26/10/10

By Claire West

The recent drama played out at Anfield (and the High Court) shows what happens if the relationship between a company’s directors and its shareholders breaks down.

Minority shareholders have various options when seeking to protect their interests following board or majority shareholder misconduct of a company’s affairs.

Membership rights

Under s.33 of the Companies Act 2006 (‘CA 2006’), a shareholder can sue the Company if their membership rights are infringed. It is not clear as to what constitutes a “membership right” and it is often impractical to rely on this remedy. It is therefore important to protect any shareholder rights in a separate contract such as a shareholders’ agreement.

Shareholders’ agreement

A shareholders’ agreement may contain reserved matters (where certain key decisions require the consent of all, or a certain percentage, of shareholders).

A shareholders’ agreement creates personal contractual rights enabling one shareholder to enforce provisions of the agreement, under general contract law principles, directly against another party to the agreement.

Foss v Harbottle and derivative actions

The above case has long provided that where a wrong has been done to a company, the company is the proper claimant. However, exceptions to this rule have evolved. A shareholder action brought under one of the exceptions would be a derivative action because the shareholder’s right to sue is not a personal right (but has derived from the company’s right to sue).

The shareholder bringing the claim must obtain permission from the court to continue his claim. This procedure is potentially time consuming.

Unfair prejudice

Section 994 CA 2006 allows a shareholder to bring a personal action on the grounds that the company is being run in a way that he has suffered unfair prejudice.
The court has power to grant such an order as it thinks fit to provide relief, the most common being for the purchase of the petitioner’s shares by the wrongdoer.

Further protection for shareholders

Section 122(1)(g) Insolvency Act 1986 provides the right for a shareholder to apply for the company to be wound up on the grounds that it is just and equitable to do so. This would be drastic; effectively ending the corporate life of the company.

Further provisions of the CA 2006 allow shareholders to remove a director from office; requisition a general meeting; require the circulation of statements and force resolutions onto the agenda of a general meeting.

Conclusions

Shareholders have power afforded to them and they are showing that they are increasingly prepared to challenge the board of a UK company.

It remains to be seen if directors will start playing a more defensive game to ensure that they do not leave the goal wide open for unwanted shareholder activism.
Paul Taylor is a partner at City law firm Fox Williams LLP (www.foxwilliams.com). Paul can be contacted by email at PTaylor@foxwilliams.com. Duncan Jones is a trainee solicitor at Fox Williams LLP. Duncan can be contacted by email at DJones@foxwilliams.com.