How Should I Protect My Position as A Minority Shareholder - Court Actions

This series is focusing in on the protections available to shareholders in a limited company. So far, we have looked at the potential duties owed by directors to shareholders. This blog will look more closely at the ways in which a shareholder can use the courts to protect their interests. We have previously used the example of X Limited, a family firm with two minority shareholders, Y and Z.

Here, we are going to look at the three statutory remedies a shareholder has: derivative actions, unfair prejudice orders and a just and equitable winding up

1. Derivative Action

A derivative action allows a minority shareholder, as representative of all other shareholders to raise an action on behalf of the Company for the purposes of writing a wrong actioned by the majority shareholders on the Company.

Previously, a derivative action would often be founds in large Public Limited Companies, where there is a distance between the members and directors. As company law has developed, the derivative action remedy has been called upon across various types of Companies. The evolution of derivative actions means that in theory, Y or Z could bring a derivative action on behalf of the Company against W to redress wrongs committed by W on the Company. As before, keep your eyes peeled for my colleague Joanna Millar’s upcoming blog series which shall explore the intricacies of derivative actions in more detail.

2.  Unfair Prejudice Orders

Section 994 of the Companies Act 2006 creates protection for shareholders under statute as it gives the shareholder the ability to apply to the court for an unfair prejudice order.

There are two factors required for an unfair prejudice claim to be successful:

• The conduct must harm the relevant interest of the shareholders; and
• The conduct must be unfair.

The courts have had applied a high bar for a claim to be successful. Generally, a claim will only be successful if the Petitioner has proved an actual breach of terms that have been agreed as to how the company will be run.

3. Just and Equitable Winding Up

As a potential last resort, a minority shareholder may petition the court to wind up a company on just and equitable grounds under sections 122-125 of the Insolvency Act 1986.

There are a number of different circumstances in which a just and equitable winding up petition can be brought. Grounds for a just and equitable winding up petition are as follows:

• There has been a breakdown of mutual trust and confidence between ‘quasi-partners’;
• Deadlock (e.g. where the minority holds 50% of the voting rights);
• The Company has been mismanaged by the Directors or other members of the company;
• Exclusion from management (e.g. failure of the company directors to consult the minority in respect of the management of the company or provided timely or adequate management information).

The decision whether to wind up a company on just and equitable grounds is discretionary, so the court will consider all the factors involved before making a winding up order. If the court believes there is some other remedy, such as one party purchasing the other party’s shares for a specific amount, it will usually prefer to go down that route.

Read Part 1 of the ‘How Should I Protect My Position as A Minority Shareholder’ series here.

Read Part 2 of the ‘How Should I Protect My Position as A Minority Shareholder – Directors Duties’ series here.

For more information on the above please contact Oliver Craig, Trainee Solicitor, email  OCraig@gilsongray.co.uk / +44 (0)141 286 2017 or Craig Darling, Partner – Corporate Law, email cdarling@gilsongray.co.uk/ +44 (0)141 530 2044