Rights and Remedies of Shareholders

Question 1

Membership rights under the Articles: s 33 CA 2006

Answer 1

The Articles of a company regulate the relationship between the members and each other and between the members and the company. They act as a contract. This is enshrined in s 33 CA 2006, which provides as follows:

The provisions of a company’s constitution bind the company and its members to the same extent as if there were covenants on the part of the company and of each member to observe those provisions.

The effect of this provision is that members can sue under s 33 CA 2006 if their membership rights are infringed. The usual remedy for breach of s 33 CA 2006 is damages.

The meaning of membership rights is far from clear. It is necessary to look to decided case law to establish the rights that have been considered to be membership rights in the past.

Examples of membership rights that have been enforced under s33 CA 2006 (or the corresponding section of CA 1985):

• right to a dividend once it has been lawfully declared;
• right to share in surplus capital on a winding up;
• right to vote at meetings; and
• right to receive notice of GMs and AGMs.

Rights of members which are not membership rights are not enforceable under s 33. For example, in Eley v Positive Government Security Life Assurance Co Limited the company’s articles contained a provision that the plaintiff would be appointed as the company’s solicitor. He was never appointed as such although he did become a member. The court held that the plaintiff could not sue under the equivalent of s 33 CA 2006 as the right to be appointed as the company’s solicitor was not a membership right.

Note that a company’s Articles are deemed to be a complete contract and the court will not imply any terms into them whether to create business efficacy or otherwise. In order to protect members, it is important, therefore, that any of their rights which are not membership rights are set out in a separate contract (such as a shareholders’ agreement) and not in the Articles.

Question 2

A Shareholders’ Agreement

Answer 2

A Shareholders’ Agreement is a contract between some or all of the shareholders, in which they can agree between themselves how to regulate the affairs of their company.

They can, for instance, agree not to change the Articles of the company and not to exercise their power under s 168 CA 2006 to remove any director of the company unless they are all in agreement.

Such provisions in a Shareholders’ Agreement will constitute personal rights and obligations on the shareholders, including how they will exercise their voting rights on certain decisions.

Another key reason why Shareholders’ Agreements exist is because they can be kept private (unless they are explicitly referred to in the Articles).

Question 3

The Articles

Answer 3

The Articles are treated as a contract between the company and its shareholders in their capacity as shareholders pursuant to s 33 CA 2006, and do not therefore deal with shareholders’ personal rights and obligations.

The provisions of the Articles are subject to CA 2006, whereas a Shareholders’ Agreement is an arrangement arrived at between the shareholders in their personal capacities and gives them more freedom in respect of what they can agree to.

Where the shareholders agree between themselves in a Shareholders’ Agreement as to how to regulate the affairs of the company, the company should not be a party to any terms which restrict its statutory powers.

This does not mean, however, that the company should never be a party to a Shareholders’ Agreement: only that it should not be a party to those provisions that restrict it from exercising its statutory powers.

Question 4

The use of Shareholders’ Agreements in protecting minorities

Answer 4

Right of action/enforceability

A Shareholders’ Agreement provides a right of action which enables one member to enforce the provisions of the Shareholders’ Agreement directly against another, whereas under the Articles this right of action may not arise. Because of the difficulties shareholders can encounter in enforcing the provisions of the articles under s 33 CA 2006, a Shareholders’ Agreement can be used in order to ensure the enforceability of provisions that would not be regarded as membership rights.

If a term of a Shareholders’ Agreement is breached it can be enforced in the usual way under general contract law principles. A shareholder will be able to claim for breach of contract, or alternatively could apply to the court for an injunction to prevent a breach of the terms of the agreement. A Shareholders’ Agreement can also prevent the need for s 994 petitions (unfair prejudice), although it obviously cannot stop a disgruntled shareholder from bringing such a petition.

Reserved matters in shareholders’ agreements

Certain matters can be reserved in a Shareholders’ Agreement as matters requiring the consent of all shareholders or certain individual shareholders and this protects minority shareholders. For example, a Shareholders’ Agreement may provide that the unanimous consent of all shareholders is required to pass a resolution to remove a director. This does not remove the right of the shareholders to remove a director under s 168 CA 2006, as a company is bound to accept the vote of a shareholder even if this is in breach of the provisions of the Shareholders’ Agreement.

Where a removal resolution is passed without the required unanimity, provided a simple majority voted in favour (in accordance with CA 2006), the resolution would still be valid, and the director would be removed from office. The director would then have a claim against the other shareholders for breach of the Shareholders’ Agreement. The threat of a breach of contract claim effectively means that the minority shareholder is able to influence whether or not the resolution is passed.

Amendments to shareholders’ agreements

A further reason why parties may enter into Shareholders’ Agreements is that amendments to a company’s articles of association can be made by passing a special resolution requiring 75% approval. Changes to a Shareholders’ Agreement in contrast will require the unanimous approval of all parties to the agreement. This would consequently give a minority party a right of veto to any proposed changes.

