Nov 24
If you are a minority shareholder and you suspect that either a director or a majority shareholder is misusing company assets, there are legal remedies that can help you to protect the business, as well as your own shareholding.
There are many ways in which a director or shareholder may misuse company assets. Sometimes this may be inadvertent or just incompetence, other times it may be deliberate. In smaller companies where the directors are also shareholders, lines may become blurred and the directors may not always fully appreciate their duties to the company and shareholders.
Some common examples of misuse include:
Both directors and shareholders are under very strict duties to protect company assets, and breach of these duties can have serious repercussions.
The first place to look is the constitution of the company.
Shareholder rights are set out in a number of areas, including the company’s Articles of Association, the Memorandum of Association and in your shareholder agreement if there is one.
Voting rights may exist in the company’s incorporation documents which allow shareholders to vote on certain issues. This may include what dividends are taken by shareholders and what remuneration is taken by directors. Shareholders may also be given voting rights for significant changes or actions, such as the selling of or transference of company assets outside of the usual course of business.
Minority shareholders have less individual voting power than majority shareholders.
However, even if a vote (against a certain transaction for example, or to decide director’s remuneration) may require a 50% or a 75% shareholder majority vote before it can be passed, minority shareholders can join together to block a majority vote if 25% or more agree. This is often a very good option for minority shareholders who hold similar concerns about the misuse of company assets where a vote can bring about a change.
If a joint voting block is not the answer, or is just not possible to achieve, minority shareholders also have certain remedies by applying to court.
There are three kinds of applications which can be made.
If you feel seriously aggrieved about the way the business is being run, and believe it is affecting your shareholding, you can bring an ‘unfair prejudice’ claim to court to say that you are being unfairly prejudiced by the actions of the management.
You will need to prove to the court that you have been prejudiced. If the court finds in your favour, it can make any order that it thinks is appropriate in the circumstances. This might include ordering the company to purchase your shares, so you are released from your shareholding and are paid a fair value for your shares. Or the court could also order the company to pay you damages for any loss suffered.
A derivative claim is an application brought in court by a shareholder on behalf of the company, unlike unfair prejudice which is specific to a particular shareholder.
You will need to show that the actions of the majority shareholder(s) or director(s) have been contrary to the company’s interests. This can cover a wide range of actions, some of which are discussed above.
Similar to unfair prejudice, if the court finds in your favour, it has very wide powers to make any order that is appropriate.
Because this action is brought on behalf of the company, any award by the court will be for the benefit of the company as a whole, not any particular shareholder personally.
This can be a very effective way of ensuring that directors or shareholders do not continue to act without impunity, and can allow for a reversal of transactions that were not for the benefit of the company. If that is not possible, it can provide for sufficient compensation to be paid by those that benefitted. It may also ensure that remuneration is brought into line, and dividends paid if appropriate.
This is a further option for an aggrieved minority shareholder, but it is only likely to be granted in exceptional circumstances as it will end the company if granted. If there is another suitable remedy, the court will avoid winding up.
This is often used if there has been a complete breakdown in mutual trust and confidence between the shareholders that goes beyond the remedies available to a minority shareholder if they were to bring an unfair prejudice claim.
As a minority shareholder, you may feel sidelined and powerless compared to majority shareholders and directors, but there are various remedies available to you to address matters that you feel strongly about.
We can bring an action to court on your behalf, or on behalf of the company, to stop misuse of company assets by directors or shareholders, and ensure accountability to the company.
The Dispute Resolution team at Raworths based in Harrogate, North Yorkshire, has many years’ experience in commercial disputes. For further information and assistance, please contact Jonathan Mortimer or another member of Raworths’ Dispute Resolution team.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.
Published on 14 November 2024
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