Protection of minority shareholders
Certain individuals including shareholders may apply to a Court for protection where they allege that a company’s affairs are being conducted in a fashion which is “unfairly prejudicial” to the membership of the company at large or a section of it.
The application to the Court is made by a petition filed at Court by the aggrieved shareholder(s). The test of whether the company’s affairs have been conducted in an unfairly prejudicial fashion is an objective one. Fairness is judged not in an entirely “moral” sense – but a legal one – “is the conduct in accordance with the constitution of the company?” Conduct that is not in accordance with the strict interpretation of the company’s constitution will not satisfy the test unless it is also prejudicial.
Many of the cases concerning unfair prejudice to minority shareholders involve companies which have developed methods of management more akin to unincorporated business – such as a partnership – where there may be an understanding that each owner (partner/shareholder) of the business will be entitled to be actively involved in managing the business. In the context of a formal company structure a minority shareholder may lack the ability to “be heard” – and this could potentially amount to unfair prejudice.
A shareholder may be able to establish unfairly prejudicial treatment if he can demonstrate that his shareholding has been devalued by behaviour such as diverting business to a competitor business in which the majority shareholder has an interest, or the majority shareholder awarding himself dis-proportionate financial benefits.
If the Court makes a finding that the company has been culpable of unfairly prejudicial conduct the Judge has a range of powers - including imposing regulations on the conduct of the affairs of the company, requiring the company to undertake or desist from specified acts. The Court has a discretion whether or not to act and will take into account whether the minority shareholder has “clean hands”. The Court may direct one member of the company to purchase another member’s share.
Actions to protect the interest of minority shareholders are expensive and hazardous. We suggest:-
(1) That if setting up a company you take care to understand the constitution of the company and set up a carefully thought out Shareholder’s Agreement. A little trouble and expense at the beginning can save a great deal more of both later.
(2) If there are sufficient difficulties to warrant the contemplation of proceedings for protection of a minority shareholder – in reality a working commercial relationship (so vital in small and medium sized enterprises may have broken down) and a mediated solution is likely to be considerably cheaper and less commercially disruptive.
We are able to offer specialist advice.