I’m a shareholder; how am I protected?

In UK companies, every shareholder has rights based on the level of their shareholding i.e the more shares held, the more rights the shareholder has. However, there are some important rights and protections that shareholders have regardless of the number of shares they hold.

A shareholder may become concerned by the way the company is being operated. So, what can be done? A shareholder could issue an Unfair Prejudice Petition to the Court-to seek protection against unfairly prejudicial behaviour.

What is unfair prejudice?

There are two things to consider as to whether behaviour is unfairly prejudicial under section 994 of the Companies Act 2006:

1. The conduct must be prejudicial – i.e. it must cause prejudice or harm to the interest of the shareholder(s) such that they are in some way worse-off; and
2. The conduct must be unfair.

PrejudicePrejudice can be shown if the shareholder can demonstrate that the economic value of their shares has significantly decreased or is put at risk by the conduct they are complaining about. However, prejudice need not necessarily be economic in nature.

Conduct will not necessarily be prejudicial simply because it concerns a breach of some obligation. It is important to note that a complaining shareholder will not be entitled to this relief if they cannot demonstrate that the complaint has had a negative impact.

UnfairnessThe test for unfairness is objective. This means that a Court will look at whether a reasonable person would consider the conduct unfair. You do not have to show any bad faith on the part of the ‘offending’ party or any intention to cause prejudice.

Conduct is more likely to be unfair if it is contrary to the terms of the commercial relationship between the company, its directors and its shareholders. However, it will all depend on how the shareholder acquired its shares.

Examples of unfairly prejudicial conduct:There is no definitive list but here are some examples of unfair prejudice claims:

• Breach of fiduciary dutyThis is where a director either misappropriates company assets, procures an allotment of shares to dilute a minority shareholding or damages the relationship of mutual trust and confidence.

• Diluting minority shareholdingsThis is frequently seen by businesses as an option for overcoming objections from a minority shareholder, but allotting further shares in the company for the purpose of improperly diluting the shareholding of a minority shareholder is an obvious example of unfair prejudice.

• Failure to declare dividendsLack of dividends is not, unfair prejudice since the decision as to whether or not dividends can or should be declared is a commercial one. However unfair prejudice can occur when the shareholder has received less in dividends than was agreed as part of his or her decision to become a shareholder.

Unfair prejudice is likely to occur when the directors have neglected their obligation to pay dividends or have refused to do so for an improper purpose or when the company cannot afford to pay dividends because the directors have drawn excessive remuneration.

• Payment of excessive remunerationRemuneration is a commercial matter that the courts don’t generally get involved in, but there are exceptions where the drawing of remuneration constitutes a breach of an agreement or understanding that the directors will not be remunerated.

On occasion the courts will step in if remuneration is excessive by reference to the true value of services provided, and/or is instead in reality a disguised dividend payment or where remuneration has not been approved by the board, the shareholders or according to the Articles.

• Breach of the Articles or any shareholders’ agreementGenerally, this will mean a breach of the terms on which the shareholder acquired their shares and may result in unfair prejudice occurring.

This may include breaches of the Companies Act 2006, for example, failure to hold annual general meetings, failure to provide accounts, failing to disclose interests in transactions with the company or registering new members in breach of restrictions within the Articles

• Deadlock‘Deadlock’ refers to a situation in which the company is effectively unable to make decisions, due to no conflicting party having the requisite majority at board and/or shareholder level to enable decisions to be passed.

Often this occurs due to a breakdown in relationships which has not been caused by any unfair prejudice – whilst this will generally mean that an unfair prejudice petition cannot be justified, it may be that in the circumstances it would be ‘just and equitable’ for the company to be wound up, and an application could be made to the court for that purpose.

Need Help?

If you would like any help and advice on your rights as a shareholder or you are concerned you don’t have the right protections in place, please contact our specialist legal team on 0151 305 9650 or email hazel.walker@glenvillewalker.com

This article is not intended to be interpreted as advice.