Misuse of company property or assets by majority shareholders or directors is a common cause of concern among minority shareholders. If you are lucky, there will be other minority shareholders who can join you in tackling this problem through your voting rights. However, even if not, there are several options open to you.
‘Minority shareholders in a business can often feel powerless to take action against directors or shareholders due to their lower voting rights,’ says Kiran Solanki Solicitor at Crane and Walton Solicitors LLP. ‘However, if you are a minority shareholder and you suspect that either a director or a majority shareholder is misusing company assets, there are remedies in place that can help you to protect the business, as well as your own shareholding.’
Kiran Solanki explores the options and remedies for a minority shareholder.
What can constitute a misuse of company assets?
There are many ways in which a director or shareholder may misuse company assets. Sometimes this may be inadvertent or just incompetence, other times it may be deliberate. In smaller companies where the directors are also shareholders, lines may become blurred and the directors may not always fully appreciate their duties to the company and shareholders.
Some common examples of misuse include:
- where director shareholders are paid excessive salaries that are unjustified for that business, especially where this leaves insufficient profits for the declaration of dividends and thus payment of dividends to minority shareholders;
- when assets are sold at an undervalue, or transferred out of the business without proper consideration, benefitting another business connected to an individual director or shareholders;
- if business is diverted to another company, of which the director or majority shareholder has a financial interest, to the detriment of the business; or
- general mismanagement, such as excessive or unusual borrowing, or signing contracts which are not beneficial to the company, but might benefit the majority shareholder.
Both directors and shareholders are under very strict duties to protect company assets, and breach of these duties can have serious repercussions. We look at some of the potential actions that can be taken by a minority shareholder and the remedies that can be ordered.
What rights does a minority shareholder have?
Shareholder rights are set out in a number of areas, including the company’s Articles of Association, the Memorandum of Association and in your shareholder agreement if there is one. They also exist in several areas of company legislation.
Voting rights may exist in the company’s incorporation documents which allow shareholders to vote on certain issues. This may include what dividends are taken by shareholders, and what remuneration is taken by directors. Shareholders may also be given voting rights for significant changes or actions, such as the selling of or transference of company assets outside of the usual course of business.
However, for matters where voting rights are not the answer, taking a matter to court can bring a number of useful remedies for minority shareholders.
What options does a minority shareholder have?
Voting options
Minority shareholders have less individual voting power than majority shareholders.
However, even if a vote (against a certain transaction for example, or to decide director’s remuneration) may require a 50% or a 75% shareholder majority vote before it can be passed, minority shareholders can join together to block a majority vote if 25% or more agree. This is often a very good option for minority shareholders who hold similar concerns about the misuse of company assets where a vote can bring about a change.
Court remedies for minority shareholders
If a joint voting block is not the answer, or is just not possible to achieve, minority shareholders also have certain remedies by applying to court.
Unfair prejudice claim
If you feel seriously aggrieved about the way the business is being run, and believe it is affecting your shareholding, you can bring an ‘unfair prejudice’ claim to court to say that you are being unfairly prejudiced by the actions of the management.
You will need to prove to the court that you have been prejudiced. If the court finds in your favour, it can make any order that it thinks is appropriate in the circumstances. This might include ordering the company to purchase your shares, so you are released from your shareholding and are paid a fair value for your shares. Or the court could also order the company to pay you damages for any loss suffered.
Derivative action
A derivative claim is an application brought in court by a shareholder on behalf of the company, unlike unfair prejudice which is specific to a particular shareholder.
You will need to show that the actions of the majority shareholder(s) or director(s) have been contrary to the company’s interests. This can cover a wide range of actions, some of which are discussed above.
Similar to unfair prejudice, if the court finds in your favour, it has very wide powers to make any order that is appropriate.
Because this action is brought on behalf of the company, any award by the court will be for the benefit of the company as a whole, not any particular shareholder personally.
This can be a very effective way of ensuring that directors or shareholders do not continue to act without impunity, and can allow for a reversal of transactions that were not for the benefit of the company. If that is not possible, it can provide for sufficient compensation to be paid by those that benefitted. It may also ensure that remuneration is brought into line, and dividends paid if appropriate.
Just and equitable winding up
This is a further option for an aggrieved minority shareholder, but it is only likely to be granted in exceptional circumstances as it will end the company if granted. If there is another suitable remedy, the court will avoid winding up.
This is often used if there has been a complete breakdown in mutual trust and confidence between the shareholders that goes beyond the remedies available to a minority shareholder if they were to bring an unfair prejudice claim.
How can we help?
As a minority shareholder, you may feel sidelined and powerless compared to majority shareholders and directors, but there are various remedies available to you to address matters that you feel strongly about.
We can bring an action to court on your behalf, or on behalf of the company, to stop misuse of company assets by directors or shareholders, and ensure accountability to the company.
Our solicitors have many years of experience in this area. For further information and assistance, please contact Crane and Walton Solicitors LLP in Coalville on 01530 834466. Crane and Walton LLP also has offices in Ashby, Leicester and Melbourne.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.
