Power among the shareholders of a company is generally measured by the size of their shareholdings and accordingly their voting rights.  Usually, the more shares you hold the more power you have over the company itself.

In most circumstances, any disagreement between shareholders will be resolved by a vote on the issue in question with the majority deciding the outcome. 

That being said, those with a minority shareholding cannot be abused and enjoy certain protections - there are some fundamental restrictions on what actions majority shareholders can take which allow minority shareholders to seek redress when they feel aggrieved at the activities of the majority.

There are a number of circumstances in which a minority of shareholders may feel aggrieved.  For example, if a director who is also a majority shareholder acts dishonestly or against the best interests of the business and then ratifies their actions by passing company resolutions.

Should this situation occur, a minority shareholder should consider whether any of the statutory or contractual protections discussed below apply.  They should take specialist advice on how to exercise these protections in order to ensure that the interests of the company are protected.

There are a number of options for minority shareholders to seek redress:

Calling a general meeting

A general meeting can be called by shareholders provided they make up five per cent of the voting rights of the company. This means that in some circumstances minority shareholders can call such a meeting without the backing of the company board, or the other shareholders, to make themselves heard. This can be used as an opportunity to discuss concerns and air grievances before further action needs to be considered.

Relying on a shareholders' agreement

A shareholders' agreement will bind the shareholders of a company to act in accordance with its terms and may contain protections for minority shareholders. A specialist commercial lawyer will be able to check the terms of any agreement and explain any protections for minority shareholders.

Bringing a derivative claim

This is a type of legal action brought by the shareholders of a company seeking a remedy on behalf of the company. In limited circumstances, the law governing companies allows minority shareholders to bring a claim without the input of the board of directors who would usually make such a decision. 

In practice, this allows minority shareholders to seek a remedy against third parties or even against directors of the company in their personal capacity.  This right may be used where a director has used his or her majority shareholding to ratify an alleged wrongdoing.  For example, authorising the sale of company property at an undervalue and then using a majority shareholding to ratify that decision.

Bringing a claim for unfair prejudice

In the event that a shareholder feels that the company is being run in a way which is 'unfairly prejudicial', they may seek a remedy under the Companies Act 2006. For example, where there is failure to hold annual general meetings or to comply with the provisions of the Companies Act, a claim based on unfair prejudice may be brought. To bring a claim of this kind, the conduct must be considered unfair from the perspective of an objective outsider. Whether or not this test can be met is best judged by a lawyer who is an expert in the field.

Outcomes for the minority shareholder

If a minority shareholder can persuade the court that their claim is well founded, the court has a number of options, including:

• supervising any future amendment of the articles of association;
• granting an injunction prohibiting the company from doing the act which has prompted the claim;
• intervening in the running of the company's affairs more generally; or
• ordering the purchase of the minority shareholder's shares by the company or its members.

How we can help

It is almost always in the interests of both the company and the shareholders to resolve disputes of this kind quickly and without the need to go to court.  These situations are often sensitive in nature and input from a specialist legal advisor can often defuse things at an early stage. If negotiation is unsuccessful and a claim is brought, advice will be required on the best route to take and which remedies might be available.

As specialists in dispute resolution, we can provide tailored advice to ensure that you take the most appropriate route to resolving any minority shareholder dispute.

We can assist in pre-empting such problems by preparing a shareholders' agreement if required. If a dispute has already arisen, we are experienced in acting for clients in pre-action negotiations and any litigation which may follow.

For further advice on any of the issues raised in this article, or for commercial law advice more generally, please contact JPP Law on 020 3468 3064 or email info@jpplaw.co.uk