Rupert D’Cruz (Barrister, Littleton Chambers)

rdc@littletonchambers.co.uk

12 April 2011 - Ekaterinburg

SHAREHOLDERS’ RIGHTS -

OBTAINING RELIEF FROM THE ENGLISH COURTS

Categories of Shareholder Disputes

1. Breach of a shareholders’ agreement and articles of association Articles = contract between shareholders + company and

between each shareholder and every other Common law claim for breach of contract

2. “Unfair Conduct” Claims for unfair prejudice Claims to wind-up the company Derivative claims

(1) Breach of Shareholders’ Agreement and Articles of Association

Available relief declaration that an action based on a breach of the agreement or the articles is invalid

- wrongful exclusion by one shareholder of director nominated by another- setting aside improper allotment of shares

specific performance- requiring one shareholder to purchase the shares of another- right to receive a dividend

injunction (including interim relief) to restrain the breach of the agreement or the articles

- preventing sale of share to third party in breach of pre-emption rights- TNK-BP

damages

(2) Unfair Conduct:

(i) unfair prejudice petition

(ii) winding-up the company

(iii) derivative actions

(i) Unfair Prejudice s.994(1) of the Companies Act 2006 (“CA”):

A [shareholder] .. may apply .. for an order that:

(a) the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of [shareholders] generally or of some part of its [shareholders] … , or

(b) an actual or proposed act or omission of the company … is or would be so prejudicial.

Aim: to protect minority shareholders where the majority act in a way that is 'unfairly prejudicial’to their interests.

Examples of unfair prejudice

exclusion from management (where (legitimate) expectation of participation);

diversion of business to another company;

using company assets for personal benefit;

award excessive financial benefits;

abuses of power/breaches of the company’s articles

Unfair prejudice and “quasi-partnership companies”

Small companies

Although operating as limited company in practical terms run as a partnership

Courts more willing to recognised additional rights of minority shareholders

particularly protection from being excluded from management of the business (without good reason).

Remedies for Unfair Prejudice

s.996, CA:

(1)     … the court may make such order as it thinks fit for giving relief…

(2)     .. the court's order may:(a)     regulate the conduct of the company's affairs in the future;

(b)     require the company to — (i)     refrain from doing or continuing an act complained of, or (ii)    do an act that … it has omitted to do;

(c)     authorise civil proceedings to be brought in the name and on behalf of the company by such .. persons and on such terms as the court may direct;

(d)     require the company not to make any, or any specified, alterations in its articles without the leave of the court;

(e)     provide for the purchase of the shares of any [shareholders] … by other [shareholders] or by the company itself …

Costs

Company cannot fund legal fees of majority shareholders in unfair prejudice dispute.

Where necessary, court will grant an order restraining company from doing so.

If the minority shareholder is successful, the respondent shareholders will pay minority’s costs.

(ii) Winding Up the Company

s.122(1)(g), Insolvency Act 1986:

“A company may be wound up … if the court is of the opinion that

it is just and equitable that the company should be wound up”.

Wronged shareholder may apply to wind up the company.

Must have a ‘tangible interest’ in doing so:

e.g. when the company is wound up and its debts are repaid, there will be a surplus

Does not include:

benefiting a competing business in which the applicant has an interest preventing the company from continuing litigation against him

In practice, often occurs in small businesses (2/3 shareholders working together in a quasi-partnership).

Court will not wind-up the company if another remedy is available (e.g. order that other wrongdoer buys his shares) and wronged shareholder refuses

Remedy of last resort.

Court will not wind-up the company if another remedy is available (e.g. order that other wrongdoer buys his shares) and the wronged shareholder refuses to pursue that remedy

In practice, often occurs in small businesses (2/3 shareholders working together in a quasi-partnership).

(iii) Derivative Claims

General Rule:Only the company (through its board of directors) can bring proceedings for a wrong done to the company

Exception:If the wrongdoers are the directors themselves who use their control over the company to suppress a claim by the company

s.260(3), CA:

(1)     .. applies to proceedings … by a [shareholder]: (a) in respect of a cause of action vested in the company, and (b) seeking relief on behalf of the company.

(3)     A derivative claim … may be brought only in respect of a [claim] … involving negligence, default, breach of duty or breach of trust by a director ….

The cause of action may be against the director or another person (or both).

(4)     It is immaterial whether the cause of action arose before or after the [shareholder] became a member of the company.

(5)     (a) “director” includes a former director; (b) a shadow director is treated as a director

Directors’ Duties Under the CA (1)

s.171(1): “.. [to] “a) act in accordance with the company's constitution: and (b) only exercise powers for the purposes .. they are conferred.

s.172(1): “.. [to] act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its [shareholders] ….”

s.173(1):  “.. [to] exercise independent judgment.”

Directors’ Duties Under the CA (2)

s.174(1):  “.. [to] exercise reasonable care, skill and diligence.

s.175(1): “.. [to] avoid a situation in which he has .. a direct or indirect interest that conflicts … with the interests of the company.”

s.176(1): “not [to] accept a benefit from a third party conferred by reason of his (a) being a director, or (b) doing (or not doing) anything as director.”