Prepacks and reporting to creditors: What does the new SIP16 mean to you?

The new Statement of Insolvency Practice 16 (SIP 16) “Pre-packaged sales in administration” comes into force on 1 November 2013.

Insolvencypractitioners who negotiate sales of all or part of a distressed company’s business and assets with a proposed purchaser prior to their appointment, with a view to the sale being completed on or shortly after their appointment, will be familiar with the requirement to report on the terms of the sale to creditors: the first version of SIP16 has been effective since 1 January 2009. However unsecured creditors have continued to criticise the process of pre-packs and argue that the information about the sale is too little, too late. New SIP 16 aims to address some of this criticism.

The importance of complying with SIP 16 is well understood by insolvencypractitioners and the emphasis of new SIP 16 is to ensure that creditors and other interested parties retain confidence in the professionalism and independence of insolvency practitioners and the benefits of using the administration process. To ensure this independence, insolvency practitioners should take care not to advise the directors but recommend the directors obtain their own professional advice about the options facing a distressed company.

It is clear that the new SIP 16 is looking for greater transparency and accountability from insolvency practitioners in their notification to creditors and the administrators’ proposals. The list of information to be supplied to creditors has not substantially changed, however insolvency practitioners will be required now to analyse and evaluate the information. For example, what were the outcomes of any consultation with major creditors or any marketing activities?

To address a major concern voiced by creditors, there is considerable focus on the price paid for the business and assets and their valuation. The basis of the valuation and the reasons for adopting it must be given. Any discrepancy between the valuation and the sale price must be explained.

New SIP 16 also aims to accelerate the information process for the benefit of creditors. The present requirement to provide a detailed explanation and justification of the prepack sale has been given a new deadline of within 7 calendar days of the transaction. If this was not challenging enough, insolvency practitioners must add their confirmation that the intended statutory purpose can be achieved by the prepack sale and that the price is the best that could reasonably be obtained in all the circumstances. The increased transparency of the valuation process will be of great assistance to insolvencypractitioners in the making of these judgments.

More explanation has to be given for any gaps or delays in the information to creditors: if no marketing was done, a reason must be given. If the first notification is not given to creditors within 7 days of the sale, the reasons for such delay must be supplied.

The other common criticism of prepack sales, that the purchaser has been involved in the business being sold, is addressed by various additional disclosure requirements contained in the new SIP 16. The importance of the company’s directors obtaining their own independence advice throughout the sale process is emphasised in SIP 16.

The FWJ Insolvency team has considerable experience of prepack sales and can advise insolvency practitioners or purchasers on all aspects of any insolvency sale or creditors who have any concerns about the conduct of a business sale. FWJ can also advise the directors or former directors of a distressed business throughout all stages of any insolvencyprocess, upon any proposed sale or in connection with any investigations into their conduct as directors or claims against them.

Does Providing Professional Advice to a Limited Company put the Advisor at Risk?

The answer is generally no. Giving advice in a professional capacity to a limited company does not normally make someone a shadow director. However, you may be more at risk in certain situations - for example as an in-house lawyer or a financial adviser.

To minimise risk liability a person concerned should:

1. Ensure that all business decisions are properly taken by the board;

2. Ensure that any advice given does not take the form of a “dictat”;

3. Avoid taking control of the financial affairs of the company you are giving advice to;

4. Always make sure that minutes of board meetings reflect that decisions have been made by the board;

5. Always ensure the minutes reflect the capacity you are attending in (i.e. not as a director – for example as an advisor to the board).

There have been instances where management consultants have been disqualified and held to be de facto directors but the above should help avoid this situation arising.

What is meant by being involved in the “management” of a company?

The meaning has been interpreted extremely widely. There are no hard and fast rules as to what it means as every company is run differently. The courts look at matters on a case by case basis to determine whether a person’s role is effectively involved in the management of a business rather than that of an employee.

