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Minority Shareholders

Rights and remedies available to minority shareholders

Membership rights – enforcement under s 33 CA 2006

• Articles act as a contract between the members and each other + between the
members and the company = members can sue (usually for damages) if membership
rights are infringed (s 33)
o Membership rights =
§ Right to a dividend once lawfully declared
§ Right to share in surplus capital on winding up
§ Right to vote
§ Right to receive notice of GMs
o Non-membership rights are not enforceable under s 33 + should be set out in
a shareholders’ agreement

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Derivative actions

• Shareholder’s right of action ≠ personal; it derives from the company’s right of

action, which it has not exercised
• Rule in Foss v Harbottle: where wrong has been done to company, company
(through board or majority shareholder) is proper claimant; minority shareholder
not the proper claimant

• Exceptions to the rule:

o Majority exercise their votes in such a way as to defraud minority shareholders
§ E.g. Directors in control of company + minority unable to bring action on behalf of
company against directors
o Directors guilty of breach of fiduciary duty, provided breach not ratifiable by majority
o Company proposes to act ultra vires / illegally
o Company has purported to pass OR where SR, or other special procedure required
o Company proposes to act on the authority of a resolution which is defective because
inadequate notice was given

• S 260(3) – express right to bring derivative claim in respect of a cause of action

arising from an actual or proposed act or omission involving negligence, default,
breach of duty (inc. those under s 170-7) or breach of trust by a director of the
company
o Director includes shadows + former (s 260(5))
o No requirement that director has benefited personally from the breach
o NB cause of action only arises in respect of actions / omissions of a director,
BUT action may be brought against the director or another person or both
§ Derivative actions against third parties only in very limited
circumstances, e.g. where third party enters into contract, knowing in
breach of director’s duties

• S 260(1) = action initiated by a current member of a company:

o In respect of a cause of action vested in the company; and
o Seeking relief on behalf of the company
… regardless of whether cause of action arose before or after person became a
member (s 260(4)) (but must still be a member at time of action)

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Court approval

1. Member must show prima facie case to obtain the permission of the court to
continue a derivative claim once the claim from has been issued (s 261(1))
o Court must refuse permission where (s 263(2)):
a) satisfied that a person acting in accordance with s 172 (promoting
success of company) would not seek to continue the claim
b) Cause of action yet to occur + authorised by company
c) Cause of action has occurred + was authorised / ratified
o Court must then consider s 263(3) factors:
a) Member acting in good faith?
b) Importance a person acting in accordance with s 172 would attach
to continuing the claim
c) Cause of action yet to occur – likely to be authorised / ratified
before it / after it occurs?
d) Cause of action occurred – likely to be ratified?
e) Company has decided not to pursue a claim?
f) Member could pursue action in his own right rather than on behalf
of company?
2. Court must have particular regard to any evidence it has before it as to the views of
the members who have no personal interest in the matter (s 263(4))

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Unfair prejudice (s994)

• Member may bring an action for himself on the grounds that (s 994(1)):
a) the company is being run in a manner unfairly prejudicial to the members
generally or some part of its members (including himself); or
b) an actual or proposed act or omission of the company is or would be unfairly
prejudicial.
• Reasonable bystander (objective test) applied

Unfairly prejudicial conduct

• Excessive remuneration – may be UPC, even where remuneration disclosed in

company’s accounts
• Legitimate expectation (for small, private companies – quasi-partnership)
– shareholders’ expectation that they be involved in management of company +
prevention of such involvement may = UPC (Ebrahimi v Westbourne Galleries
Limited)
o O’Neill – reliance on legal rights to dismiss a director is not sufficient where it
would be inequitable to so dismiss
o Re a Company No 00477 of 1986 – interests of a member who risked his
capital in the business of a small private company extended to LE that he
would continue to be employed as director

• Negligent or inept management ≠ UPC unless conduct serious and/or repeated

mismanagement which puts at risk the value of the minority shareholder’s interest
• Disagreements as to policy ≠ UPC

• Breaches of the Arts – usually required for UPC, but may be cases where inequitable
for directors to rely on strict legal powers
• Bad faith – no need to show for UPC

• Claimant’s conduct – no requirement that C have “clean hands”, although conduct

relevant

Negotiated settlement

• NS is the preferred option, as s 994 petitions are expensive, time-consuming and

complicated + give uncertainty to petitioner

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Court order

• S 996(1) = general power to grant such order as the court thinks fit
• S 996(2) = types of order that may be made:
o Orders regulating the future conduct of the company’s affairs (s 996(2)(a))
o Orders requiring the company to do / refrain from certain acts (s 996(2)(b))
o Orders providing for the purchase of the petitioner’s shares by the
wrongdoer (value argued) (s 996(2)(e))
§ Usually where one side willing to buy out the other + argument over
valuation, court will encourage parties to settle out of court by means
of binding third-party valuation
§ Where one party does not want to sell shares, s 994 may not be
suitable course of action as this order is that most commonly granted

Valuation under s 996(2)(e)

• Shareholders should first seek to use valuation mechanism set out in Arts, if any +
courts will seek to apply a similar mechanism
• Usually, court will not consider the fact that the shareholding is small and holds little
power when valuing the shares, especially where minority shareholder being forced
to sell due to UPC of majority shareholder (i.e. majority shareholder is also director)
• Valuation date = that on which the court order was made, unless problems at
company mean there has been a decrease
• C’s conduct (e.g. unreasonable refusal of past offer) may be relevant

Just and equitable winding up (IA 1986)

• Right to apply for company to be wound up on grounds that just and equitable to do
so (s 122(1)(g) IA 1986)

Shareholders’ agreements – protecting minority interests

• SA provides right of action under general contract law principles of one shareholder against another,
to ensure the enforceability of provisions that would not be regarded as membership rights for s 33
CA 2006,
o E.g. right to:
§ Be appointed as company’s solicitor
§ Approve certain transactions

Reserved matters (veto provisions)

• Reserved matters = matters requiring the consent of all / certain shareholders

• NB Company bound to accept decision made in accordance with Arts, even if contrary to shareholders
agreement => personal claim accrues to affected party

• Changes to a shareholders’ agreement requires the unanimous approval of all parties

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