Shareholder disputes – should you seek relief?

Petition against unfair prejudice

Where a dispute arises between shareholders it may be necessary to consider whether an application for relief from unfair prejudice should be brought.

If a shareholder with shares in a company who has voting rights – considers the affairs of a company are being, or have been, conducted in a manner which causes their interests to be unfairly prejudiced, they can bring a petition under section 994 of the Companies Act 2006.

If a court determines that the petition is well founded, it can make an order granting the applicant relief from the matters complained of in that petition.

This article will focus on the forms of relief available to shareholders.

Forms of relief

In accordance with section 996(1) of the Companies Act 2006, the court has broad discretion to make any order that it sees fit for giving relief in respect of the matters complained of. Notwithstanding this discretion, section 996(2) of the Act sets out a list of the potential orders that a court may make. These include orders to:

(a) Regulate the conduct of the company’s affairs in the future

(b)  Require the company –

(i)  To refrain from doing or continuing an act complained of

(ii)  To carry out an act that the petitioner has complained it has omitted to do

(c)  Authorise civil proceedings to be brought in the name of, and on behalf of, the company by such person or persons and on such terms as the court may direct

(d)  Require the company not to make any, or any specified, alterations in its articles without the leave of the court

(e)  Provide for the purchase of the shares of any members of the company by other members or by the company itself and, in the case of a purchase by the company itself, the reduction of the company’s capital accordingly.

The reality of relief

Unfairly prejudicial conduct against a shareholder usually leads to the complete breakdown in the relationship between the parties. As a result, the most common form of relief ordered by a court falls within the latter option above – requiring the purchase of shares.

We regularly see courts ordering that a shareholder’s shares should be purchased by the other company members or, in some scenarios, the company itself. In exceptional cases, where a court determines that a shareholder’s conduct demonstrates they are unfit to run the company, the court may order their shares be sold to the petitioning, shareholder.

Purchase orders can be beneficial as they provide the parties with a “clean break” from each other and allow the company to continue to operate without the need for the ongoing involvement of the conflicting members or the court.

However, purchase orders are not suitable in all circumstances as the relief ordered by a court must always be proportionate to the unfair prejudice that has been suffered.

Where a court determines the prejudicial conduct of a member was relatively modest, a purchase order might be a disproportionate remedy. In such circumstances it may be more appropriate for a court to either consider one of the alternative forms of relief set out in section 996(2) or use its discretion to order a more appropriate remedy.