The relationship between majority and minority shareholders is not always an easy one. Majority shareholders often want to run the business in the way that they see fit and without interference, while minority shareholders may feel that major decisions are being made without any accountability and that the company is being run to benefit only the majority. Minority shareholders may also have criticisms over the competence of those in charge.
These conflicts of interest mean that disputes often arise between shareholders and those with smaller numbers of shares may wish to take action to protect their interests.
Although it may seem that minority shareholders do not hold much influence, their powers can be enough to make life difficult for the majority shareholders and in some circumstances to force them to take action to remedy matters.
The shareholders’ agreement will usually set out certain rights, for example, whether a shareholder has a right to vote on the appointment of a new director. Even if minority shareholders have not been given extensive rights in the agreement, the Companies Act 2006 as well as case law gives them a number of rights and remedies. Further rights may also be included in the terms of the share issue and in the company’s articles of association.
Under the Companies Act, those who hold 5% of a company’s share capital have the power to call a general meeting and table resolutions. Where the directors fail to convene a meeting, the shareholders can do this themselves.
Shareholders with 10% of a company’s nominal share capital between them can request a full audit of the company’s accounts. Those with 15% can prevent changes to the rights attaching to shares, which can stop amendments that would unfairly prejudice the minority shareholders.
Where a shareholder or group of shareholders has more than 25% of a company’s shares, they have the power to prevent certain decisions requiring 75% of the vote, including the passing of a special resolution, amendment of the company’s articles of association, purchase of company shares using company capital and issuing shares without a right of pre-emption.
There are a number of actions open to minority shareholders, including the following:
Unfair prejudice claim
Where the actions taken or proposed by the company and its directors prejudice the members or a specific group of shareholders, then they may be able to claim unfair prejudice.
Where the claimants can show that the conduct is or would be prejudicial to the members or a group of them and that it is unfair, the court can make an order in any of the following terms:
- Preventing the company from carrying out a specified action
- Requiring the company to do something, to include changing its constitution
- Requiring the company to purchase a member’s shares
- Preventing changes to the company’s articles of association
- Regulation of the company’s future conduct
Derivative claim
Where an action on the part of a majority shareholder has wronged the company, for example, by way of negligence, breach of duty or breach of trust, minority shareholders can ask the court for permission to bring a claim on behalf of the company, known as a derivative claim.
Claim for breach of contract
Shareholders will usually have a range of rights in contractual agreements, such as the shareholders’ agreement or the company’s articles of association. These can include the following:
- Rights to information about the running of the company
- Pre-emptive rights of first refusal to buy new shares or shares being sold
- The right to veto certain actions proposed by the directors, such as appointing a new director
- Observer rights, to have a representative present at board meetings
Where any of these rights are granted, minority shareholders will be able to bring a claim for breach of contract if they are not observed.
Winding up petition
As a last resort, minority shareholders could consider applying to the court for a winding up order. The shareholders filing the winding up petition would need to have held their shares for at least 6 of the previous 18 months and would need to demonstrate a fundamental breakdown in the relationship between them and the company directors. The court is only likely to consider this if no other options are available and where winding up would be just and equitable.
Minority shareholder dispute resolution – negotiation and pressure
It is often better to try and resolve issues by agreement without resorting to court action. This is generally a faster and more cost-effective way of resolving issues and more likely to avoid damaging the company and its reputation. Good communication is vital and if minority shareholders are finding it difficult to deal amicably with company directors and/or majority shareholders, an expert in corporate law and dispute resolution may be able to help.
By setting out the position and the required solution, issues may be clearer for those involved. Once they realise that a solicitor has been instructed, they are more likely to understand that the difficulties will not simply go away. This can motivate everyone to negotiate a solution.
There are also points of pressure that can be applied, for example, a minority shareholder with a 10% holding can request a full audit of the company’s accounts, which could be both time-consuming and costly. Directors wishing to avoid this may be willing to listen to alternative suggestions.
It is highly recommended that you take action without delay when an issue of concern arises, before the matter escalates or positions become entrenched. For information about avoiding disputes, see our article on Strategies for Avoiding Shareholder Disputes.
We were named as the ‘Commercial Disputes Specialists of the Year’ in the Corporate Livewire Innovation & Excellent Awards 2020 as well as ‘Boutique Litigation Law Firm of the Year’ in both the 2019 and 2020 Global Awards by ACQ5. Partner, Dipesh Dosani, was named Commercial Litigation Lawyer of the Year in 2019 and 2020 in the ACQ5 Law Awards.
If you would like to talk to one of our expert legal team about a contract dispute, call us on 020 3968 6030, email us at enquiries@lincolnandrowe.com or fill in our contact form and we’ll be happy to help.
The above information is for general guidance on your rights and responsibilities and is not legal advice. If you need more details on your rights or legal advice about what action to take, please contact a legal advisor.
