If you become a shareholder of a company, we strongly recommend that you have a shareholders` agreement drawn up. As a minority shareholder, the clear provisions of a shareholders` agreement make it easier for you to assert a claim if the majority shareholders violate the agreement. Similarly, majority shareholders can protect themselves from a costly unfair claim of harm against them if everything is clearly regulated in an agreement. This is where section 994 of the Companies Act 2006 comes in. It provides recourse to minority shareholders in situations where, for example, their stake is deliberately devalued or if they are excluded from management if they expect to be involved. It should be noted that while the shareholders of a limited liability company may, by unanimous written agreement, exclude the right to seek compensation in court for unjust prejudice, there is no such right of withdrawal for the shareholders of a limited liability company. The most common remedy for unjust harm is when the court orders the defendant (the shareholder against whom the action was brought) to acquire the plaintiff`s shares at a fair value and at a specific time. This is a rare example of a majority shareholder suffering from unfair prejudice, rather than (as is more common) a minority shareholder. This is also unusual because the relief granted was not a share buyback, but an ordinance on the corporate governance of the company. A shareholder may claim unfair harm if he or she believes that the majority shareholders acted unfairly with respect to the manner in which the business is conducted.
That allegedly unfair activity must have led to an infringement of the applicant`s position as a shareholder. Our team has extensive experience in negotiating, drafting, interpreting and implementing shareholder agreements for a variety of companies in many different industries. We have years of experience in bringing and fighting claims of unfair prejudice before the courts. Whether you are a minority or majority shareholder, our team is very familiar with all aspects of unfair bias and will guide you every step of the way. Please contact us to discuss your options. When it comes to disputes, directors and majority shareholders have the power to settle things the way they want, but minority shareholders have little to protect them. Contractually, minority shareholders, even if they are directors, have only the articles and shareholder agreements of the corporation on which they can rely if they find that their interests are under attack, and these may not be particularly useful. In many cases, no shareholders` agreement has been signed, there is only one “agreement” between the parties, and over time this often becomes a “misunderstanding”. A wide range of circumstances can result in unfair harm, such as. B misuse of the company`s assets, serious mismanagement, exclusion from management5 and inappropriate dilution of minority shareholdings. However, looking at some of the cases where unfair adverse behaviour has been alleged, it is clear why it is desirable to support the minority shareholder`s position in a joint venture with adequate contractual protection.
While conduct in the circumstances of a particular case may satisfy the “unfair harm” test, such conduct will not necessarily meet that test in the circumstances of another enterprise. In this context, the following examination also highlights some of the contractual positions commonly taken to protect minority shareholders: the power to approve civil proceedings subject to court-ordered conditions may be a particularly useful remedy, as it allows for legal action to be brought by the company, which means that the majority of the costs of that action are then borne by the company and not by the applicant. would be worn. In practice, the most common remedy available to a successful claimant is to order that his shares be purchased by those who caused the unjust damage. However, the valuation of shares can cause significant problems as there are many contradictory valuation methods. The courts have generally held that actions must be assessed at a time that is fair to the applicant, that is, usually when the harm to the petitioner began. The court may also order that the valuation be based on the fact that unfair adverse conduct (which may have devalued the company`s shares) did not take place. In certain circumstances, it may be appropriate for the Court to order the majority shareholder to sell its shares in the applicants, although this is much less common. Petition procedure Judicial proceedings for unjust damages are initiated by means of an application.
The application must indicate the reasons for which it is filed and the type of appeal that the applicant (i.e. the shareholder bringing the action) is requesting. The Court of Justice shall fix a hearing date on which the applicant and each defendant must be present before the court or the instructions relating to the proceedings relating to the application. Injunctions may be available to protect the position of the company and the petitioner until the petition is heard. Shareholders or directors accused of being guilty of unfair conduct must be named as defendants in the application, as well as all members of the corporation whose interests have been affected by the alleged misconduct or who would be affected by a court order. A third party who is not a member of the company should also be reached if he could be affected by the proposed remedy or if he was directly involved in the allegedly unfair harmful conduct. Finally, the company itself is generally referred to as a respondent, although to some extent it is a nominal respondent. Professional secrecy In general, in legal proceedings, communication between a client and his lawyers with regard to the receipt and provision of legal advice is privileged from the moment of manufacture and therefore does not have to be shown to the other party in the legal proceedings. However, there is an important exception to this rule in the case of undue hardship proceedings, as a nominal party, communication between the Company and its lawyers cannot be excluded from submission in the proceedings under § 994. Therefore, a corporation must be cautious when providing legal advice on an issue that may potentially lead to a section 994 claim, as everything that is said to the company`s lawyers or by the company`s lawyers must be disclosed to the disgruntled shareholder in the subsequent section 994 proceeding. Costs Although it is not possible in this guide to estimate the amount of costly proceedings under § 994, they are naturally expensive and time-consuming.
Alternative remedies There are other remedies for shareholders that should also be considered and, depending on the circumstances, are either better suited to a shareholder`s situation than a claim for unjust prejudice, or that additional arguments or claims may be made at the same time as a section 994 claim. Other remedies to be considered include an application for “fair and equitable liquidation” under section 122(1)(g) of the Insolvency Act 1986 and a derivative action under sections 260 to 264 of the Companies Act 2006. For more information on shareholder disputes and unfair bias, please contact Andrew Perkins. Ashford`s LLP is regulated by the Solicitors Regulation Authority. The information contained in this Notice is intended to be general information about English law only and is not exhaustive. It should not be used as legal advice or as an alternative to seeking professional advice in relation to specific circumstances. If the court finds that the minority shareholder has been treated unfairly, it has a number of remedies. Among other things, it can issue an order regulating the future affairs of the company, ask the company to do or not do something, or force the company to make certain changes to its articles or not. These are all set out in section 996 of the Act, but the most commonly used remedy is to order the purchase of the minority interest at a fair price by the majority shareholder or by the corporation. Third, injustice can occur when the majority “applies the rules in a manner that is considered contrary to good faith in fairness.” [13] Conduct must not be unlawful, but unfair.
[14] Here, the application of the notion of abuse becomes increasingly difficult. It highlights the inherent tension between contract law and equity. Although the common law has traditionally assumed that parties do not have a general duty of good faith, it now recognizes that a party with a certain degree of discretion under a contract may be required to exercise it in a manner that is not capricious or inappropriate: Braganza v. BP Shipping Ltd.[15] Fairness has taken a different path, imposing additional tariffs (or, more precisely, restrictions) on people treated as fiduciaries. Partnership is a paradigmatic fiduciary relationship,[16] and the duty of the greatest good faith imposed on true partners has been extended to shareholders of corporations that are in a quasi-partnership. .
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