Minority Shareholder Rights and Remedies
Shareholders often have different expectations on how a business should be run. Consequently, it is often the case that shareholders’ disputes arise. It is in such cases that the relationship between majority and minority shareholders may cause further difficulties, primarily due to the widespread perception that majority shareholders and/or the directors act oppressively or unfairly towards the minority shareholders.
Another cause for tensions between majority and minority shareholders may be the former’s tendency to make decisions without being sufficiently accountable. Such perceptions are reinforced in relation to private companies, where the minority shareholders are particularly vulnerable: unlike the shareholders in a public company, they cannot readily exit the company by disposing their shareholdings in an open market and at a fair value. It is important to make clear that minority shareholders are, from the outset, in a vulnerable position. Since a company makes decisions based on majority rule, there is an inherent risk that such majority may abuse this power to the detriment of minority shareholders.
The question of minority shareholder rights and the remedies available to them is therefore an important one, because minority shareholders must be able to protect their interests not only in practice due to the prevalence of disputes, but also in principle, in terms of protecting the rights of minorities who need to act in accordance with the majority view. In addition, due to the COVID-19 outbreak, the oppression of minority shareholders by managers has become even more widespread, making the issue of minority shareholder rights all the more relevant currently.
Minority shareholder and their rights
As a matter of background, a minority shareholder refers to a shareholder who owns less than 50% of a company’s shares that have voting rights attached and acquires its statutory rights by virtue of the Companies Act 2006 as well as through the company’s articles of association and shareholder’s agreement.
Under the Companies Act, a shareholder’s rights can vary depending on their shareholdings or voting rights in the company. Therefore, where the shareholders’ ownership or voting rights are:
A minimum of 5%
The shareholder can:
- apply to court to prevent a public company being converted to a private company;
- call a general meeting and table resolutions;
- require the circulation of a written resolution to shareholders (in private companies); and
- require the passing of a resolution at an annual general meeting (AGM) of a public company.
A minimum of 10%
The shareholders have a right to call for a poll to vote on a resolution.
More than 10%
If a general meeting is to be convened and held at shorter notice than the statutory period or the period set out in the Articles, the shareholders can exercise their rights and prevent the meeting being held on short notice.
A minimum of 15%
Companies tend to have share capital with more than one class of shares e.g., ordinary shares, preference shares and deferred shares. The rights of a class of members may only be varied in accordance with the company’s articles or the shareholders’ consent where the articles provide no variation provision or for companies without a share capital.
The shareholders under the Companies Act 2006 can object to the variation by applying to the court to cancel the variation of class rights provided the shareholders did not consent to or vote in favour of the variation.
More than 25%
The Companies Act 2006 requires special resolution to be passed by a majority of not less than 75%. Therefore, where the shareholders represent more than 25% of the total voting rights of eligible members, they will be able to block a resolution which is to be passed as a special resolution.
Avenues of redress: how minority shareholders can enforce their rights
Where a minority shareholder feels he is being oppressed by the majority shareholders and / or the directors or that his rights as a shareholder have been compromised, there are various avenues that he can pursue to seek redress.
1) Unfair prejudice petition
A claim of unfair prejudice is available where the company and its directors have taken action that may prejudice the members or a certain group of shareholders. More specifically, Section 994 of the Companies Act 2006 enables an aggrieved minority shareholder to present an unfair prejudice petition if the unfair prejudicial conduct is in respect of the company’s affairs, including any management decisions or if the shareholders attempted to exert greater control which disrupted the management, leading to detriment to the proper running of the company. The relevant section stipulates: ‘A member of a company may apply to the court…for an order…on the ground that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of its members generally or of some part of its members’.
The burden of proof is on the minority shareholder, the petitioner. For relief to be granted, the petitioner must demonstrate both real prejudice and unfairness to their interests. This could include showing that the economic value of his shares has decreased significantly. However, the prejudice need not be just economic detriment. There are various other actions or omissions that could result in prejudice: a director misusing or misappropriating the company assets, the purchasing of an allotment of shares to dilute a minority shareholder’s interest, and failure to hold annual general meetings or providing accounts. Such incidents may offer sufficient ground for a shareholder to base his petition. A caveat to this is that ‘unfairly prejudicial’ behaviour must be specific and must not be trivial in nature.
