Shareholders are often involved in disputes within the companies of which they are members.
Under English law, if shareholders wish to complain about perceived irregularities within the company, there are three main ways in which they can do so: (i) by way of contractual rights arising from the company's articles of association; or (ii) by way of a statutory remedy such as (1) a derivative action or (2) an unfair prejudice claim.
i Contractual Rights.
Section 33 Companies Act 2006 (‘CA’) states that “The provisions of a company’s constitution bind the company and its members to the same extent as if there were covenants on the part of the company and of each member to observe those provisions”.
The significance of this section is that the company's constitution (defined by section 17 of the Companies Act 2006 as its articles of association and its resolutions) binds the company to each of its members and the members of the company to each other. It should be noted that section 33 of the Companies Act 2006 only applies where it relates to the rights of members (i.e.: the right to a dividend once declared; the right to vote at meetings; the right to share in the surplus capital on a winding up; the obligation to pay for shares issued).
However, in the event of a claim for breach of a membership right, the action is brought by the shareholder for breach of contract and any order obtained by the member is enforceable by the shareholder and binds the company.
Therefore, where no membership right is at issue, section 33 cannot be relied upon. In Beattie v E. and F. Beattie Ltd [1938] Ch 708 the claimant was both a director and a shareholder of the company and it was held that a dispute between a director and the company for the repayment of sums improperly paid to the director was not a dispute relating to the director's capacity as a shareholder but only as a director. Therefore, he could not enforce a provision in the articles requiring the use of arbitration to resolve disputes between the company and its members.
ii Statutory Remedies:
- Derivative Action
On the other hand, if the company has suffered a wrong, a shareholder can seek redress on behalf of the company.
In the past, a shareholder was often unable to sue where a wrong had been done to the company because (i) the company is a separate legal entity from its members - therefore the company would have to be the claimant if a wrong had been done to it; and (ii) the decision whether or not to sue had to be taken either by the directors or by the members of the company in a general meeting. Thus, a minority shareholder was always in a weak position and unable to sue the wrongdoer on its own unless it had either a majority at a general meeting or the support of the board of directors.
The exception to the above rule was developed through case law and in certain circumstances the courts allowed a shareholder to sue the wrongdoer on behalf of the company, even without the consent of the board or members. This type of action was known as a 'derivative action' because the shareholder's right to sue was derivative of the company's right to sue. Accordingly, if for some reason the company failed to sue, the member would have a mechanism to sue on the company's behalf.
Derivative actions are now codified in the Companies Act 2006 (Ch. 1, Pt. 11). Section 260(3) provides that 'a derivative action may be brought only in respect of a cause of action arising out of an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company'.
Although it can be inferred that a shareholder may bring an action for any breach or default by a director, the claimant must apply to the court for leave to bring a derivative claim and must make a prima facie case to have the claim allowed to proceed. The court will consider, among other things, whether a person acting in the company's best interests would or would not pursue the claim; the good faith of the shareholder bringing the claim; any prior approval or ratification of the act or the possibility of subsequent ratification by the company; the views of shareholders who have no direct or indirect interest in the matter - see Companies Act 2006, section 263(3)(4).
- Unfair Prejudice
In addition to section 33 and the derivative action, a claim for unfair prejudice is also available to shareholders of a company. The statutory remedy is codified in sections 994-999 of the Companies Act 2006.
Section 994 states that “a member of a company may apply to the court by petition for an order …on the ground (a) that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or (b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.”
Therefore, if a claimant proves that he has been unfairly prejudiced by the way in which the company's affairs have been conducted or by an actual or proposed act or omission of the company, and that the prejudice has affected the interests of at least some of the members of the company, the court will consider the appropriate remedy to be granted to that claimant. Note that section 996(1) gives the court wide powers, stating that it "may make such order as it thinks fit for giving relief in respect of the matters complained of". Section 996(2) also gives the court a non-exhaustive list of remedies.
If your company is facing internal conflicts between shareholders or directors, seeking timely legal advice is crucial. Our experienced lawyers can provide valuable guidance and support throughout the process of navigating internal shareholder or director disputes. Our experts specialise in corporate law can assess the legal aspects of the dispute, provide advice on your rights and obligations, and develop a strategic approach to achieve a favourable outcome. We can offer you a variety of dispute resolution techniques whilst advocating your interests. We review shareholder agreements, and other relevant contracts to identify any provisions that may be useful in resolving the dispute or preventing future conflicts.
Contact B&M Law LLP toady on 020 3865 5437 or email us at info@bandmlaw.co.uk to schedule a consultation with our experienced legal experts.
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