Boardroom Disputes Part 3 - The Minority Shareholder
This is the third in our series of articles concerning boardroom disputes. In previous articles we have summarised the context in which these disputes need to be resolved, including the relationships between the parties, and have then looked at matters from the view of the majority shareholder.
We have considered the power struggle in a hypothetical company with a split of shares 60%/40%. In practice most two person companies set up on a 50/50 split therefore disputes involving a minority shareholder will often involve three or more shareholders in all.
Hopefully, the minority shareholder has only taken that position within a company having had reassurance from a professional adviser that there is appropriate protection for minority shareholders contained in the Articles of Association or in a shareholders agreement. Without the protection of such arrangements, the negotiating position of a minority shareholder following a fallout can be a very difficult one.
Priorities
Although it may seem harsh to say so, the situation in which a minority shareholder has been asked to leave can be easier to resolve than one in which a minority shareholder has decided that he wants to go. The reason for this is there is likely to be a greater willingness to negotiate. If it is the minority shareholder’s decision to leave, he will want to know how quickly he can do this and will need to understand whether or not there is any pressure he can exert on the majority shareholder to come to the table and do a deal quickly.
His main priorities are likely to be:
1. To obtain “fair value” for his shares. This would normally be preserved by a properly drafted shareholders agreement or appropriate provisions in the Articles of Association. In the absence of such provisions, the value of a minority shareholding is usually heavily discounted against a value based on a proportionate share of the total value of the company. This discount reflects the fact that it will be difficult to find a market for shares which do not give control of the company.
2. To avoid any further liabilities arising from or responsibility for the company’s future trading. This will also involve seeking a release from any guarantees, and the repayment of loans. It can be tempting to think that it is a good idea to remain as a director of the organisation but if the company is embarking on a course of action to which he objects (in particular, if that involves additional risks to the directors e.g. flirting with insolvency) this can feel very uncomfortable. It will be essential to resign as a director if there is any question of setting up a competing business.
3. To be released from any restrictive covenants so that he can continue in business elsewhere.
Important factors to look for
Every situation is different due to the personalities involved and the nature of the business but in order to get a clear picture of his negotiating position the minority shareholder should take a view on the following.
1. Has he provided loans or guarantees to the company? If so, how much is involved? What will happen to the company if these are withdrawn? Look carefully at the terms. Can the company afford to pay?
2. What is the current value of the company (therefore what would be a fair value for his shares). (It may be necessary to obtain independent advice on this).
3. Does he have an immediate need for cash for his shares? In theory the value of the shares could remain in the company and will grow along with continued good performance of the company but is it a safe or desirable investment?
4. What is the strength of the individual’s personal relationships with clients, customers, suppliers and employees?
5. Are there any particular circumstances which might aid negotiation e.g. that the shareholder is an essential signatory on all business cheques on the only company bank account.
Potential problems
Since, by definition, the minority shareholder does not have control of the company, and the majority shareholder(s) will have effective control of the company he/they may decide to do things with the company which are deliberately designed to undermine position of the minority shareholder e.g.
a. They may try to issue new shares to themselves so as to increase their voting rights and to reduce the proportionate value of his shares and/or
b. They may decide to increase the remuneration of the other shareholder employees and/or
c. They may refuse to declare any further dividends and/or
d. (More radically) they may try to wind down the business and transfer it to a new company.
What remedies are available?
Any legal remedies that may be available can only be pursued by applying to the courts. The availability of these will need to be highlighted early in correspondence so that the majority shareholders are put on notice that they face the risk of litigation including Orders for costs if they do not negotiate on sensible terms.
If litigation is required, it may be possible to show that the other directors are in breach of their duties as directors of the company. Alternatively, it may be necessary to issue an “unfair prejudice” petition under Section 994 of the Companies Act 2006.
There is no “one size fits all” strategy which will work in these situations but experience shows that there are many different approaches which can be taken with a view to resolving the differences without the need to go to Court. The optimum strategy will very much depend on the individual circumstances of the case.