Whilst the management of a company is largely at the discretion of the board, directors should be aware of various shareholder rights of action where shareholders do not agree with directors’ decisions.
Shareholder rights of action include:
- bringing an unfair prejudice action;
- bringing a derivative action on behalf of the company; and
- petitioning for winding up of the company.
If the conduct of the company has been carried on in a way that unfairly prejudices the shareholders generally, or some part of the shareholders, the shareholders can bring an unfair prejudice action.
Although prejudice may refer to an action causing a reduction in value of the shareholders’ shares, the right of action is much broader than financial loss. For example, exclusion from management or breach of a shareholders’ agreement can constitute unfair prejudice where these formed the basis on which the shareholder agreed to become a shareholder in the company. Specific examples include:
- the company borrowing money to repay directors loans in priority to loans made by a minority shareholder; and
- failure to hold meetings and disclose directors’ interests in transactions in accordance with agreements between the shareholders, including a company’s articles of association.
The court has wide powers to remedy unfair prejudice, including: orders to regulate the business of the company in the future, requirements to purchase the shares of the prejudiced shareholders or, in extreme cases requiring the transfer of shares to the prejudiced shareholders.
In certain cases involving negligence, default, breach of duty and/or breach of trust by a director, a shareholder can bring an action in their own name on behalf of the company to right the wrong done to the company. For example, a shareholder could seek to bring a derivative action where company funds have been directed to a director’s personal account in breach of his duties as a director. Directors should note that derivative claims cannot be brought if the matter is capable of and has been correctly approved by the company. The derivative action must be in the best interests of the company; personal vendettas will generally lead to the court refusing to proceed with the claim.
Finally, a shareholder could petition to wind up the company on just and equitable grounds, for example where there has been fraud or impropriety on the part of the company or its directors. On a winding up order being made, a liquidator will take control of the company’s assets and the directors’ powers cease.
Therefore, whilst a court will generally be reluctant to intervene in management decisions, directors should carefully consider the rights of shareholders and ensure that they are acting in accordance with their obligations as directors at all times.
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