Ask corporate solicitors for advice about holding shares in a company, and they will likely tell you that it would be sensible to record the rights and obligations of the parties in a shareholder’s agreement.
Sometimes that advice is not followed because of costs, and sometime the parties feel that their relationships are so close, that contractual protections are unnecessary. It can, however, be these close relationships that create the most problems in companies, and resolving issues when things go awry can be very difficult, time consuming and costs.
This was the position in the reported case of Sally Ann Gibbins v John Peter Francis Tierney & Ors [2024] EWHC 2004 (Ch), where DFA Law acted for the successful claimant, a mother, who was forced to bring a claim against two other shareholders, including her son, and the company, to protect her interests. The reporting of the case is of interest to solicitors, as it highlights that a minority discount to the value of an individual’s shares should not be applied when the court grants remedies in certain cases. However, to business owners it should simply serve as an example of the costs and complexity of pursuing claims when shareholders’ interests are not regulated and protected.
To expand on this, claims to protect the position of minority shareholders, and sometimes majority shareholders, are brought as Unfair Prejudice Petitions.
These claims seek to provide protection where an individual believes that the company’s affairs are being conducted in a way that is unfairly prejudicial to their interests. This typically means that conduct is having an adverse effect on the value of the shareholding (such as the diversion of business or disposing of assets at an undervalue), unfairly preventing dividends from being paid, and in certain cases where the court considers the business to be a quasi-partnership company, where the individual has been excluded from management.
Any shareholder can bring such a claim, but they must be able to show that the conduct complained of has caused them prejudice, and that prejudice is unfair in the circumstances. The court will consider the wider picture in assessing whether the conduct of the defaulting parties creates unfair prejudice, and not every decision will be considered to be unfair, even where that decision may be considered to be poor and/or causes loss.
Convincing a court that this unfairness threshold has been crossed can be difficult. That is especially where there are no documents to show the intention and understanding between the shareholders in relation to the operation of the company.
Where a claim is successfully pursued, the remedy is often an order for the majority to buy out the minority’s shares at a fair value. As in the case referred to above, that valuation can be at a date prior to the prejudice, although the court can also make adjustments or award compensation to reflect the unfair conduct. The court does have wider powers than this though, and can also make orders to regulate the operation and conduct of the company.
Ultimately, whilst sometimes Unfair Prejudice Proceedings are unavoidable, the costs, delay and distress of these proceedings can often be avoided by the parties agreeing how to regulate their relationship in advance, and in this respect shareholders agreements are a worthwhile investment.
For more information, contact Paul Currie at DFA Law on 01604 609560 or visit the DFA Law website.
