statutory duties which directors owe to the company in relation to its management. The directors of the company are required to:

  1. Act within the powers of the company;
  2. Promote the success of the company;
  3. Exercise independent judgement;
  4. Exercise reasonable care, skill and diligence;
  5. Avoid conflicts of interest;
  6. Not accept benefits from third parties; and
  7. Declare interests in proposed or existing transactions or arrangements with the company.

As the action is bought on behalf of the company, it is the company that will benefit from any successful claim rather than the shareholder bringing the claim.

The court’s consent is not required to issue the claim, but leave of court is required to allow the claim to continue. The court will initially assess the strength of the claim being made. The court will not grant leave if it is found that there is no prima facie case to answer. There are two specific situations in which section 263(2) of the CA 2006 prevents the court from granting leave:

  1. If directors, who are under a duty to promote the success of the company, would not seek to continue the claim; and/or
  2. If the cause of action arises from an act or omission that has been authorised or ratified by the company.

There are also several factors outlined in section 263(3) of the CA 2006 to which the court must give particular regard in assessing whether to grant leave. These include:

  1. Whether the shareholder is acting in good faith in seeking to continue the claim;
  2. The importance that a person acting in accordance with the duty to promote the success of the company would attach to continuing it; and
  3. Whether the act or omission in respect of which the claim is brought gives rise to a cause of action that the shareholder could pursue in his own right rather than on behalf of the company.

The process for making a successful derivative claim can be lengthy and arduous for a minority shareholder. A minority shareholder may also be deterred from pursuing this action because any remedy following a successful claim will benefit the company rather than the shareholder. However, it is important minority shareholders are aware of this protection in relation to securing the position of the company.

An application for the company to be wound up under section 102 of the Insolvency Order.

A final option for a minority shareholder is to apply under section 102(g) of the Insolvency Order for the company to be wound up on “just and equitable grounds”. Instances of this claim being bought are relatively rare, largely because the winding up of the company is usually of no benefit to any of the parties involved. It is rarely an attractive option for a shareholder to pursue as their investment will be lost. The court is reluctant to grant this application and must be satisfied that there is no better alternative; this is a high threshold which is difficult to meet.

In considering any potential action by a minority shareholder, it is vital that expert legal advice is engaged at the earliest possible opportunity. This will ensure that any claim pursued is the most appropriate in the circumstances.

The Corporate team at Carson McDowell has extensive experience in all forms of shareholder disputes. If you would like any advice in relation to a shareholder dispute or to discuss the content of this article, please contact Josh Hunter from the Corporate team.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.

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