Looking ahead: shareholder agreements
It is often prudent for shareholders to document the terms of their agreement. This is often done by the insertion of special provisions in the company’s articles of association or by a separate agreement (“shareholders’ agreement”) between shareholders or by a combination of the two.
Shareholders in private limited companies address issues such as restrictions on the transferability of their shares and the absence of a market for sale of those shares, especially if the shareholder is not in a controlling position. A person acquiring shares in a private company without obtaining control will prudently seek special protection and rights to safeguard his position.
We can produce for you a practical document covering both everyday and also many of the extraordinary issues that can arise out of limited companies.
Looking back: unfair prejudice to the minority
Where the affairs of a company can be demonstrated to have been conducted by the majority shareholders in a manner unfairly prejudicial to the minority shareholders, a right of action for an injunction and damages may be available by way of application to the Companies Court.
Section 994(1) of the Companies Act 2006 provides:
“A member of a company may apply to the court by petition for an order under this Part on the ground:
- that 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
- 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.”
The remedial power available to the court under section 996 of the 2006 Act is a very wide one.
Section 996 provides:
(1) If the court is satisfied that a petition under this Part is well founded, it may make such order as it thinks fit for giving relief in respect of the matters complained of.
(2) Without prejudice to the generality of subsection (1), the court’s order may-
(e) 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 a purchase by the company itself, the reduction of the company’s capital accordingly.
What does ‘unfairly prejudicial’ mean?
“Parliament has chosen fairness as the criterion by which the court must decide whether it has jurisdiction to grant relief. It is clear from the legislative history …….. that it chose this concept to free the court from technical considerations of legal right and to confer a wide power to do what appeared just and equitable.
But this does not mean that the court can do whatever the individual judge happens to think fair. The concept of fairness must be applied judicially and the content which it is given by the courts must be based upon rational principles: ‘The court … has a very wide discretion, but it does not sit under a palm tree.’
Although fairness is a notion which can be applied to all kinds of activities, its content will depend upon the context in which it is being used. Conduct which is perfectly fair between competing businessmen may not be fair between members of a family.
In some sports it may require, at best, observance of some rules, in others (‘it’s not cricket’) it may be unfair in some circumstances to take advantage of them. All is said to be fair in love and war. So the context and background are very important.
First, a company is in an association of persons for an economic purpose, usually entered into with legal advice and some degree of formality. The terms of the association are contained in the articles of association and sometimes in collateral agreements between the shareholders. Thus the manner in which the affairs of the company may be conducted is closely regulated by rules to which the shareholders have agreed.
Second, company law has developed seamlessly from the law of partnership is treated as a contract of good faith. One of the traditional roles of equity, as a separate jurisdiction, was to restrain the exercise of strict legal rights in certain relationships in which it considered that this would be contrary to good faith.
“These principles have, with appropriate modification, been carried over into company law.
The first of these two features leads to the conclusion that a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted.
But the second leads to the conclusion that there will be cases in which equitable consideration make it unfair for those conducting the affairs of the company to rely upon their strict legal powers. Thus unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith.” O’Neill v Phillips