However, there are indicators that a person is acting beyond the remit of a mere “employee” and is effectively involved in the management of a business:

(i) Being a signatory on the company bank account;

(ii) Attending board meetings;

(iii) Being involved in strategic planning;

(iv) Being the “go to” person for customers and clients;

(v) Otherwise making decisions that no other person can make and/or having no one to account to.

What is a Director?

A “Director” is not generally defined in legislation, but relates to any person occupying the position of director by whatever name called. This can include senior managers, partners, trustees or governors. Conventionally, a director appointed to a company’s board and registered at Companies House is referred to as a De Jure director.

A director will always include non-executive directors who, although not having a role in the company’s day-to-day affairs, have identical responsibilities to the executive directors (i.e. the active directors) in respect of company affairs and duties under the Companies Acts.

Other individuals may also be defined as a director and therefore be subject to the same responsibilities and requirements of ordinary De Jure directors. These generally fall into one of two definitions, either a “Shadow Director” or a “De Facto Director”.

“Shadow Directors” are specifically included within the definition of a director by statute, which describes such persons as, “a person in accordance with whose directions or instructions the directors of a company are accustomed to act,” although this excludes roles where the directors acted in reliance of an individual acting in a professional capacity (e.g. an accountant). “De Facto Directors” are not generally defined by the legislation but are well recognised in common law as comprising those individuals who act as a director even though not validly appointed as so.

The Importance of a Shareholders’ Agreement

Year on year many small limited companies are successfully set up by family members, friends and former colleagues with great business ideas, yet for some such happy beginnings may not last. Disputes may arise shortly after the company’s birth or many years after, often as a result of changes in the strategy and management of the company.  Ranging from the differing or competing business interests of individual shareholders to the implementation of a contentious dividend policy creating an contentious salary disparity between shareholders, these disputes can have serious financial implications and can cause irrevocable damage to a small business.  Despite this fact, the drafting of a shareholders’ agreement, the pre-nup of the corporate variety, is often way down the to-do list when individuals decide to start-up a company.  Ironically, a well drafted and structured shareholders’ agreement can provide a company and its shareholders with the very protection and flexibility it needs to flourish and grow in a dispute free environment.

At FWJ, we are seeing an increasing number of boardroom disputes or disgruntled shareholders as businesses face ongoing difficult trading conditions.  These conflicts between directors and/or shareholders can seriously destabilise a business by distracting valuable management time away from the essentials of attracting customers, delivering the product and maintaining cashflow. We can, of course, assist parties in progressing a claim against a business partner, be it a co-director, another shareholder or as an investor against a single director or the entire board, or by helping parties arrive at a satisfactory settlement of any such dispute, but these actions can be slow, divisive and expensive.  As with your domestic arrangements, forward planning is the answer. So what is the best preventive treatment?

When setting up a new business, or becoming involved as a new director or shareholder-investor of an existing business it is always best practice to record in writing the internal agreements that will govern the relationship between you: how are the decision making powers divided between you?  How are they challenged?  How can you replace a director or shareholder?  How do you get your value out of the company in future? No-one wishes to appear to be uncommitted or planning for failure, but time and again, these questions, if not thought about and the parties’ agreements recorded, will have the capacity to cripple a business if they occur at a later stage.  As financial pressures on a company or its directors or members increase, so these issues become more prominent.  There is no need to wait until a problem actually occurs; would your company benefit from an interim health-check?  A full, open discussion between all the relevant parties may be difficult at the outset, but could result in a robust organisation containing committed and confident members who trust each other and are motivated to maintain their investment of time, money or skills for the greater benefit of the company and its trading counterparties.

If you are about to enter into a new or significant commercial relationship or, as a financier, you are looking at taking on a new client, or simply as part of your regular client audit, ask if they have adapted their articles to reflect how the business is intended to run in reality, rather than just adopting the statutory Model Articles or some company incorporation agent’s standard form that does not take into account this company’s specific circumstances or needs.  Is there an agreement between the shareholders governing the scope of shareholder influence and control of the distribution of the company assets either on an ongoing basis or on a sale or break up?  From a financier’s objective, would you be more attracted to a business where the owners and management demonstrated in their business plan and constitutional documents that they were well prepared and forward-looking in their housekeeping as well as their commercial thinking?

