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Shareholder Disputes

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Disputes between Shareholders can be disruptive, costly and time consuming, and have potentially devastating consequences for businesses.  Such disputes can arise for a number of reasons including the following:

  • Disputes over the future direction of the business.
  • Conflict of interest between the various parties involved.
  • Breach of Director’s duties.
  • Issues regarding salaries.

What is a minority Shareholder to do?

As a minority Shareholder you may often feel that your rights are ignored by the majority who are running the Company in a manner in which you feel is contrary to your interests.  The protection afforded under the Companies Act 2006 provides minority Shareholders with redress against the decisions of the majority.  A minority Shareholder can make an Application to the Court. The minority Shareholder will be required to show that the conduct amounts to unfairly prejudicial behaviour on the part of the majority Shareholder.  Common examples of such behaviour include the following

  • Breaches of the Company’s Articles of Association.
  • Misusing Company assets.
  • Diverting business away from the Company to benefit/profit a majority Shareholder who may have an interest in the Company to which the business is being diverted.
  • Exclusion from Company meetings.

The Court has a wide discretion to remedy the situation which may involve an order not limited to the following:-

  • Order for the purchase of Company Shares by any members or the Company itself.
  • Require the Company to refrain from doing or requiring the Company to do an act which the minority Shareholder has complained of
  • To regulate the Company affairs in the future.

It is important to remember that there are two requirements of unfairly prejudicial behaviour the first being that the conduct must be prejudicial to the interest of the minority Shareholder and secondly that the minority Shareholder must show that the prejudicial behaviour/action is unfair.

Claims against Directors

Under the Companies Act 2006 a derivative claim may be brought by a member of the Company against a Director for negligence, default or breach of a Director’s duties to the Company.  It is important to note that a derivative claim is brought by a Shareholder on behalf of the Company against the Company’s Directors.  The relief which is sought is therefore on behalf of the Company as opposed to the Shareholder.  Until the introduction of the statutory derivative action under the Companies Act 2006 the restrictive rules for derivative claims have meant that very few cases have reached the Courts.  However, the Companies Act 2006 has expanded the duties of a Director which has in turn meant that potentially there is more likelihood of a breach occurring.

Both unfair prejudiced petitions and derivative claims under the Companies Act 2006, are complex in nature and can lead to costly and time consuming litigation.  Often parties will want to bring a speedy resolution to the dispute to not only reduce costs but also to ensure that the day-to-day conduct of the business is not effected by the dispute.  Early legal advice in such disputes is essential to ensure that any party is protecting their position should litigation proceed.  The negotiation of such disputes is also an area in which parties should seek advice before a potential settlement is reached.

The above article is not legal advice, it is intended to provide information of general interest only.  Should you require any information in relation to the issues raised in this article please contact Christopher Ahearne on 01245 228130 or email ahearnec@gepp.co.uk