How some companies are manipulated by majority shareholders

How do some directors and/or majority shareholders manipulate a company to the disadvantage of other shareholders?

Unfortunately, manipulation of a company’s finances is not that unusual. One of the most obvious ways that this occurs is by minimizing the company profits and thereby having little or no dividends to be distributed to shareholders. The main shareholders, who may also be directors, will use the company’s finances for their won benefit, perhaps paying themselves significant amounts on service contracts or as employees. Finances may be utilized in all manner of ways that may be lawful, but which benefit individuals, such as company cars or other benefits, health insurance, business trips and other expenses.

Another example is where resources are diverted or manipulated for the benefit of related people or businesses – perhaps the company may do business with a company owned by the majority shareholders even where the terms offered are only really advantageous to the other company.

Other tactics might include loans to directors which carry no interest and where the company has no intention of pursuing repayment.

Sale of the company may be another opportunity to disadvantage unprotected minority shareholders. The business may be sold on terms which are only advantageous to those in control, as directors and/or majority shareholders. A sale may be mooted to a related entity, owned or controlled, directly or indirectly by the majority owners.

The above are just a few examples. As explained above, many shareholders would think that such actions would be regulated and prohibited by law – unfortunately, this isn’t the case, unless there is clear fraud or perhaps tax avoidance or manipulation. Even in those situations, the minority shareholder may suffer financially before any action is taken against wrongdoers.

How does a shareholder enforce his/ her rights?

There are various options, including –

• if there is a shareholders agreement, and other parties are in breach, take action for damages based on breach of contract
• in extreme circumstances, an injunction might be a [possibility, although it is high risk and not a remedy easily given with a shareholders dispute
• submit a resolution and seek to call a formal meeting of the company to redress the situation
• get good legal advice as soon as possible – it may be necessary to compile evidence before seeking to take action – this is especially the case since it is a feature of cases of alleged corporate manipulation and unfair prejudice that the aggrieved shareholder has difficulty in getting access to documents and information to clearly show what has happened.
• if there are a number of shareholders, discreetly seek to find out if other minority shareholders are aware of concerns or are similarly aggrieved. Complaints from an isolated shareholder may not be considered a particular threat where there are several others not on side.
• asking the DTI’s Investigations Branch to investigate the conduct of the company and/or its directors – this is a stringent step and should be very carefully considered before being auctioned.
• using an experienced commercial mediator to try to resolve the dispute – however this cannot be forced on the parties.
• asking the board of directors to take action in the company’s name against an individual director (known as a derivative action)
• applying to court based on unfair prejudice.
• make an application to court for the company to be wound up

Unfair Prejudice

As described earlier in this post, English law largely leaves it to shareholders to regulate matters between them – this in turn raises something of a presumption that a shareholder who recognizes the need to protect his or her interests will ensure that there is a shareholder agreement in place and suitable articles of association. The absence of these may well lead a court to adopt the starting point that the court ought not to interfere.

Having said this, some situations which, based on case law, with appropriate evidence, might lead to a finding of unfair prejudice include :-

• being excluded from management and decision making and generally not being kept informed of strategic decisions or a refusal to provide reasonable information.
• diverting business to related businesses owned by the majority shareholders).
• use of the company for personal gain such as the majority shareholder paying themselves excessive amounts, either directly or indirectly.
• abuses of power and breaches of the articles of association

If you are having problems with other shareholders or believe that you are being prejudiced by unfair or manipulative behaviour by the majority or other shareholders, I can help. Get in touch to discuss your situation.