Minority Shareholder Disputes: How to Deal With the Key Boardroom Issues

Advising clients on minority shareholder issues can be a minefield. Paul Kite, head of IBB’s commercial litigation and disputes team, highlights a number of common issues that fall to be considered when advising a minority shareholder who is looking to exit the company as a result of the actions of a majority.

Question 1: The directors of the company are paying themselves excessive remuneration. What can I do?

Response: Ask whether, applying “objective commercial criteria”, the remuneration falls within the bracket that executives carrying the relevant responsibility and discharging the sort of duties that those concerned were, would expect to receive? Consider remuneration in the round: include pension, bonus, benefits in kind and salary. There will be no single correct figure for reasonable remuneration so consider the reasonable range. If the remuneration falls outside the reasonable range then the minority shareholder is likely to have grounds for complaint.

Question 2: No dividend has been declared for a number of years. Can I insist upon a dividend?

Response: Explore the reasons for the non-payment of a dividend. Whilst there is no legitimate expectation of a dividend payment, the company does have an implied power to distribute profit to the shareholders. What is the dividend policy? In cases where dividends are paid to some but not all shareholders it is relatively easy to establish that minority shareholder rights are being breached. But what if the company directors claim to have a “no dividend” policy for legitimate reason? The directors have a discretion whether or not to recommend payment of a dividend, subject to any restrictions in the company’s constitution. The company is not bound to declare dividends. Look at the policy/decisions together with payments made to the directors and their remuneration. Do these amount to a dressed-up return of capital to the majority? Look at the motive behind such policies/payments. If the directors appear to be preferring their own interests over those of the company they may be in breach of duty.

Question 3: Assuming that the conduct complained of amounts to unfair prejudice[1], what can I do?The directors tell me that I cannot complain to the court as the company’s articles contain pre-emption rights requiring me to offer my shares for sale at a value to be determined by the company’s auditor. Is this right? I’m concerned that the auditor will side with the directors.

Response: Any pre-emption mechanism should not preclude the minority shareholder from seeking relief from the court; most commonly a share purchase order. Whilst the sale mechanism set out in the articles or a shareholders agreement will usually govern the voluntary sale of shares between the parties, the court’s jurisdiction to do what is just and fair where the rights of a minority shareholder have been unfairly prejudiced will not be restricted. In a case where excessive remuneration has been paid, the Court is likely to order that the “excess” is brought back into the company for the purposes of calculating the value of the outgoing shareholder’s shares.

Question 4: This has been going on for some time, but I have not felt able to address it before now. Is there a limitation period in which I must bring my claim before the court?

Response: No, not where a minority shareholder seeks relief under s.994 of the Companies Act. There is no limitation period, although the Court may take into account any delay in deciding what remedy to grant. For example, it may limit the period in which it is prepared to order excessive remuneration to be brought back into the equation.

Question 5: Remind me what I have to establish to persuade the Court that it should intervene and order my shares to be bought by the other shareholders?

Response: That the company’s affairs are being or have been conducted in a manner that is both unfair and prejudicial to the interests of the shareholders or a proportion of them (including the complainant). Conduct may be unfair and/or prejudicial; it is not automatically both. Examples of unfair conduct usually flow from a breach of the articles, any shareholders agreement, or from unwritten agreements between the shareholders; the latter being most relevant to small companies operating as quasi-partnerships. The prejudice usually relates to the impact on the value of the shares.

Question 6: If I am successful and the Court orders the majority to buy my shares, when will the shares be valued? The majority have deliberately run the company down and diverted business to another company they own in the last couple of years.

Response: The valuation date will be determined by the Court. The starting point for the valuation date is the date that the Court orders the shares to be purchased, but the overwhelming consideration is fairness. There have been instances where the Court has ordered the shares to be valued at an earlier date, for example where the company has been deprived of business or the conduct of the majority requires it.

Question 7: And how will the shares be valued?

Response: This is a matter for expert valuation evidence. Typically experts will value the company on a net asset basis or capitalised earnings basis as a going concern. However, the court is not bound to follow one or more expert valuations and has a wide discretion to do what is fair and equitable in all the circumstances of the case to arrive at a fair price for the shares.

Question 8: Will the price be discounted to reflect the fact that the shareholding is a minority holding?

Response: Ordinarily a discount will be appropriate unless the company is regarded by the Court to have operated as a quasi-partnership or there are some other exceptional circumstances. Minority holdings generally attract less than a full pro rata value. In a family company it may be necessary to look at how the shareholdings have come about; whether by virtue of a true quasi-partnership arrangement or some other arrangement, such as inheritance for example.

Question 9: If the Court give me my order to have my shares purchased by the majority, and value the shares after rectifying the position with the excessive remuneration, how long will I have to wait for the money? What if the majority try to appeal the decision to delay matters?

Response: The court will determine the mechanism for the sale to include the payment date/method if the parties cannot agree this. However, it is possible to ask the Court to order a payment on account of the purchase price. Where this appears to the court to be fair, by reference to the circumstances of the individual case, it does have a discretion to make such an order.

[1] S.994 Companies Act 1996 offers a variety of remedies to a minority shareholder whose interests are being unfairly prejudiced by the majority