Rupert DCruz (Barrister, Littleton Chambers)
[email protected] 12 April 2011 - Ekaterinburg
SHAREHOLDERS RIGHTS - OBTAINING RELIEF FROM THE ENGLISH COURTS
Slide 3
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
Slide 4
(1) Breach of Shareholders Agreement and Articles of
Association
Slide 5
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
Slide 6
(2) Unfair Conduct: (i) u nfair prejudice petition (ii)
winding-up the company (iii) derivative actions
Slide 7
(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 prejudicialto their
interests.
Slide 8
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
companys articles
Slide 9
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).
Slide 10
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;
Slide 11
(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
Slide 12
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
minoritys costs.
Slide 13
(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.
Slide 14
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.
Slide 15
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).
Slide 16
(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
Slide 17
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).
Slide 18
(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
Slide 19
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.
Slide 20
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.