FWJ’s Shareholders and Directors Advice team can assist your company, or your client,
in developing structural documents such as modified articles of association or shareholder agreements suitable for your business needs. It is recognised that further capital outlay, at this difficult time, may not be attractive, but our experience of dealing with disputes where no prior agreements are in place indicates that there is merit in making this investment. Whilst having a shareholders’ agreement is not the complete inoculation against the problem, such an agreement, properly drafted, can help structure discussions between parties and assist in the effective negotiation of a pragmatic solution to enable the company to survive the difficult market conditions.

For more information on  the drafting or interpretation of shareholders’ agreements or any of above, please feel free to contact Andy Wilks  0207 841 0390.

Directors' Duties – The Basics and the Risks

Directors' duties were codified by Part 10 of the Companies Act 2006:

1. Chapter 1 of Part 10 (sections 154-169) sets out the laws relating to company Directors (appointment, register and removal).
2. Chapter 2 of Part 10 (sections 170-180) sets out the statutory duties on Directors.

The provisions of the Act extend to all Directors, including shadow Directors (being those who are not appointed Directors but whose decisions the company follows) and de facto Directors (those who act as Directors although they have not been formally registered as a Director at Companies House).

The main statutory duties of a Director under the Companies Act 2006 are as follows: 

1.         Section 171 – Duty to act within powers – Directors should not exceed the powers conferred on them by the company’s Articles of Association nor should the Company exceed (at the Director’s direction) what it is allowed to do in its Memorandum of Association.

2.         Section 172 – Duty to promote the success of the company – a Director must act in the best interests of the company and for the benefit of its Shareholders having regard to the likely consequences of any decision. This includes considering the interests of employees, business relationships with suppliers, customers and others, the impact on the community and environment, maintaining the reputation of the company and acting fairly between members of the company. 

3.         Section 173 – Duty to exercise independent judgement – As the company is a completely separate entity, its Directors must consider all decisions independently from their own interests, any professional advice received or any third party influences.  Directors have a duty to personally consider whether each decision taken is in the company’s best interests, rather than just relying on third party advice or influence as authority for their subsequent decisions. 

4.         Section 174 – Duty to exercise reasonable skill and care and diligence – Directors should act in a manner that any reasonably skilled Director would generally act in their particular area of management.  Directors should attend board meetings (or as many as reasonably possible) to ensure good corporate governance and supervision of their fellow Directors and to ensure the correct management of the company’s affairs.   Ignorance of decisions taken and lack of participation is often the catalyst for Director disqualification proceedings where Directors fail to act on information they ought reasonably to have been aware. 

5.         Section 175 – Duty to avoid conflicts of interest - Directors must avoid situations where they have or could have a direct or indirect interest that conflicts or may conflict with the interests of the company.  Where a conflict of interest may exist, the Director must ensure that the company’s interests prevail and a common way to avoid issues over conflicts is to disclose all matters to the board of Directors so that the company (acting through its Directors) can make a decision with all the facts in front of them (see Section 177 below).  This may mean that conflicted Directors do not participate in decisions where their conflict of interest exists.   

6.         Section 176 – Duty not to accept benefits from third parties – This section extends Section 175 as Directors must not prioritise their own interests above that of the company's when dealing with company business and property and must not, for example, make a secret profit from any undisclosed and unauthorised transaction or divert work away from the company for their own benefit. Any benefits obtained in this way may have to be accounted for to the company.  Furthermore, Directors should not accept loans or the benefit of guarantees from the company.  This duty can quite often overlap with a Director’s duty to promote the success of the company (Section 172 above). 

7.         Section 177 – Duty to declare the nature and extent of any interest in a proposed transaction or arrangement – Directors must disclose all interests in relation to all transactions (eg property, information, shares held etc) irrespective of whether or not the company could take advantage of it.  Directors should again obtain board and Shareholders approval, where required, before steps are taken.  Again, this extends the other duties in Sections 171 to 176.

