A shareholder of a company has the right to bring an action against the company if he is not satisfied with the way the company’s affairs are being handled by its directors. Child & Child has experience in advising shareholders on both derivative actions and unfair prejudice petitions.
A shareholder may consider bringing a derivative action in circumstances where there is a cause of action against a director arising from an act or omission involving a director’s negligence, default, breach of duty or breach of trust. The cause of action must be vested in the company and the relief sought must be on behalf of the company rather than the shareholder.
In order to bring a derivative claim, the shareholder must be able to prove to the court a prima facie case for permission to continue the claim. This is to prevent frivolous claims being made by shareholders. The court has to consider the evidence provided by the shareholder without requiring the company to provide evidence. If a prima facie case is established, the court may give directions as to the evidence required by the company.
In making its decision to grant permission, the court must take into account s263 of the Companies Act 2006 which states that the permission must be refused where:-
- A director acted in accordance with his duty to promote the success of the company would not continue the claim; or
- The cause of action arises from an act or omission that is yet to occur, that the act or omission has been authorised by the company; or
- The cause of action arises from an act or omission that has already occurred and that the act or omission was authorised by the company before it occurred or has been ratified by the company since it occurred.
In considering whether to give permission, the court must take the following into account:-
- Whether the shareholder is acting in good faith in seeking to continue the claim;
- The importance that a director acting in accordance with his duty to promote the success of the company would attach to continuing the claim;
- Where the cause of action results from an act or omission that has occurred or is yet to occur, whether the act or omission would likely be authorised by the company before it occurs or be ratified by the company after it occurs;
- Whether the company has decided to pursue the claim; and
- Whether the act or omission in respect of which the claim is brought gives rise to a cause of action that the shareholder could pursue in his own right rather than on behalf of the company.
The court will consider all of the available evidence, together with the above factors before deciding whether the claim should continue. If the court decides to grant permission it will give appropriate directions for the future conduct of the case.
An action for unfair prejudice may be brought against the company by a minority shareholder pursuant to s994 of the Companies Act 2006 where
“(a) .... the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or (b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.”
A shareholder must be able to show that the conduct is both unfair and prejudicial. Typical examples of unfairly prejudicial conduct include:
- A mismanagement of the company’s affairs;
- Dilution of a shareholder’s shares for the purposes of reducing the shareholder’s influence in the company;
- Failing to provide the shareholder with information;
- Failing to pay a dividend in circumstances where a dividend should be paid;
- Breach of a director’s fiduciary duties; or
- Failure to comply with the Companies Act 2006
The court has a wide range of powers pursuant to s996(2) of the Companies Act 2006 which includes the power to:
- Regulate the conduct of the company's affairs in the future;
- Require the company to refrain from doing or continuing an act complained of, or to do an act which the shareholder has complained that it has omitted to do;
- Authorise civil proceedings to be brought in the name of the company by such persons and on such terms as the court may direct;
- Require the company not to make any, or any specified, alterations in its articles without the leave of the court; and
- 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 the purchase by the company itself, the reduction of the company's capital accordingly.
The most common form of relief sought by petitioning shareholders is the purchase of their shares by the remaining members of the company at a fair price.
Please telephone James Beat on 020 7201 3553 or Dipesh Dosani on 020 7201 3575.