Question 5

Any shareholder

Answer 5

• Receive notice of a GM (s 307)
• Appoint a proxy to attend a GM in their place (s 324)
• Vote at a GM (provided they hold voting shares) (s 284)
• Receive a dividend (if declared)
• Receive a copy of the company’s accounts (s 423)
• Inspect minutes and company registers (s 116)
• Ask the court to prevent a breach of directors’ duties
• Commence a derivative claim (s 260 - see later)
• Bring a petition for unfair prejudice (s 994 - see later)
• Bring a petition for just and equitable winding up (s 122 Insolvency Act 1986 - see later)

Question 6

5% or more

Answer 6

• Require directors to call a General Meeting (s 303)
• Require the circulation of written statements regarding proposed resolutions to be considered at a GM (s 314)
• Circulate a written resolution (s 292)

Question 7

10% or more

Answer 7

• Demand a poll vote (MA 44)

Question 8

Over 25%

Answer 8

• Block a special resolution (s 283) (note that a special resolution is passed by 75% or more of the votes)

Question 9

Over 50%

Answer 9

• Pass or block an ordinary resolution (s 282) (note that an ordinary resolution requires over 50% of the votes to pass, therefore a shareholder with exactly 50% of the shares can block an ordinary resolution but cannot pass the ordinary resolution alone)

Question 10

75%

Answer 10

• Pass a special resolution (s 283) (note that a special resolution is passed by 75% or more of the votes)

Question 11

The removal of directors

Answer 11

Under s 168(1) CA 2006, a company (ie the shareholders) may by ordinary resolution remove a director before the expiration of their period of office.

The ability to remove a director from office is the ultimate sanction that shareholders have against a director. It is not possible for the Board to remove a director (unless the articles specifically provide for this).

Directors who are also shareholders are allowed to vote in their capacity as a shareholder on the ordinary resolution to remove them. You will consider in this element the different ways in which a director who is also a shareholder may protect themselves when it comes to a shareholders’ vote on a resolution to remove them.

For the purpose of this topic, we refer to a resolution to remove a director under s 168(1) CA 2006 as a “removal resolution”. Under s 168(2) CA 2006 special notice (28 days) is required of a removal resolution.

Note that it is not possible for a company to use a written resolution to remove a director (s 288(2)(a)).

Question 12

What is special notice?

Answer 12

Shareholders proposing a removal resolution must give notice of that proposed removal resolution to the company (ie to the board of directors) at least 28 clear days before the General Meeting (‘GM’) at which the removal resolution will be voted on by shareholders (ss 312(1) and 360(1) and (2) CA 2006).

It is the board that usually decides what matters will be considered at a GM. Therefore, when the board receives notice of the proposed removal resolution, two courses of action are open to it:

Option 1

The board may place the removal resolution on the agenda of a GM

Option 2

The board may decide NOT to place the removal resolution on the agenda of a GM

Question 13

Option 1: Board places the removal resolution on the agenda of a GM

Answer 13

If the board does decide to place the removal resolution on the agenda of a general meeting, it should give the shareholders notice of that removal resolution at the same time and in the same manner as it gives notice of the general meeting (s 312(2) CA 2006). This means that the board will need to give shareholders at least 14 clear days’ notice of the removal resolution under ss 307(1) and 360(1) and (2) CA 2006.

If that is not practical (eg because notice of the general meeting has already been sent out), notice of the removal resolution may be given either by advertisement in a newspaper or any other mode allowed by the company’s Articles at least 14 clear days before the GM(ss 312(3) and 360(1) and (2) CA 2006).

Question 14

Why does the board need to give shareholders notice of the removal resolution when it was the shareholders who sent the removal resolution to the board in the first place?

Answer 14

Only some of the shareholders (the ‘unhappy shareholders’) will have sent the proposed removal resolution to the board. The company’s other shareholders may have no knowledge of the fact that the unhappy shareholders have proposed a removal resolution. Therefore, if the board decides to put the removal resolution on the agenda of a general meeting, it needs to give notice to all shareholders (including the unhappy shareholders) of the fact that a general meeting will be held and that, at that general meeting, all shareholders will have the opportunity to vote on a removal resolution.

Question 15

Option 2: Board does NOT place the removal resolution on the agenda of a GM

Answer 15

Alternatively, the board may decide not to place the removal resolution on the agenda of a general meeting. Directors are not bound to place the removal resolution on the agenda for consideration at a forthcoming general meeting (Pedley v Inland Waterways Association Ltd). In practice, this creates a problem for shareholders as directors may choose simply to ignore the proposed removal resolution.

If the removal resolution is not placed on the agenda, it will not be considered at the general meeting. In this case, the shareholders may need to force the directors to call a general meeting in accordance with s 303 CA 2006.