8.         Insolvency - Whilst a Director is generally under a duty to act in the best interests of the company and its Shareholders, the moment the company is deemed to be insolvent, they are under a legal duty to protect the interests of the creditors instead of the Shareholders and the company must then function for the primary purpose of getting the best return for creditors. 

Risks Faced by Directors for Breach of their Fiduciary Duties

We list below the main claims for personal liability faced by Directors.

1.         Wrongful Trading - This is when a Director continues to trade or enter into contracts after he/she knew or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation.

2.         Fraudulent Trading - This is when the Director carries on business with the intention to defraud creditors or for any other fraudulent purpose, eg taking deposits for orders they know the company cannot fulfil or entering into contracts when the Director knows there are insufficient funds to conclude the contract.

3.         Misfeasance - This is a breach of the fiduciary duties of care owed by a Director, as detailed above, e.g. wrongly taking out money from the company, using company money for matters not associated with company business or directing payment to associated parties.  Such a claim is normally issued to seek recovery of the losses arising from the misfeasance from the Director(s).

4.         Preferences – This applies where Directors make payments or transfer assets to one creditor (or a group of creditors) in preference to the remaining creditors.  Whilst such a claim would be issued against the Director personally, a liquidator or administrator can seek to reclaim such monies as a preference transaction from the recipient directly (together with their legal costs, if necessary).

5.         Transactions at an undervalue - Where the company transfers assets for significantly less than their market value, the undervalue amount can be reclaimed by a liquidator or administrator in a similar manner to a preference transaction. 

6.         Voidable transactions – This is another antecedent transaction (i.e. one occurring pre-insolvency) which allows the reclamation or setting aside of any transaction carried out between the date of the presentation of a winding-up petition and the final winding-up order.  This includes share transfers. 

7.         Transactions defrauding creditors – This provision applies to both companies and individuals where a transaction at an undervalue has occurred where it can be demonstrated to have occurred with the intention of putting such assets beyond the reach of creditors.  Directors can be liable under this section where they transfer company assets, either to a third party or for their own benefit.  This provision enables the Court to set aside the transaction, make a compensatory award or any other order deemed appropriate to protect the interests of the prejudiced creditor(s).

8.         Director Disqualification – A Director can be disqualified from acting in the promotion, formation or management of a limited company where it can be established that the Director’s conduct evidences them to be unfit to act as a Director.  The grounds of disqualification are very wide and unrestricted, in a similar manner to claims for misfeasance (see above).  It should be noted that, following disqualification, there is a statutory provision enabling disqualified Directors to seek leave to act as a Director of a specified company(s).

For more information, please feel free to contact Partner Andy Wilks Shareholder Disputes team on 0207 841 0390.

Avoiding Deadlock – Court Intervention or Shareholders’ Agreement?

If the attendance of a specific director is a requirement of a company’s constitution, can a decision made at a directors’ or shareholders’ meeting be valid if that director is not present?  Further still, can that director’s removal as a director of the company be possible without their attendance?  

Simply put, the answer to this question is no, which leads to a situation in which it may be impossible to remove an uncooperative director without breaching the company’s constitution, resulting in a deadlock situation.

Perhaps unsurprisingly this situation is commonly encountered by many small and often family run businesses and, whilst understandable that a director wishes to ensure that the management and strategy of the company remains under their control and that their interest remains secure, the situation becomes complicated when director relations start to fall apart.

Court Intervention

Section 306 of the Companies Act 2006 provides some comfort to companies, as a court may, at the request of a director or shareholder, order a general meeting to be called, held or conducted in any manner it thinks fit where it is impractical to call or conduct the meeting in the manner prescribed by the company’s articles (as supplemented by the Companies Act 2006).  Furthermore, the court has the general power to make any necessary directions to give efficacy to the operation of the company, which may include amending a company’s quorum from two to one, amongst other things.

