What are Shareholders?
Individuals that own at least one share of a company’s stock. As shareholders are company owners, they share in the company’s success or failure with the stock valuation increasing or decreasing accordingly.
Quality as the priority
Shareholder Disputes
What are Shareholder disputes?
Shareholder ownership differs from partnerships and corporate shareholders as they are not liable for the company’s debts or any other financial obligations. They also do not manage the operations. A board of directors is appointed to control the activities of a company.
Shareholder rights
While they’re not involved directly with the company’s operations they do still have rights in and around the company. These include:
- Power to influence management
- By having control over who sits on the board of directors, they have the right to influence who holds management positions.
- Right to vote at a company’s annual or general meeting
- Possibly the most significant right of a shareholder is the ability to cast votes on any significant changes before they can take place. Giving them the opportunity to influence further how a company is ran.
- The right to take legal action for wrongful acts
In cases where a shareholder feels their rights are violated, or there has been a breach of the shareholder's agreement. They can, by right, take legal action against the company.
Shareholder Disputes
Disputes with shareholders can arise for several reasons, including but not limited to:
- Disagreement over the direction of the company
- Poor personal relationships
- Conflicts of interest
- Lack of company performance
- Lack of individuals performance
- Lack of funds reaching shareholders
- Terms of a director’s service contract
- Concern board is not meeting its responsibilities
Shareholder rights and Safeguards
In recent years there has been continuous growth of companies, and this has led to a stronger demand for shareholders rights and remedies that safeguard the interest of investors from manipulative management.
The power amongst the shareholders of a company are determined by voting rights which depends on the type of shares owed. Usually, the more shares owned the more power a shareholder has. This can often cause conflict between directors duties and shareholders interest when it comes to decision making, and the legitimate interest of the company.
The courts do not generally interfere in the management of the company in respect of shareholders matters of internal administration, so long as the directors are acting within their powers conferred to them under the articles of association. Judges have long been reluctant to interfere in the internal affairs of companies, since it is unnecessary to give recourse to the courts in regard to matters which a company can settle on its own, or an irregularity which it can ratify through its own internal procedures.
The question arises as to what should happen if the directors breach their duties to the company. At common law, shareholders’ remedies are dominated by the rule in Foss v Harbottle, the case concerned two minority shareholders who claimed the directors of the company had misappropriated the company’s assets. The court dismissed the claim and held that, when a company is wronged by its directors, it is only the company that has cause to sue.
The court established two rules. The first, ‘proper plaintiff rule’ states that a claim against a party in respect of a wrong committed against the company, may only be brought by the company. Secondly, the ‘majority rule’ states that if company members are in disagreement, they should resolve this at a general meeting. This principal is fundamentally connected with the democratic principle of the rule in Salomon v Salomon of separate legal personality. Thus, preserving the practical advantages and key roles of the companies, both for commerce and modern economy. For example, if these principles were absent, the flood gates would open and the courts would be inundated with claims.
This position further disadvantages minority shareholders positon and their rights to claim protection. The difficultly the courts face is striking the appropriate balance between safeguarding minority shareholders whilst upholding the autonomy of companies. However, minority shareholder have been afforded protection against internal wrongdoings through statute, which are as follows:-
Unfair Prejudice Petition - s994 Companies Act 2006
A shareholder may obtain a remedy by petitioning the court where “the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or to some of its members (including at least himself)”. It is important to act quickly as the court will reject an application where the shareholder has allowed things to run, as the court will regard this as an acquiescence of the action taken. The outcome is usually a share purchase order of the minority’s shares. However, these applications are rarely straightforward and are often settled before the court is asked to make a final decision.Statutory Derivative Action - s260 Companies Act 2006
A minority shareholder is permitted to bring a derivative claim in the company’s name for a wrong committed against the company. The claimant uses the action to ‘stand in the shoes’ of the company in bringing a claim against a director. This right is available, for example, where wrong-doing directors control the board and refuse to take action on behalf of the company. Thus, such a claim is an exception to the rule in Foss v Harbottle. A claim may be brought by any shareholder for an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director. There is no need to demonstrate any actual loss suffered by the company.Just and Equitable Winding Up – s122 Insolvency act 1986
The presentation of a winding up petition on the just and equitable ground is usually used when shareholders differences have become irreconcilable, and a ‘commercial divorce’ is the only way to deal with it. The company is wound up and anything left after payment to creditors and liquidator’s will be distributed between the shareholders.
However, not all shareholders will be able to justify a winding up petition to the court, there must be strong reasons for believing that the company can no longer continue. It is necessary to demonstrate that there is a tangible benefit in making a winding up order. Therefore, if an alternative remedy which allows the company to continue exists, the shareholder may find the court refuse to make the order.
Resolving disputes
Resolution of disputes does not need to take place in a courtroom. At Primas, we have a proven track record in utilising alternative dispute resolution (“ADR”), such as mediation, for both UK based and international companies to obtain successful results.
Of course, not all matters can be resolved in this manner and they need to be litigated through the Court, for example in matters relating to unfair prejudice. In those circumstances we have a litigation team with a wealth of experience in providing the best possible advice.
Why Primas?
At Primas, we have an experienced and trusted commercial litigation team that prides itself on providing a dynamic, pro-active and successful strategy.
If you need advice or help with a shareholder dispute, do not hesitate to contact us here.
