Disagreements between shareholders can quickly become serious and start to have an impact on the day to day running of a business. Whether you are a large business, an SME, or a start-up, shareholder disputes can at the very least be disruptive to the business.
It is not uncommon for parties in business to sometimes disagree with each other. This may involve the direction of the business, deadlocks concerning decisions, or performance issues. Usually, such disagreements should be resolved quickly and informally. If the disagreement escalates, it will be worth checking over any shareholders agreement, or the company’s articles of associations. It can often be the case however that no provision has been made for disagreements between the members.
Remedies in law
Under section 994 of the Companies Act 2006, minority shareholders may have a claim against other shareholders and the company if his/her interests are being “unfairly prejudiced”.
These types of claims are usually initiated in the following circumstances:
- A minority shareholder feels he is being excluded from the affairs of the company by the other shareholders,
- There is a failure to pay reasonable dividend
- There has been misappropriation of company assets
- There has been a missed business opportunity
- There are other grounds for arguing that the company is being run in a manner prejudicial to the interests of the minority shareholders
What is a minority shareholder?
A minority shareholder of the business is member who does not have voting control of the company, meaning he/she owns fifty percent or below of the company’s equity.
What is “unfair prejudice”?
The test for unfair prejudice is objective, meaning the court will look at whether a reasonable man would regard the conduct as being unfairly prejudicial to the shareholders’ interests. Both unfairness and prejudice must be established in order for a claim to succeed. A deadlock in a decision of the shareholders is not sufficient to bring a claim.
What is the court likely to order?
The court has wide ranging powers in this area, but the most common remedy is for the court to order that the minority shareholder’s shares are purchased by the majority shareholder of the company. Other remedies available to the court however include:
- To step in and regulate the company’s affairs going forward
- To order the company to refrain from doing something about which the minority shareholder is complaining, or order the company to take some specified action to regularise the position
- To require the company not to make any alterations to its articles of association without permission of the court.