Corporate governance and compliance - Minority shareholder protection

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Overview

Protecting minority shareholders is fundamental to fair corporate governance in the UK. For those preparing for the SQE1 FLK1 exam, it's necessary to be familiar with the legal tools and remedies available. This article examines important protection mechanisms, such as unfair prejudice petitions, derivative actions, and just and equitable winding-up, as well as preventive measures. Gaining knowledge in these areas prepares students to excel in corporate governance and compliance sections of the exam.

Unfair Prejudice Petitions

Unfair prejudice petitions, outlined in Section 994 of the Companies Act 2006, offer a powerful remedy for minority shareholders facing unfair treatment within a company.

Key Details

  • Legal Basis: Section 994 allows members to petition the court if company actions harm their interests unfairly.
  • Grounds: Common issues include exclusion from management, withholding dividends without reason, asset misappropriation, and breach of shareholder agreements.
  • Judicial Interpretation: Judges have wide discretion in defining unfair prejudice, as seen in O'Neill v Phillips [1999] UKHL 24.

Remedies

Court orders under s.996 may include:

  1. Regulating future company conduct
  2. Mandating specific actions or restraints
  3. Authorizing legal proceedings in the company's name
  4. Mandating a share buyout

Example: Re Tobian Properties Ltd [2012] EWCA Civ 998

In this case, a minority shareholder was excluded from decision-making in a family business. The Court of Appeal supported the petition, ordering a fair-value share buyout, illustrating the remedy's effectiveness in such scenarios.

Derivative Actions

Derivative actions enable minority shareholders to initiate legal proceedings on behalf of the company against errant directors or majority shareholders, serving as an important check on corporate misconduct.

Legal Framework

  • Basis: Part 11 of the Companies Act 2006
  • Scope: Covers breaches of duty, trust, negligence, or default by a director
  • Procedure: Two-step process for court approval to pursue the claim

Key Considerations

  1. Establishing a prima facie case
  2. Good faith of the applicant
  3. Claim's importance to the company
  4. Prospects of authorization or ratification
  5. Views of independent shareholders

Case Study: Bhullar v Bhullar [2015] EWHC 1943 (Ch)

Minority shareholders in this case pursued a derivative action against directors who misappropriated a corporate opportunity. The court allowed the action, stressing the need to hold directors accountable for fiduciary breaches, especially in fraud cases affecting minorities.

Just and Equitable Winding-Up

Just and equitable winding-up, found in s.122(1)(g) of the Insolvency Act 1986, allows a company to be dissolved when corporate dysfunction becomes insurmountable.

Principles

  • Discretionary Remedy: Grounded in equity
  • Last Resort: Used when other solutions are ineffective
  • Grounds: Include broken trust, management deadlock, and oppressive actions

Landmark Case: Ebrahimi v Westbourne Galleries Ltd [1973] AC 360

The House of Lords confirmed winding-up on equitable grounds in a quasi-partnership case. Lord Wilberforce highlighted the significance of considering equitable factors over strict legal rights, especially in small private firms resembling partnerships.

Preventive Measures: Contractual Remedies

Proactive contractual strategies are vital in preventing conflicts and safeguarding minority shareholder rights.

Shareholders' Agreements

Key elements may include:

  1. Tag-along and drag-along rights
  2. Pre-emption rights
  3. Dispute resolution clauses

Articles of Association

Important provisions:

  1. Weighted voting rights
  2. Quorum requirements
  3. Reserved matters needing supermajority approval

Case Study: Arbuthnott v Bonnyman & Ors [2015] EWCA Civ 536

The Court of Appeal upheld drag-along terms in a shareholders' agreement, stressing the importance of adhering to contractually agreed terms to manage shareholder relations and expectations.

Conclusion

Understanding minority shareholder protection mechanisms is essential for SQE1 FLK1 exam success and effective corporate governance. The combination of statutory remedies, equitable winding-up, and preventive contractual strategies forms a comprehensive framework for protecting minority interests. Key aspects to keep in mind include:

  1. Unfair prejudice petitions provide remedies for adversely affected minority shareholders.
  2. Derivative actions allow claims to be made against directors on behalf of the company.
  3. Just and equitable winding-up acts as a final solution for corporate dysfunction.
  4. Contractual agreements can prevent conflicts and offer additional protection.
  5. Knowing how to apply these mechanisms practically is important for analyzing complex corporate governance issues in both exams and future practice.