Under section 994, Companies Act 2006 (CA 2006), a shareholder of a company may petition for relief where:
1. The affairs of the company are being conducted in a manner that is unfairly prejudicial to the shareholder's interests as a shareholder.
2. An actual or proposed act or omission of the company is or would be so prejudicial.
In any litigation petition, the shareholder will need to prove both prejudice and unfairness in order for relief to be granted. This article consider some grounds for prejudice.
A shareholder will be able to prove prejudice if the economic value of his shares has significantly decreased, or there is a threat of such a decrease as a result of the conduct of which the complaint is made. However, prejudice justifying a petition is not confined to economic detriment.
Examples of prejudice include:
1. Breach of director’s fiduciary duty as detailed in sections 171 to 177 CA 206. This is not of itself unfair prejudice, actual prejudice must have been caused as a consequence of the breach of the director’s fiduciary duty. Therefore breaches of duty resulting in the misuse or misappropriation of company assets or the procurement of an allotment of shares to dilute a minority's interests will be unfairly prejudicial. You should liaise with your litigation solicitor and get guidance on your director’s duties.
2. Mismanagement of the business. A court will generally not interfere in questions of commercial judgment and business decision making. However, where mismanagement rather than a mere difference of opinion on commercial decision making is established, this could amount to unfair prejudice, if it is significant having regard to the:
a. Scale of any financial loss resulting from the decision.
b. Frequency and duration of decisions constituting mismanagement.
3. Failure to pay dividends to shareholders. A court will generally not interfere in questions regarding the determination of the level of dividends payable to shareholders, since it is a commercial decision. In any event there must be sufficient distributable reserves to pay dividends, which may be reduced significantly by any projected working capital requirements and reinvestment of that working capital in the company. However, unfair prejudice and a valid litigation claim may be established where:
a. The petitioner became a shareholder on condition that there would be a dividend payment of a certain level, if justified by the company's financial position, and no such payments have been made.
b. The directors:
i. have abdicated their responsibility to determine dividend payments; or
ii. have refused to pay dividends on improper grounds
iii. have not complied with the terms of the articles of association and/ or any shareholders agreement.
c. The reason dividends have not been paid is because all distributable profits have been exhausted by the drawing and/ or payment of unjustified remuneration to the Board, including executive and non-executive directors.
4. Payment of excessive remuneration. A court will generally not interfere in questions regarding the determination of the level of remuneration. However, there are exceptions including:
a. Where remuneration is not calculated by reference to the value of the services provided by directors and is instead a disguised payment of dividend or return of capital.
b. Where remuneration has not been approved by the board of directors, shareholders or otherwise in accordance with the articles of association and/ or any shareholders agreement.
It should be noted that despite the above, it will be very difficult for a petitioner to bring a successful litigation claim, if as a result of such conduct, the petitioner is no worse off.
Summerfield Browne Solicitors have offices in London, Birmingham, Oxford, Cambridge, Northampton and Leicestershire.