Smith v Butler & another [2011] EWHC 2301 (Ch)

The case of Smith v Butler successfully illustrates s.306 in action.  The claimant, Smith, was the Chairman of a company and held 68.8% of the shares whilst the Managing Director, Butler, held the remaining 31.2%.  The quorum requirement for general and board meetings was two, one of which had to be Smith unless he waived the requirement.  In 2011 the parties fell out with suspicions of fraud being raised by Butler against Smith culminating in Smith wanting to appoint a new CEO and Butler seeking to suspend Smith as a Director.  Butler proceeded to hold a meeting in which Butler and a third director signed a resolution of the board authorising the suspension.  Following this, Smith requested that a general meeting be held in order to remove Butler and the third director as directors, Butler’s refusal to attend the meeting led to the meeting be held inquorate causing Smith to make an application to court to seek an order that a general meeting be called with a quorum of one.

It was held by the court that a quorum of one would be allowed as the Articles were designed to give excessive protection to Smith who could not be dismissed as a director.  As a point of interest, the court also commented that Butler, as a minority shareholder, could in fact have commenced unfair prejudice proceedings and/or sought permission to commence a derivative action.

Conclusion – the need for a Shareholders’ Agreement

Whilst this case is an example of court intervention in a deadlock situation, the reality is that a s.306 application is often an option of last resort, as the courts are generally hesitant to interfere in company matters unless absolutely necessary.  A preferable and potentially more cost effective option would be for a company to invest in the drafting of a clear and concise shareholders agreement to strike an effective balance between protection and flexibility and which contains specific provisions dealing with potential deadlock scenarios. This would enable the company to function successfully and thrive irrespective whatever the situation.

For more information on the drafting or interpretation of shareholders’ agreements or any of above, please feel free to contact Partner Andy Wilks  on 0207 841 0390.

Decision making – shareholder trumps director

It is fairly commonplace for a director to hold a dual role within a company, acting as director and/or shareholder, officer or representative of a shareholder. These roles should for the most part align with one another, however, if these dual interests come to conflict, the importance of reconciling the terms of any shareholders’ agreement with the company’s articles of association soon becomes paramount.

The recent case of Jackson v Dear and another [2012] EWHC 2060 (Ch) examines the position of parties to a shareholders’ agreement who are also directors of that same company and are accordingly subject to the usual fiduciary and directorial duties.

Facts

The case concerned three individual founders of a company who together owned a second company, which held all the voting shares in their founding company. The Claimant, being one of the founders, entered into a shareholders’ agreement with the other founders, which provided for (amongst other things) his appointment as director of both the founding company and the second company, terminable upon the occurrence of agreed termination events. The Articles, however, provided for the removal of a director by notice given by two or more other directors. This latter power was invoked by the 2 remaining founder Defendants on the premise that they viewed the Claimant to be unsuitable as a director and as such were fiducially required to remove him.

Essentially, the Defendant directors sought to remove the Claimant in their capacity as directors through the use of the company’s Articles thereby actively circumventing their commitment to the Claimant as parties to the shareholders’ agreement.

Decision

It was held by Justice Briggs that it was an implied term of the shareholders’ agreement that the Claimant would not be removed unless there was an event justifying termination under that agreement. Furthermore, the Claimant, as a contracting party, was entitled to assume that the other parties would not voluntarily render the agreement inoperative. Significantly, Justice Briggs went on to outline three alternative methods to avoid a breach of fiduciary duty on which the Defendants’ case so heavily relied, as follows:

1.      By making the second company sanction the breach of fiduciary duty in not removing an allegedly unfit director, or

2.      By the Defendants’ giving a direction to the board not to remove the Claimant under the Articles of the second company; or

3.      By amending the Articles of the founding company so as to disable the Article against the Claimant, save for a Termination Event occurring.

