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Boardroom Bust-Ups
- Minority Shareholder Protection
The scenario
You are a director and employee in a company which was set up a number of years ago, you are also a minority shareholder. There are other shareholders, some or all of whom are also directors and employees.
There are no special provisions in the articles of association and there is no shareholders agreement as no lawyers were consulted at the incorporation stage.
A majority of the directors have decided that they want to remove a director, perhaps you. They are either not prepared to purchase shares or are making an offer that is considered unreasonable. What can such a director do?
Minority Rights
Minority shareholder protection is one of the most complicated areas of company law.
Decisions of directors or shareholders are normally taken on the basis of majority vote. If you happen to find yourself in the minority, there is not normally anything that you can do about it. However, the law does provide certain protection for the interests of the minority, although it is actually quite difficult and potentially very expensive to enforce minority rights.
A shareholder who believes that his or her interests are being prejudiced by the way the affairs of the company are being managed by the directors has a right to petition the court to seek relief. The court has the widest possible discretion in the matter. The most usual remedy however, is to order the purchase of the minority shares by the majority on a pro rata basis (as a proportion of the value of all shares, without reduction because it is a minority holding).
Almost all such petitions relate to companies with 10 or fewer members and one of the commonest allegations as a ground of "unfair prejudice" is exclusion from management. Other examples of conduct which have been found to be unfairly prejudicial include the following:-
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Removal as a director
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Making a discriminatory rights issue of shares
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Payment of inadequate dividends.
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Taking excessive remuneration/management fees out of the company
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Allotting shares improperly/in breach of pre-emption rights/deleting pre-emption rights from articles.
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Diverting business opportunities away from the company.
Shareholder disputes can be enormously expensive to resolve because lawyers have to review the whole history of a company before advising and because both sides can become entrenched in their views. The dispute also takes up an inordinate amount of management time, which is particularly detrimental to smaller, owner managed companies.
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