Shareholders Rights of Redress

When the shareholders of a public company raise protests at the annual general meeting about how the company is being run, the directors normally come under great pressure from the press as well as from the members of the company. This is unlikely to be the case for a smaller company, but there are still remedies for redress that the shareholders can pursue, even though these are relatively limited.

If the court can be persuaded that the company is being run in a way that is unfairly prejudicial to the interests of the shareholders (for example, when the directors vote themselves massive salaries, thereby depleting the company’s resources), the holders of a minority of shares can apply for ‘relief’ or for the company to be wound up.

One right shareholders do not have (unless it is contained in the company’s articles or in a shareholders’ agreement) is the right to compel anyone else to buy out their shareholding. A company is not like a partnership, which can (normally) be dissolved simply by a notice being given by a partner, with the effect that the partnership is terminated and can be wound up and any remaining assets distributed.

A shareholder who does not like the way a company is run is much more effectively ‘locked in’, unless he or she can persuade the court that the operation of the company is manifestly unfair to the shareholders. This is made more difficult in the usual case in which the management of the company is in the hands of people who are themselves shareholders.

If a company in which you own shares is being run in a way that unfairly prejudices you, what are your options?

Firstly, where a fair offer has been made for the purchase of the dissenting shareholders’ shares, the court is unlikely to decide that there has been any unfairness. The first step in this type of dispute is often, therefore, to attempt to negotiate a sale of the shares at an acceptable price. If a realistic offer is obtained, there is still a lot of thinking to do as there are often many ways of structuring such deals and these can have very different tax consequences. So, careful consideration needs to be given, at each stage, to the implications of accepting an offer.

Secondly, look at the shareholders’ agreement. In smaller companies, having a shareholders’ agreement is normally a very sensible precaution to take. A well-drafted shareholders’ agreement will normally contain a mechanism for shareholders to resolve disputes regarding the management of the company, which is almost invariably made up of the majority shareholders. Usually, this involves a procedure whereby should irreconcilable differences occur, one side is allowed to buy the shareholding of the other at a price determined by a formula.

Thirdly, if a fair offer for the shares is not received and a share sale on reasonable terms cannot be engineered, an application to the court for relief may be made. The Companies Act contains provisions which allow shareholders to seek relief in various different ways, which have included, for example, allowing the company to take a charge of the pension fund of a director who had been paid excessive pension contributions to the detriment of the company’s shareholders. As a long stop, the court may order the company to be wound up and the assets to be distributed to the shareholders, after its liabilities have been settled. However, this step would sacrifice the underlying business.

In any event, litigation in such circumstances is uncertain and can be expensive, so settlement without court proceedings is normally preferable: mediation can often offer a cost-effective solution.

 

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.