Conclusion

Crucially, in as much as this case essentially reconciles the current case law relating to implied terms and interpretation of contracts, it also acts as a caution to all directors who may be under the illusion that, by regarding themselves as two separate entities (being director and shareholder), they can advantageously rely upon a company’s Articles to circumvent onerous clauses within the shareholders’ agreement. It is instead the case that, unless there’s an effective carve out in the shareholders’ agreement; the contract principle that a party must do nothing of his own motion to render an agreement inoperative, will prevail.

For more information on the drafting or interpretation of shareholders’ agreements or any of above, please feel free to contact Partner Andy Wilks, 0207 841 0390.

Common FAQs for Shareholders and Directors

How do Shareholders’ and Directors’ roles differ?

A company is an independent legal entity separate from its Directors and Shareholders.

A Director of a company is responsible for directing its affairs on a day-to-day basis, promoting its success and protecting all stakeholders (i.e. Shareholders, employees, the company itself and, in certain circumstances, creditors).  

The Shareholders of the company have an interest in the equity (i.e. the net value of its assets), which they own in accordance with the shares allocated to them.  They have certain powers under the relevant legislation in terms of how their decisions (referred to as “resolutions”) are reached, how the structure of the company is managed (including its funding and Directors’ appointment) and how they can deal with company assets (e.g. payments to Directors).  The Shareholders otherwise have no role in managing the company or determining its direction, other than as determined in the company’s constitution (i.e. the Memorandum and Articles of Association), any Shareholder’s agreement and by way of resolutions passed at general meetings of Shareholders.

Directors must call an Annual General Meeting of Shareholders (“AGM”) but there is also an ability for Shareholders, of the requisite number, to request a meeting outside of these time limits during the year – this is called an Extraordinary General Meeting (“EGM”). Shareholders’ decisions are normally reached by reference to the Shareholders present (or voting by a nominated proxy, usually the chairman) voting on specific decisions and such decisions are passed either by an Ordinary Resolution (requiring 50%) or a Special resolution (requiring 75%).

What happens if Directors or Shareholders disagree on a decision?

The Company’s Articles of Association and/or Shareholders’ Agreement sets out the rules as to how company decisions can be taken and what Directors can do as part of their day-to-day governance of the company’s affairs.  

Beyond the day-to-day decisions, the majority of decisions made by a company (e.g. the removal of a Director and the approval of “conflict” situations) require a simple majority (i.e. 50.01%) of Shareholders present at a general meeting to agree to pass an “Ordinary Resolution”.  

In the event that a Director or Shareholder disagrees with a decision made at a general meeting, it is first necessary to consider whether correct notice of the meeting was provided, all other formalities complied with and whether the appropriate Shareholder Resolution was passed to validate the decision being complained of.  In the event that this is not the case then the decision (i.e. the Resolution) may be invalid and the decision will not stand.  The status quo will therefore continue until a valid Resolution is passed and a decision made. This can raise difficulties in practice and specific advice should be sought on the relevant facts.

How can a Director be removed from a company?

The most important point to note is that the removal of a Director requires Shareholder support (save a decision to demote a Managing Director to Director).  At a general meeting, Shareholder support of in excess of 50% (i.e. an Ordinary Resolution) is normally required for a decision to be taken to remove a Director from a company (unless varied by the Shareholder Agreement or Articles of Association).  It should be noted that 28 days notice (referred to as “Special Notice”) must be given to the Director of the resolution to remove him/her and, in the event that sufficient notice is not provided, the resolution to remove the Director will be invalid.  Upon receipt of notice, the Director is entitled to distribute to Shareholders his/her written representations contesting his/her removal as a Director.  The Director is also entitled to make verbal representations at the general meeting itself (note that an actual meeting is required and that the resolution to remove a Director cannot be passed by way of written resolution in lieu of a meeting).  Following representations in defence of his/her position, the Director will or will not be removed depending on whether the requisite majority of Shareholder votes is cast in favour of the Resolution to remove the Director.

What are a Director’s fiduciary responsibilities?

