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How can Minority Shareholders Take Action?

Every shareholder has basic rights bestowed on them by the Companies Act 2006. But minority shareholders have limited control over the management of the company or how it distributes its profits. This does not mean, though, that they are completely powerless. A minority shareholder can take various actions to protect their interests, including through the courts. A major way to enhance the rights of minority shareholders is via the articles or shareholder agreements. To offer the most protection this should be done before the shares are acquired.

Enhancing Basic Shareholder Rights

The Companies Act 2006 details the basic rights of a shareholder, which are dependent on the percentage size of the shareholding, ranging between 5%, 10%, 25%, 50%, 75% and 90%. Minority shareholders’ rights can be offered increased protection by adapting the standard articles or shareholders' agreement, which have limited minority shareholder rights.

One issue here is that by the time there is a dispute, it is probably too late to amend the articles or agreement in order to improve the minority shareholders' rights. In order to amend the articles, 75% of the shareholders have to vote in favour of it. It is unlikely in a dispute that the majority would vote in favour of something to support the minority. Therefore, it is prudent to ensure the amendments are made before the shares are purchased.

The following amendments can all enhance the actions a minority shareholder can take:

  • The right to information: an important right is the ability of minority shareholders to access important documentation, such as financial records. This is necessary to support any claim made by the minority shareholder that the business is not being properly managed. There is not an automatic right to this information and so this needs to be added into the articles or shareholders' agreement.
  • Powers of veto unless minority consent is acquired for major commercial decisions such as business sales and mergers, winding up or voluntary liquidation, spending above certain limits or the sale of a substantial shareholding.
  • Limiting dilution of shares under any new share issues.
  • Dispute resolution clauses to be included to resolve any issues that arise either by mediation or to allow a minority shareholder to be bought out.

Court Action

Can the court always intervene?

A minority shareholder cannot ask the court to interfere with a decision made by the majority of the shareholders – this would be regarded as a decision of the company. However, where the act has occurred through "negligence, default, breach of duty or breach of trust by a director of the company" then the minority shareholder can sometimes make the company take action against that director. These are known as "derivative actions" and are incredibly complicated scenarios where a shareholder with any level of holding requests the court to intervene either to:

  • prevent an action of the directors that they feel is harmful; and
  • make a claim against the directors for loss that the company has suffered due to their actions.

The actions are made by the shareholder but on behalf of the company rather than for themselves. There is no direct benefit for the shareholder but the action is pursued to protect the business and this ultimately protects the interests of the shareholder. However, permission is required from the court and it will require evidence to show that the claim is substantiated. Permission is very difficult to obtain so these claims are rare. However, it does provide minority shareholders with protection if required against a director that misuses his or her powers.

Unfair prejudice

If the minority shareholder can show that the action or proposed action of the company is going to be "unfairly prejudicial" to them, they can apply to the Companies Court for an order to intervene. These orders can do a range of things from either preventing the company from doing something to regulating how the company operates in the future to force the company to purchase shares from the minority shareholder. In order for this to succeed, it has to be shown that the action was both unfair and prejudicial to the shareholder. Intent is not a requirement. Timing is important, since the Court will not grant permission where the issue has been allowed to continue for some time already before the shareholder takes action.

Winding up

This is obviously the most serious route and so very strict guidance applies. A minority shareholder can petition the court to wind up the company if it is "just and equitable" to do this. It is generally unlikely this will be in the interests of any shareholder for various reasons, including the time it will take, the cost implications for the process and that the company debts require repayment as soon as the process begins. The shareholder has to show that there is a tangible benefit to the winding up order and that there is no other alternative.

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This article is intended to be no more than a general guide and does not comprise legal advice. You are strongly advised to take legal advice if you are involved in a commercial transaction.

For legal advice and assistance please contact Ian Coupland, Head of Commercial and Litigation, Lewis Nedas Law on 02073872032 or icoupland@lewisnedas.co.uk.

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