It is often thought that a majority shareholder has the right to do whatever they want with a company. However, this is not the case. Some decisions (such as a vote to wind up a company) require a 75% majority vote by the shareholders in order to be valid. In addition, majority shareholders have a legal duty not to exploit ('oppress') minority shareholders in the administration of the company's affairs. When they do, the minority shareholders may have the right to go to court to protect their interests. However, compensation is only payable where the minority shareholders can demonstrate that they have suffered a real financial loss.
A recent case makes the point. It involved a software company that had invested in and worked closely for some time with another, smaller company, to the extent that the latter was largely financially dependent on the former. The software company came to own a minority shareholding in the smaller company. However, following a series of disputes the two parted and the smaller company ultimately arranged alternative financial backing from a third company.
The software company launched proceedings against the smaller company and its directors under Section 994 of the Companies Act 2006 (“the Act”) on the basis that its position as a minority shareholder had been unfairly prejudiced. In particular, the software company focused on a special resolution that had been passed by which its interest in the smaller company, as minority shareholder, was diluted to 5.3%.
The end result was that the third company became owner of the overwhelming majority of the smaller company's shares. In those circumstances, the software company alleged that the directors had breached their fiduciary duty and acted without a genuine belief that the special resolution was in the best interests of shareholders as a whole.
The court found that the directors of the smaller company had breached their duty under Section 171 of the Act in failing to give the software company proper notice of the meeting at which the special resolution was passed. They had been intent on the improper purpose of keeping the software company in the dark until after the special resolution became a fait accompli.
In dismissing the software company’s claim, however, the court found that it had suffered no unfair prejudice. A 76% majority of shareholders had been in favour of the special resolution and it would have passed even had the software company been notified as it should have been. The smaller company had made historic losses and, had it not raised funds from the third company, it would not have survived.
The software company’s minority shareholding thus had no value as at the date of the special resolution. Since it had suffered no loss, the software company had no claim.
For information on this article or other related matters please contact our corporate and commercial team on 0808 166 8827.
 |
 |
 |
 |
 |
 |
|
