A recent court case has reduced the risk on the part of company directors / shareholders involved in divorce proceedings that assets held by a company which they control will be made the subject of a court order for sale.
Posts tagged: shareholders rights
A typical claim in a shareholders dispute is when a majority shareholder in control of a company prejudices a minority shareholder by improperly extracting value out of a company. This can be done in different ways, for example by payment of excessive salary or by sale of company assets to connected parties at a low value. Sometimes this can leave the company insolvent. Given that the principal remedy for unfair prejudice is an order requiring the majority shareholder to buy out the minority shareholder it appears to leave the minority shareholder in a no-win situation as the shares are effectively worthless. However, the court will step in to do justice in such a situation and this has been confirmed in the recent Court of Appeal case of Maidment -v- Attwood and others.
The rights of shareholders to curb excessive executive pay is an increasingly hot topic. When even the Institute of Directors publishes a survey showing that executive pay is out of kilter with performance then you know that there is a problem. As for shareholder rights in attacking excessive remuneration, the practical effectiveness of such rights depends upon the size and nature of the company in question.
The more complex personal relationships inevitable in family companies can often give rise to the more intractable and bitter kind of shareholders disputes. Litigation is not the only solution and more often than not it is not the best solution. Mediation is a powerful tool to unlock such disputes as is highlighted in an article recently published by mediator Jon Lang. Click here to read Jon’s article.
Shareholders Agreements are very useful tools that can stop disputes arising or help resolve them quickly and cheaply. However a recent case has highlighted a potential concern.
If your shareholders agreement contains an arbitration clause then there is a risk that you will be deprived of all the remedies that you might otherwise have under s.994 of the Companies Act. This means that caution should be exercised before inserting such a clause into a shareholders agreement.
The directors have come out as the initial victors in this boardroom battle (see previous post for details). It had emerged that in an attempt to block the sale, the shareholders George Gillett and Tom Hicks had exercised their shareholders rights by removing two of the directors. The High Court has found that this was in breach of undertakings given to RBS (who seem to have played the leading part in the court hearing) and awarded an injunction allowing the board to be reconvened to pursue the sale.
The announcement by the board of Liverpool FC of a proposed sale of the club against the wishes of the current American owners raises some interesting issues. The sale looks like it will barely cover the club’s indebtedness and leave the shareholders little to show for their investment. What are the rights of shareholders in this situation and what are the powers of the directors?
Few small or medium size businesses operate to the letter of their Articles of Association (”Articles”). This is not that surprising given the technical language and complexity of many of these documents. Even where the directors and shareholders are aware of the terms of the Articles the requirements can seem technical and have little relationship to the day to day business of making money. Because of this the Articles are more often observed in the breach. Most of the time companies get away with this relaxed approach but in the event of a shareholders dispute or a dispute between shareholders and directors then the first thing a lawyer is likely to do is get hold of a copy of the Articles and digest the contents. This can lead to some unpleasant surprises.
A derivative action is one where a shareholder takes legal action on behalf of the company. This goes against the general rule that the affairs of the company are managed by the directors. The reason for this remedy to is to provide a mechanism for redress where, for example, directors refuse to act (particularly where they are the wrongdoers).
The Companies Act 2006 introduced a new procedure for derivative actions which includes a two stage process for permission. So far the courts appear to have been cautious about allowing shareholders to exercise the remedy but the recent case of Stainer -v- Lee and others may indicate a slightly more relaxed approach.
If you are involved in a shareholders dispute there can be a temptation to do nothing and hope that it all blows over. Sometimes this is just what happens and it is the right thing to do. However, a failure to grasp the nettle can also have unfortunate consequences. You might find that your shareholders rights have been significantly diminished by a delay in taking action.