Developments in Employment Law 2013: An Overview

2013 was a year that kept employment lawyers and HR professionals on their toes with a number of significant developments. The purpose of this article is to give an overview of those key changes. In future reports we will be examining the most noteworthy in further detail.

February kicked off the year with a rise in the cap for unfair dismissal compensation (the “compensatory award”) to £74,200. In most cases, this is the maximum amount the Tribunal can award taking into account the loss suffered by an employee, such as for lost wages. There is a second element to an unfair dismissal award called the basic award, this is a statutory calculation and is currently capped at £13,500, From July 29th, an additional cap was added to compensatory awards so that the maximum compensatory award for unfair dismissal is now the lower of £74,200 or 52 weeks' pay. The cap does not apply to dismissals in relation to whistleblowing, for certain health and safety reasons or where there is unlawful discrimination. This new development should make it easier for employers to quantify the actual value of a claim, particularly as most employees do not earn anything close to £74,200 per year. However Compromise Agreements Ltd, a London based law firm, has sought a judicial review of the one year salary cap claiming that it indirectly discriminates against older people. The argument is that older people are more likely to be unemployed for longer than one year, so the cap restricts their access to justice. We are awaiting an outcome on this.

On March 8th, unpaid parental leave rose from 13 to 18 weeks. This means that any employee who is the parent of a child under the age of 5 may take up to 18 weeks’ unpaid parental leave up until the child’s 5th birthday. The right also applies to adopted children. For those children who are disabled, the right extends up until that child’s 18th birthday and remains unchanged from before.

Redundancy grabbed headlines last year, and not just because of the state of the economy. April 6th saw changes to collective consultation obligations. Previously where an employer was proposing to dismiss as redundant 100 or more employees within a 90 day period, the requirement was to consult for a minimum of 90 days before the first dismissal took effect. From April, the consultation period was reduced to 45 days. This is a significant benefit to employers. 

In May, employers were then thrown into confusion with the Employment Appeals Tribunal case of USDAW v Ethel Austin Ltd (in administration) and another case UKEAT/0547/12; 0548/12 (known as the “Woolworths case”). Section 188 (1) of the Trade Union and Labour Relations (Consolidation) Act 1992 (“TULRCA”) states that the duty to consult applies only where 20 or more dismissals are proposed at one establishment. However, there is a discrepancy between TULRCA and the Collective Redundancies Directive which it purports to implement. The Directive contains no "establishment" requirement.  Consequently the Employment Appeals Tribunal held that, owing to the fact that TURLCA is incompatible with the Directive, the words "at one establishment" must be disregarded for the purposes of any collective redundancy exercise involving 20 or more employees. This is very bad news for employers. 

Previously an employer could avoid collective consultation obligations if it was not proposing to dismiss as redundant 20 or more employees at any one location, and each location could be shown to be a distinct entity. Now if an employer is proposing to dismiss as redundant 20 or more employees across their business as whole, no matter where their staff are located or how disparate, collective consultation will be triggered. 

The Government has been granted leave to appeal against this decision.

June saw a number of significant developments brought in by the Enterprise and Regulatory Reform Act 2013, most notably changes to whistleblowing protection. Employees had increasingly been using the Public Interest Disclosure Act 1998 (“PIDA”) to bring complaints against their employers about breaches to their own employment contracts, rather than reporting serious wrongdoing within their organisation. There was nothing specifically preventing this in the legislation, but it was not the original aim of PIDA. It is an attractive route for employees as whistleblowing claims do not have a compensatory cap nor does the 2 year qualifying employment period to bring a claim apply. In an effort to discourage this practice, PIDA has been amended to make clear that in order to obtain protection under the act, an individual must reasonably believe that a disclosure he or she makes is in the public interest. 

There was a previous requirement that any disclosure had to be made in good faith. In an effort to move away from focusing on the motivation of the individual making the disclosure, this requirement has been removed. Instead, compensation can be reduced by up to 25% where it can be shown that a disclosure was not made in good faith.

There are often genuine concerns from individuals that if they do “blow the whistle”, not only will they be unfairly targeted by their employer, but also picked on by their colleagues. From June, employers can now be held vicariously liable where their employees victimise a colleague because he or she made a protected disclosure. The employer will be deemed to have carried out these acts unless it can show that it took all reasonable steps to prevent the victimisation occurring. 

Also from June, employees no longer need the normal minimum qualifying service of 2 years to be able to claim unfair dismissal where the reason for dismissal is their political opinions or affiliation.