Nonetheless, in practice, the courts are normally reluctant to intervene where the dispute entails commercial judgement. This could include failure to pay dividends to shareholders or payment of excessive remuneration to directors. The underlying idea behind this is that intervention in the commercial sphere by the courts should only occur when that is essential. This is also reflected in Re Elgindata, where it was expressly stated that a court should be hesitant ‘in finding that a member had a right to expect from directors a reasonable standard of management… when investing in a company shareholders take a risk that management may prove not to be of the highest quality’. The court will also not intervene in the internal management of a company if the company acted within its powers, i.e. acting in a way which is approved by the majority. In addition, if the unfair prejudicial conduct has been addressed and cannot recur, then it is unlikely that the court will grant relief. Therefore, there is a contrast between how the law functions de jure and de facto.
To address and remedy the unfair prejudice, the court has a wide discretion in making orders as it thinks fit based on what the shareholder had petitioned. The court is hence not constrained by the shareholder’s (subjective) goals. The court will look at the matter aiming to:
- provide redress to the shareholder;
- ensure that the unfair prejudicial conduct does not continue into the future;
- regulate the affairs of the company in the future (if applicable).
A non-exhaustive list of examples of orders that a court could make on such occasions is as below:
- prohibiting changes to the company’s articles of association;
- requiring the company to refrain from an act or to carry out an act that it has omitted to do;
- making orders against directors and third parties (if they were the respondents to the petition) where it is just to grant a remedy against them having regard to their involvement in the conduct complained of.
2) Bringing of a derivative action
A minority shareholder has the right to bring a derivative claim for wrongs (committed against a company by directors or third parties) on behalf of the company on the basis of the following:
- breach of duty and or
- breach of trust.
In bringing such a claim, the minority shareholder does not need to show that the wrongdoer benefited from the breach of duty in question. Once the derivative claim is issued, the minority shareholder must seek the court’s permission to continue such claims. This is required before further steps may be taken in the derivative proceedings.
The most common circumstance in which a shareholder will seek permission to continue a derivative claim is where he has himself started the claim. However, the below are also permissible grounds for the claim to continue:
- the claim has been commenced or continued in a manner that amounts to an abuse of process;
- the company or member has failed to prosecute the claim diligently;
- it is appropriate for the member to continue the claim as a derivative claim.
Nonetheless the court has the discretion to permit a shareholder to continue a claim. A list of non-exhaustive factors is set below:
- whether the shareholder is acting in good faith;
- the importance that a person acting in accordance with the duty to promote the success of the company under section 172 of the Companies Act 2006 would accord to the proposed claim;
- whether a proposed or past act or omission would be likely to be authorised or ratified;
- whether the company has decided not to pursue the claim
The court will however refuse permission if:
- a person acting in accordance with the statutory duty to promote the success of the company would not seek to continue the claim;
- the proposed or past act or mission for which the minority shareholder wants to bring the derivative claim has been authorised by the company before it occurred or ratified since it occurred. The below acts are incapable of authorisation or ratification. The acts were:
- beyond the powers of the company;
- of fraudulent character;
- prejudiced the interests of creditors
3) Petition for the winding up of the company
Alternatively, the disgruntled shareholder can petition for the winding of the company on the just and equitable ground. This can occur on the basis of the following:
- loss of substratum (the purpose for which the company was formed is no longer being pursued, or where the company pursues a different path to that originally envisaged);
- exclusion; and
The shareholder must demonstrate that a tangible benefit will be derived from the winding up and that the company will have a surplus at the trail of the petition.
However, due to the serious consequences of this remedy, petitioning for the winding up of the company is often the last resort. Importantly, the court’s decision to wind up on a company on the just and equitable ground is discretionary. The order will not be made if the court considers that there is some other remedy that is available to the shareholder and it is unreasonable to seek the winding up of the company rather than to purse the alternative remedy, such as the presentation of an unfair prejudice petition or one shareholder purchasing the other shareholder’s shares for a specific amount.
Conclusion and critique
While there are several statutory remedies available to the minority shareholders where their interests are compromised, the appropriate remedy to pursue largely depends on the circumstances of each case. Whether the protection offered to minority shareholders is, in itself, adequate has been questioned. This is especially a concern in common law countries, where, as has been discussed above, most remedies are largely dependent on judicial discretion. Whilst discretion is crucial in terms of flexibility, it may also lead to unpredictability for minority shareholders, who cannot be certain about the remedy the court will grant. For instance, Section 994 leaves significant leeway to courts in deciding what exactly amounts to unfair prejudice.
Examined in parallel, the remedies provided by the English framework, at least in terms of their application by the courts, diminish the power of shareholders to control and decide how a company is managed. Instead, it is the courts that have the last word in business decisions. In response to such problems, an alternative could be forming front-end contracts, which could provide for specific provisions to resolve oppression.