Shareholder dispute case decisions

Shareholders do petition the court for declarations and orders to protect their investment.  We use the decisions when working out the strategy for our clients.   We have set out below some of the leading decisions as a guide for shareholders and the directors of companies to consider when dealing with difficult situations.

Majority shareholder buys out minority shareholder

A leading case is Irvine & Ors v Irvine & Anor. Here a minority shareholder director brought an action against the majority shareholder director for the acquisition of the minority’s shareholding. The minority shareholder held just under 50% of the company’s shares.  The minority shareholder claimed he was excluded from managing the company’s affairs. He was not given financial information nor included in business decisions. The minority shareholder's claim was based on the right in the Companies Act to claim unfair prejudicial treatment of a minority shareholder.

The outcome for the minority shareholder

The court agreed with the minority shareholder. The court stated the company was a quasi-partnership, due to

• The limited number of shareholders;
• Both shareholders being employees and company directors.

The court’s quasi-partnership conclusion meant that the majority shareholder:

• Should have acted as if the minority shareholder was a business partner;
• Was obliged to consult on decisions and provide information.

The court ordered the majority shareholder to buy out the minority shareholder.  The court instructed an expert to value the minority’s shares. The experts valuation included a 30% discount on the price per share to reflect the minority shareholding.  That meant the minority shareholder received 70% of the whole company value per share.

Dismissal and disqualification of a director

In the case of Re Sevenoaks, the court ordered a director’s dismissal and disqualification. The minority shareholders claimed the director had:

• Not prepared proper accounting records;
• Used company funds for his own personal benefit;
• Failed to send the required returns and accounts to Companies House; and
• Failed to submit the company’s corporation tax return.

The director was forced by the court to resign immediately.

Wider implications of the decision

It could have been easy to avoid this issue.  For example, the articles or shareholders' agreement could have included powers to force a director to resign if a majority of shareholders vote in favour.  A power of attorney included in the documentation would have given the company the right to sign the resignation on behalf of the director being ousted.

Director service agreements can include provisions that ensure if a director’s employment terminates, the director automatically resigns the directorship.

Unfair valuation of the shares

The following circumstances demonstrate when the court deemed a minority share valuation unfair:

Inappropriate behaviour by the company which affects the value of the shares

In North Holdings Ltd v Southern Tropics Ltd the relationship between various shareholders disintegrated.  A minority shareholder then insisted that the company purchased the shares and the court should determine the share value.  A minority shareholder claimed that the directors acted in breach of their fiduciary duties they owed to the company by using its assets to purchase shares from an existing shareholder.

The court observed that where directors behave in breach of their duties to the company, and this diminishes the value of the business, the subsequent depressed share valuation can be deemed unfair.

The method of valuation permits inappropriate minority shareholder discount

In Virdi v Abbey Leisure Ltd the court held that the shareholder did not act unreasonably in refusing a valuation of his shares by the company’s auditor, as provided in the articles, on the basis that the shares might be discounted in circumstances where a discount was inappropriate. The court accepted that it would be just and equitable to disregard the articles where the valuation method was unfair.

Expert not independent

In Re Benfield Grieg Group plc the court rejected a share valuation based on the fact that the company’s auditor valuation differed from the earlier valuation of shares carried out by them for tax purposes for the same period. It 2was held that the auditors had failed to act independently when valuing the former director’s shareholding, having already compromised their independence by previously advising the company.

We have set out below a selection of recent cases involving court injunctions for asset recovery, freezing orders and court applications.  We act for those seeking an injunction or a court order as part of discovery and also defending  applications.