THE INDEPENDENT MAGAZINE FOR LEGAL PROFESSIONALS
feature archives



 

 


Are You In A Minority?

Jeremy Rowe, senior manager in the Forensic Department at Pierce Chartered Accountants examines some problems and issues facing minority shareholders involved in limited companies disputes.

 

TReporting to the Courts and advising solicitors I am frequently presented with problems and issues relating to minority shareholders in limited companies.

Such issues include valuing a minority interest, reclaiming shares from a minority shareholder or alternatively advising minority shareholders of their rights.

The disputes and problems in respect of minority shareholders generally arise as a result of the various rights and benefits which attach to different shareholdings. Such rights derive from the powers endowed directly or indirectly under the Companies Acts and/or the company's Articles of Association.

For the remainder of this article I shall assume that the company in question has only one class of share. It should be appreciated that in practice a company may have more than one class of share. It may be of little benefit owning 999 "A" ordinary shares as against one "B" ordinary share if the single "B" share has all the voting rights.

Let us assume that a company has three shareholders who are each directors and each hold 100 shares. They formed the business together many years ago and have enjoyed reasonable profits in recent years. However due to a dispute over the management of the company the directors are constantly arguing and it has recently come to a head. Two of the directors "A" and "B" are siding against the third, "C", making life impossible for "C".

If A and B wish to get rid of C they need to make him a reasonable offer for his shares and agree a compromise agreement in respect of the transfer of his shares and his resignation from the company as a director and employee.

How should the shares be valued?

Ordinarily a minority holding would be valued at a substantial discount to the pro rata value of the company as a whole. This is because a holding of less than 50% of the issued shares means that ordinarily C cannot block any ordinary resolutions proposed by the other shareholders who equally could block an ordinary resolution proposed by C.

C does have some limited rights in that he can block a special resolution which requires a 75% majority of those voting to succeed.

The more common circumstances in which Special Resolutions are required are as follows:

· alteration of the Articles of Association
· change of company name
· members voluntary winding up
· purchase of own shares out of capital
· court winding up.


Cont/d…..


Additionally C may insist on the accounts being audited if the company would otherwise qualify for exemption and is entitled to receive notice and attend all general meetings. This can be a continuing nuisance to the other directors and shareholders and leads to interesting meetings if the dispute cannot be reconciled quickly.

Thus C has some "negative" control by being able to block certain resolutions but otherwise may be excluded from having any direct influence over the management and control of the company including the level of dividends paid each year.

Thus if the company were to be valued at say £900,000 then the pro rata value of a one third holding is £300,000. This may then be subject to a significant discount of say 60% to recognise the lack of control exercisable by C providing a net value of only £120,000.

However would this be fair and equitable for C?

Quasi Partnership

The Courts have examined circumstances akin to the above and decided not. The Courts have compared such companies to partnerships leading to the term "Quasi Partnership".

The concept of quasi partnerships was first established in the case Ebrahimi -v- Westbourne Galleries Ltd [1972] 2 ALL ER 492 in which Lord Wilberforce observed three typical elements oe of the shareholders shall participate in the conduct of the business.

- Restrictions on share transfers.


In addition Lord Wilberforce suggested there may be other typical elements, in particular the provision of capital by all or some of the participants.

The concept was confirmed in Re Bird Precision Bellows Ltd [1984] 3 ALL ER44. Nourse J referred to Lord Wilberforce's speech in the previous case. He stated that where a business could just as easily have been carried on in partnership then "it is certainly usual to describe that kind of company as a quasi partnership".

If the company is treated as a quasi partnership then the value of each shareholding is generally valued as a direct proportion of the value of the company as a whole.

In the example above we valued the company as a whole at £900,000. On the face of it the company appears to operate as a quasi partnership and hence C's shareholding of one third may be valued at £300,000.

 

What happens if the Majority Shareholders do nothing?

When faced with the above arguments the majority shareholders may decide they do not wish to buy out C as the price is too high. Unscrupulous majority shareholders in such circumstances may decide to make life difficult for C in the hope he will eventually leave of his own accord on reduced terms negotiated from a position of weakness.

Is there any protection for C if the other shareholders follow such a course of action?

This is a relatively common problem and yes there is a remedy for C. Section 459 of The Companies Act 1985 provides that a company may apply to the Court for an order on the grounds that the company's affairs are being conducted in a manner which is unfairly prejudicial to the interest of some or all of the shareholders.

Under Section 459 the Court can provide a number of remedies. Such as to:

i) regulate the conduct of the company's affairs in the future

ii) provide for the purchase of the shares of any member by other members or the company itself

iii) require the company to be wound up.

The Court has wide ranging powers under Section 459 which should enable C to obtain a just and equitable resolution to his problems.

However the costs and inevitable delays of such action mean that a negotiated settlement is far better if this can be achieved. In my experience early advice from professionals experienced in such matters is vital. Often the threat of action under Section 459 can be enough to ensure all parties act sensibly and all parties achieve what they want. In the example above A and B can rid themselves of C whilst C can obtain a fair price for his shares.

Finally when dealing with minority shareholders care should always be taken to examine the company's Articles of Association to determine if there are any specific clauses dealing with the rights of individual shareholders. Similarly you should also ask whether there are any shareholders agreements which may regulate the conduct of shareholders.

However even where the Articles of Association prescribe a particular course of action, a Section 459 remedy is still available which can be used to override such provisions if they are considered unfairly prejudicial.

Jeremy Rowe is a senior manager in the Forensic Department at Pierce Chartered Accountants in Blackburn, Lancashire. Jeremy is part of a team of five forensic accountants working in the areas of personal injury, matrimonial finance, commercial litigation, fraud, criminal work. Please telephone Jeremy Rowe on 01254 688100 if there are any matters you wish to discuss, alternatively you can email him
j.rowe@pierce.co.uk..

Jeremy Rowe

   
Search WWW Search The Barrister