Company Shareholders – What’s fair and what’s not?

Under the Companies Act 2006, a company shareholder can petition the Court where the conduct of the company’s affairs have been unfairly prejudicial to that shareholder. It is not necessary to show that the persons controlling the company’s affairs have acted deliberately or in bad faith towards that shareholder, although it helps. It should be noted that the conduct may be unfair but without being prejudicial, or it may be prejudicial without being unfair. The shareholder must show that it’s both unfair and prejudicial.

Common examples of unfairly prejudicial conduct include the following:

• Exclusion from management, when the company has been formed on the understanding of such participation
• The majority shareholder diverting business to another company in which he has an interest.
• The majority shareholder awarding himself additional financial benefit
• Abuses of power.
• A right issue of shares could be capable of amounting to unfairly prejudicial conduct if the minority shareholder is known not to have funds to take up the offer and the rights issue was made for that reason.
• Substantial delays in holding AGMs or to provide accounts to the member
• Serious mismanagement may also give rise to a claim.

In fact, there isn’t a defined list – each case would be tested on its own merits. The Court has wide powers if satisfied that the conduct is unfairly prejudicial, and may make such Order as it thinks fit, This Order can include:

1. Regulation of the conduct of the company’s affairs in future.
2. Requirement of the company to refrain from doing the act complained of.
3. Authority to bring Court proceedings in the name of the company; and
4. Provision that one party buy the other party’s shares. This is the most commonly sought relief. In such circumstances where an Order is made for one party to purchase the other party’s shares, there is no universal rule as to the appropriate method for valuing those shares. However, the shares should be valued at the date of the Court Order, although the Court could deviate from this principle, and it would normally state that the valuation should be unaffected by any reduction in the company’s value caused by the unfair conduct.

Bill Watterson’s cartoon character Calvin said “Life is full of surprises, but never when you need one”.  However, when they do arise, the Courts may be able to help.