Welcome to MJ Hudson’s monthly On Target, where you’ll find useful tips and insights to ease you through your M&A transactions.
This month we focus on some of the rights held by minority shareholders of a company incorporated in the UK, and how they can impact on the influence wielded by majority shareholders. From blocking important decisions to unfair prejudice claims, the power of the minority should not be underestimated, particularly if the majority shareholder wishes to effect an orderly exit in a manner and at a time of their choosing, or the company is in choppy water.
Where to find these rights?
Minority rights have two key sources: statute (principally the Companies Act 2006 for companies incorporated in the UK) and contract. Many of the statutory rights outlined below are mandatory, i.e. cannot be disapplied. By contrast, contractual rights are freely negotiated, and typically enshrined in a shareholders’ agreement and/or the company’s articles of association. Now that you know where to look, what are these rights and how can they affect you?
Shareholders in this category may hold little more than a quarter of the company’s shares, but statute grants them the power to block some of the most important decisions a company might wish to make. This is because the Companies Act 2006 requires a 75% shareholder vote to (among other things):
It is likely that any significant structural change (such as a pre-sale corporate reorganisation) will require one or more of these actions so, from a majority shareholder’s perspective, it is critical to have this in mind when agreeing the extent and terms of any minority interest.
Even a majority shareholder with 85% of the company’s share capital is not necessarily home and dry. For example:
Shareholders may also be entitled to bring a claim for unfair prejudice, or a statutory derivative claim, purely by virtue of being a shareholder, and irrespective of the size of their stake.
Where the affairs of a company are being conducted in a manner that is unfairly prejudicial to a shareholder’s interests, or an actual or proposed act or omission of the company would be prejudicial, any shareholder can apply to court for relief.
Both prejudice and unfairness must be evidenced. A member may, for example, be able to demonstrate this where an act or omission has resulted in a disproportionate significant decrease in the economic value of their shareholding, or a company has procured the allotment of shares with the purpose of diluting a minority shareholder’s interest.
If successful, the court has a wide range of powers which include:
Statutory Derivative Claim
Where a company’s directors have been negligent, have breached their fiduciary duties to the company or committed a breach of trust, a shareholder can initiate what is known as a derivative claim. This is a claim brought by the shareholder on the company’s behalf, in respect of a cause of action that the company would ordinarily have against one of its directors, a third party, or both.
Such derivative claims can only be pursued if certain criteria are fulfilled, and the court has wide discretion to examine the merits of the claim and to determine whether a derivative claim is appropriate in the circumstances. In practice this makes them notoriously difficult to pursue.
Statutory rights are only half (or, often, less than half) of the story – shareholders typically enhance or vary statutory provisions within the articles of association, and in a bespoke shareholders’ agreement. The most common minority rights to watch out for are:
If there has been a fundamental and irreparable breakdown in the relationship between the shareholders and the company’s directors, any shareholder who has held their shares for at least 6 out of the last 18 months may apply to the court to seek a winding up of the company. The court will decide whether it would be just and equitable to do so. As a general rule, the court will only make an order to wind up the company where the applicant shareholders have no other remedies available.
Is this brief too brief? Do you need any help with your upcoming M&A process? Expert legal advice is on hand from MJ Hudson’s M&A team. Just contact any of the On Target team (details below) or your usual MJ Hudson M&A contact, and we’ll gladly help.
OVERVIEW: On Target is produced by MJ Hudson’s M&A and Private Equity transactions team. We provide expert legal advice to sponsors, managers and investee/target companies on domestic and cross-border M&A transactions. We work across the full spectrum of private market investments, from venture and growth investments to buyouts. Clients praise our entrepreneurial approach, commercial outlook and dedication to getting the deal over the line, regardless of the obstacles.
Copyright © 2019. All rights reserved.