SHAREHOLDERS’ RIGHTS OBTAINING RELIEF FROM THE ENGLISH COURTS
Rupert D’Cruz
(Barrister, Littleton Chambers)
rdc@littletonchambers.co.uk
12 April 2011 - Ekaterinburg
Categories of Shareholder Disputes
1. Breach of a shareholders’ agreement and articles of
association
 Articles = contract between shareholders + company and
between each shareholder and every other
 Common law claim for breach of contract
2. “Unfair Conduct”
 Claims for unfair prejudice
 Claims to wind-up the company
 Derivative claims
(1) Breach of Shareholders’ Agreement
and Articles of Association
Available relief
 declaration that an action based on a breach of the agreement or
the articles is invalid
- wrongful exclusion by one shareholder of director nominated by another
- setting aside improper allotment of shares
 specific performance
- requiring one shareholder to purchase the shares of another
- right to receive a dividend
 injunction (including interim relief) to restrain the breach of the
agreement or the articles
- preventing sale of share to third party in breach of pre-emption rights
- TNK-BP
 damages
(2) Unfair Conduct:
(i) unfair prejudice petition
(ii) winding-up the company
(iii) derivative actions
(i) Unfair Prejudice
s.994(1) of the Companies Act 2006 (“CA”):
A [shareholder] .. may apply .. for an order that:
(a) the company's affairs are being or have been conducted in a
manner that is unfairly prejudicial to the interests of [shareholders]
generally or of some part of its [shareholders] … , or
(b) an actual or proposed act or omission of the company … is or
would be so prejudicial.
Aim: to protect minority shareholders where the majority act
in a way that is 'unfairly prejudicial’to their interests.
Examples of unfair prejudice
 exclusion from management (where (legitimate)
expectation of participation);
 diversion of business to another company;
 using company assets for personal benefit;
 award excessive financial benefits;
 abuses of power/breaches of the company’s articles
Unfair prejudice and “quasi-partnership companies”
 Small companies
 Although operating as limited company in practical
terms run as a partnership
 Courts more willing to recognised additional rights of
minority shareholders
 particularly protection from being excluded from
management of the business (without good reason).
Remedies for Unfair Prejudice
s.996, CA:
(1) … the court may make such order as it thinks fit for giving
relief…
(2)
(a)
.. the court's order may:
regulate the conduct of the company's affairs in the future;
(b)
require the company to —
(i) refrain from doing or continuing an act complained of, or
(ii) do an act that … it has omitted to do;
(c)
authorise civil proceedings to be brought in the name and on
behalf of the company by such .. persons and on such terms as
the court may direct;
(d)
require the company not to make any, or any specified,
alterations in its articles without the leave of the court;
(e)
provide for the purchase of the shares of any [shareholders] …
by other [shareholders] or by the company itself …
Costs
 Company cannot fund legal fees of majority shareholders
in unfair prejudice dispute.
 Where necessary, court will grant an order restraining
company from doing so.
 If the minority shareholder is successful, the respondent
shareholders will pay minority’s costs.
(ii) Winding Up the Company
s.122(1)(g), Insolvency Act 1986:
“A company may be wound up … if the court is of the opinion that
it is just and equitable that the company should be wound up”.
Wronged shareholder may apply to wind up the company.
 Must have a ‘tangible interest’ in doing so:
 e.g. when the company is wound up and its debts are repaid,
there will be a surplus
 Does not include:
 benefiting a competing business in which the applicant has an interest
 preventing the company from continuing litigation against him
In practice, often occurs in small businesses (2/3
shareholders working together in a quasi-partnership).
 Court will not wind-up the company if another remedy is
available (e.g. order that other wrongdoer buys his shares) and the
wronged shareholder refuses to pursue that remedy
In practice, often occurs in small businesses (2/3 shareholders
working together in a quasi-partnership).
(iii) Derivative Claims
General Rule:
Only the company (through its board of directors) can bring
proceedings for a wrong done to the company
Exception:
If the wrongdoers are the directors themselves who use
their control over the company to suppress a claim by the
company
s.260(3), CA:
(1)
.. applies to proceedings … by a [shareholder]:
(a) in respect of a cause of action vested in the company, and
(b) seeking relief on behalf of the company.
(3)
A derivative claim … may be brought only in respect of a
[claim] … involving negligence, default, breach of
duty or breach of trust by a director ….
The cause of action may be against the director or another
person (or both).
(4)
It is immaterial whether the cause of action arose before or
after the [shareholder] became a member of the company.
(5)
(a) “director” includes a former director;
(b) a shadow director is treated as a director
Directors’ Duties Under the CA (1)
s.171(1):
“.. [to] “a) act in accordance with the company's constitution: and
(b) only exercise powers for the purposes .. they are conferred.
s.172(1):
“.. [to] act in the way he considers, in good faith, would be most likely
to promote the success of the company for the benefit of its
[shareholders] ….”
s.173(1):
“.. [to] exercise independent judgment.”
Directors’ Duties Under the CA (2)
s.174(1):
“.. [to] exercise reasonable care, skill and diligence.
s.175(1):
“.. [to] avoid a situation in which he has .. a direct or indirect interest
that conflicts … with the interests of the company.”
s.176(1):
“not [to] accept a benefit from a third party conferred by reason of his
(a) being a director, or (b) doing (or not doing) anything as director.”