July brought in a whole host of changes, one of the most useful for employers is the introduction of pre-termination negotiations. The aim is to allow an employer and an employee to have confidential discussions; that is “off the record”, to end employment on mutually agreed terms without fear of reprisal in the Employment Tribunal. An employer may have a conversation with an employee about a performance or capability issue, without there being an existing dispute, and raise terms of proposed settlement. These conversations will not be admissible at a subsequent ordinary unfair dismissal hearing. There are a number of pitfalls to be aware of, such as these provisions do not apply to discrimination issues or automatic unfair dismissal (e.g. participation in trade unions activities) but it is nevertheless a useful tool for a manager when used correctly. 

July also marked a historic shift in the employment law landscape with the introduction of fees into the employment tribunal system. When the industrial tribunals were originally established the idea was that it would be informal, cost effective, anyone could represent him or herself and have access to justice. However, as the years have gone by, there is a strong perception that there are many vexatious litigants and the system itself is bogged down. The hope is that fees will encourage the use of alternative means of settlement, discourage unmeritous claims and provide a way of funding the tribunal system.

There are now two levels of claims. For level 1 claims, such as holiday and redundancy pay, the issue fee is £160 and the hearing fee is £230. For level 2 claims, which are the more complex such as discrimination and unfair dismissal, the issue fee is £250 and the hearing fee is £950. There are additional fees for the Employment Appeals Tribunal. There is a widespread remission system in place, so those receiving certain benefits or below a specified income threshold, will not have to pay. This may well apply to many claimants, as a significant number will be unemployed.

It is a little too early to ascertain whether the fee system will lead to a long-term decline in the number of employment claims, however early indications are that it has had an noticeable impact.  UNISON has launched a judicial challenge to the fee regime, and we will keep you posted on developments.

September heralded the introduction of a new type of employment relationship called “employee shareholder”. In return for shares within a company, employees give up some of their employment rights, most notably unfair dismissal (except in health and safety cases, automatically unfair cases, or where the dismissal is discriminatory) and the right to claim a statutory redundancy payment. The first £50,000 worth of shares (value at acquisition) is free from capital gains tax on disposal. So far, take up has been poor but it is hoped that it will appeal to start-ups and high growth businesses. 

October marked the annual increase in the national minimum wage. For workers who are aged 21 or over, the rate is £6.31 per hour. The youth rate for workers who are aged 18 but under 21 is £5.03 per hour. The young workers' rate, for those workers who are aged under 18 but who are no longer of compulsory school age, with apprentices excepted, the rate is £3.72 per hour. The apprentice rate, for apprentices who are aged under 19 and apprentices aged 19 or over but in the first year of their apprenticeship, the rate is £2.68 per hour.

The year concluded with the publication of the draft TUPE amendment regulations.

2013 has been an extremely busy year. In future articles will be exploring the issues raised here in more detail. We will also be looking at some important 2013 cases and their practical impact, such as the calculation of holiday pay and overtime, how to deal with holiday for those who are on long term sickness absence and the right to be accompanied at disciplinary /grievance hearings. 

If you would like assistance or further advice on any of the matters raised in this article, or any other employment issue, please contact Sally Bradshaw.   

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 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.

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.

Shadow Directors - Beware

A recent press release from the Department for Business Innovation and Skills (BIS) reports that a disqualified director has been sentenced to 6 months imprisonment pursuant to s.13 of the Company Directors’ Disqualification Act 1986 (CDDA) for breach of a 7-year undertaking imposed in 2007.  His fellow director was also found guilty of aiding and abetting the breach and sentenced to a 12 month community order and 180 hours of unpaid work.

The two individuals were held to have actively attempted to circumvent the sanctions of a BIS undertaking by allowing the disqualified director to sign off cheques on behalf of the company, take part in the management of the company and intentionally turn a blind eye to his undertaking by allowing the non-disqualified director to register himself as a sole director.

This case undoubtedly serves to send a clear message to all disqualified directors that the Insolvency Service and BIS are monitoring disqualified directors and will not hesitate to take firm action in respect of any breach of undertakings given to protect the public and the business community.  Furthermore, caution must also be paid by anyone who currently is or is looking to work alongside a disqualified director, as they too can be subjected to sanction for the actions of a disqualified “shadow director”.

S.17 CDDA Leave

It should be noted that options are in fact available to disqualified directors who can apply for leave to continue to act as a director under s.17 of the CDDA.  Such an application allows disqualified directors to act as a director of one or more specified companies, despite their disqualification, and opens up opportunities to disqualified directors to continue to run or be involved in the management of a business.  

This area of law is rarely black and white and the need to obtain specialised advice upon a director’s options cannot be underestimated.  For more information on seeking leave applications or defending disqualification claims, please contact Andy Wilks, Partner and head of FWJ’s Director Disqualification team on 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.