Directors have a number of legal responsibilities and duties to the company, primarily stemming from a general duty to act in good faith in the best interests of the company.  More specifically, Directors are required to act within the powers conferred upon them by the company’s Articles of Association; they must promote the success of the company and exercise reasonable skill and care and diligence in their particular area of management; they must avoid conflicts of interest (save those declared and approved at a general meeting) and they must not accept personal benefits from third parties without authorisation at general meeting (subject to any alternate provisions within the Articles of Association).

How to resolve a “deadlock” situation?

A deadlock situation commonly occurs in small or medium-sized businesses under the control of only a few Directors and/or Shareholders.  

Occasionally, the Directors may have a disagreement on certain decisions and, as a result, the board is split 50:50 and the decision is “deadlocked”.  It is not uncommon to have a provision in the company’s Articles of Association to provide for this situation and provide a casting voting to one of the Directors (usually the chairperson) or alternatively to provide for a third party to intervene.  If there is no such provision then the board is deadlocked and this will prevent the decision being decided upon.

In such a situation, the Directors should then turn to the Shareholders who have wider powers to terminate a Director’s appointment or pass Resolutions on specifically addressed matters.  However, especially with a small business, an identical situation can occur where the same individuals are both Shareholders and Directors with no other parties involved.  A deadlock situation therefore continues.

The solution to a Shareholder deadlock will again be dependent on the company’s Articles of Association and any Shareholder agreement.  If there is no provision to deal with this deadlock and no alternative provision for (e.g.) formal mediation, then the parties must look to negotiation to resolve the problem or, ultimately, their legal options. 

If the Shareholders must resort to a legal route to settle the dispute or recover their interests (sometimes as a minority shareholder – see below) then the available options include seeking to wind-up the company, issuing a petition against a Director for unfairly prejudicing a Shareholder right or seeking a derivative claim on behalf of the company (derivative meaning that the authority derives from your equitable interest in the company). 

What rights do I have as a minority shareholder?

Any shareholder with at least 5% shareholding can, subject to a company’s Articles, require the board to call a general meeting of Shareholders and to propose a Resolution for consideration by the Shareholders at a general meeting.  The decision, whether requiring an Ordinary or Special Resolution, will or will not be passed according to shareholder support.

In the event that a minority shareholder’s rights are being breached, they are entitled in the appropriate circumstances to apply to the Court for an Order stipulating that the Company has acted or continues to act unfairly (Section 994 of the Companies Act 2006).  Such a Petition is commonly referred to as an “Unfair Prejudice Petition”.  Dependent upon the facts, such a Petition, if successful, may give rise to an order giving such relief as necessary in respect of the matters complained of.  This includes orders made to regulate the company’s affairs, require the company to do or refrain from doing the action(s) complained of, authorise proceedings to be issued on behalf of the company, direct alterations to the company’s Articles of Association or provide for the purchase of shares by other Shareholders.

Where appropriate, minority Shareholders can also apply to the Courts for a company to be wound-up upon the grounds that it is just an equitable to do so (Section 122 of the Insolvency Act 1986).  Such a Petition can lead to the company being wound-up in the event that no alternative solution exists, including the purchase by the company of the petitioning Shareholder’s shareholding.  However, great caution needs to be taken in such matters as the Court is hesitant to allow minority Shareholders to disrupt a company’s business in contravention of the majority’s rights and so will only consider this an option of last resort.

Legal action can be taken against the Directors personally in respect of negligence/breach of a Director’s fiduciary duty by way of a derivative action (i.e. an application issued in the name of the company itself) against a Director personally.  Such an action can result in the Director being forced to compensate the Shareholder or the company or, if merited, the Director’s removal as Director.  

As a general note, other than as described above, minority Shareholders have a limited entitlement to affect the company process through day-to-day communication with Directors and/or Shareholders (especially in smaller businesses with common Directors and Shareholders) and to criminal redress through the police or the use of a mediation service, where applicable. 

For advice or further comment on the above, please contact Partner Andy Wilks on 020 7841 -390.