Protecting Minority Shareholder Interests

A minority shareholder is a member of a company who holds less than 50% of the shares. Inevitably, he is in a vulnerable position, as he does not control the company.

In order to protect the interests of minority shareholders, Section 459 of the Companies Act 1985 allows them to apply to the court for an order, where they believe that there is, or has been, unfair prejudice in relation to their interests.

This does not necessarily mean that a minority shareholder has to prove that the value of his shares has been adversely affected, but non-payment of dividends or exclusion from active participation in the management of a company may justify a claim.

Under Section 461 of the Act, the court has wide discretionary powers to act, if it finds that a claim of unfair prejudice has been established. It may order that conduct of the company’s affairs be regulated in future, or require the company to refrain from doing or continuing something complained of.

Usually, however, the court will direct that the company, or certain members of it, should purchase the share of the minority shareholder. This is an acknowledgement by the court that the working relationship between the parties has broken down and that it will no longer be possible for them to continue to run the company together.

For this reason, the court is increasingly reluctant to become involved in personal disputes between shareholders, being more inclined to order that one party sells its shares to another.

Assuming that the parties choose to settle a dispute of this kind themselves, there may still be disagreement as to the value to be placed on the shareholding to be sold. The court will usually find that a minority shareholding should be valued on a discounted basis, unless there are exceptional circumstances or the company is a quasi-partnership.

This approach was confirmed in a recent case, even though the minority shareholder held 49.96% of the company’s shares.

The Court of Appeal has confirmed that the remedy available under Section 459 should not be used by a minority shareholder, in an attempt to create an automatic exit route from a company, or with a view to obtaining the highest possible price for the sale of his shares.

It appears, therefore, that the court is increasingly unwilling to become involved, where parties are simply using it as a forum to argue their differences, or in a situation where personal relationships have broken down. In such cases, it is likely to be best for the parties to try to agree a share sale and valuation.

Consideration should always be given to the preparation of a shareholder agreement, regulating the shareholder relationship and providing an exit procedure, in the event of dispute or deadlock between members.