Question 16

Shareholders’ power to require calling of general meeting

Answer 16

What happens if the board tries to frustrate an attempt to remove a director by refusing to call a general meeting? (ie on receipt of the special notice, the board refuses to call a GM or decides not to place the removal resolution on the agenda of a GM).

In this situation, the unhappy shareholders may have the ability to require the directors to call a GM and, if the directors refuse to do this, the unhappy shareholders may be able to call the GM themselves. Under s 303(1) CA 2006, shareholders together holding not less than 5% of the paid up voting share capital of the company can serve a request on the company ie the board. The request will require the board to call a GM (a “s 303 request”).

A s 303 request must state the general nature of the business which the shareholders wish to be dealt with at the GM and may include the text of the resolution they want proposed at the GM (here, to consider a removal resolution pursuant to s 168 CA 2006).

Note that the power of shareholders to require the board to call a GM is a general power: it is not limited to circumstances in which they wish to consider a removal resolution.

Question 17

What are directors’ obligations on receipt of a s 303 request?

Answer 17

Under s 304(1) CA 2006, when the directors receive a s 303 request, they must call the GM:

a) within 21 days from the date on which they become subject to the s 303 request to call the GM; and

b) to be held on a date not more than 28 days after the date of the notice convening (ie calling) the GM.

If the directors fail to call a GM under s 304(1) CA 2006, all of the shareholders who submitted the s 303 request or any of them representing more than one half of the voting rights of those who submitted that s 303 request, can call a GM themselves pursuant to s 305 CA 2006.

If the shareholders call the GM themselves then that GM must be called on no fewer than 14 clear days’ notice (s 305(4) CA 2006) and held within 3 months of the date that the directors received the s 303 request (s 305(3) CA 2006). These timings are summarised in the diagram below. Note that under s 305(6) CA 2006, if the shareholders are forced to call the GM themselves, they can recover their reasonable expenses for doing so from the company.

Question 18

Effect of s 303 notice

Answer 18

Unhappy shareholders give special notice to the Board AND serve notice under s 303

Board has 21 days to decide whether to call a GM

If the board decides to call a GM, it has to be held within 28 days from date of calling it

If the board decides not to call GM: Shareholders can call GM on normal notice. GM must be held within 3 months of s 303 request

Practical points to note

In order for the unhappy shareholders to ensure the resolution to remove a director is heard as soon as possible, they will submit a s 303 request requiring the directors to call a GM at the same time as sending their s 312 CA 2006 special notice to the board.

By sending these two notices to the board at the same time, shareholders will comply with s 312 CA 2006 (which is a standalone requirement that needs to be satisfied) and also ensure that:

• the directors either call a GM with an agenda which includes the resolution to remove the director under s 303 CA 2006; or
• the shareholders can step in and call the GM under s 305 CA 2006 themselves.

Question 19

Director’s rights to protest removal

Answer 19

If a company receives notice that one or more members intends to propose a removal resolution, the company must immediately send a copy of the notice to the director concerned (s 169(1) CA 2006). Note that even if the Board decides not to put the removal resolution on the agenda of a GM, it is obliged to send the special notice to the director concerned.

The director then has the right to make representations in writing provided those representations are of a reasonable length (s 169(3) CA 2006). These representations will, for example, set out the reasons why the director feels they should not be removed. These representations should, unless they are received too late for the company to do so, be circulated to the members of the company. If the representations are not circulated, they should be read out at the GM (s 169(4) CA 2006).

In any event, the director concerned has a right to be heard ie to speak in their defence at the GM, whether or not they are a shareholder

Question 20

What if the director is also a shareholder? (B v F)

Answer 20

A Bushell v Faith clause in the articles of association may give a director, who is also a shareholder, weighted voting rights at a GM at which a s 168 CA 2006 resolution is proposed. This is likely to mean that shareholders are unable to pass an ordinary resolution to remove the director concerned.

This type of clause is often found in the articles of association of smaller companies where the directors have played a key role in setting up the company and have an expectation that they will be able to continue to be involved in the running of the business. Any shareholders’ agreement should also be checked for similar provisions.

The articles should also be checked in order to determine whether there are any transfer provisions which may govern the transfer of the outgoing director’s shareholding in the company. If a director is to be removed, the company and the shareholders are unlikely to want them to retain their shareholding, so transfer provisions are usually found in a company’s articles of association and/or in any shareholders’ agreement. These transfer provisions would, for example, require the director to transfer their shares to the other shareholders if they are removed as a director.

Question 21

What if the director is also a shareholder? (SA)

Answer 21

A shareholders’ agreement may provide that the unanimous consent of all shareholders is required in order for a resolution to remove a director to be passed. If a director is also a shareholder in a company where there is a shareholders’ agreement with such a provision, this is an important right for the director/shareholder.

It is important to note that such a provision does not remove the statutory right of the majority shareholders to remove a director under s 168 CA 2006, as a company is bound to accept the vote of the shareholders even if this is in breach of the provisions of the shareholders’ agreement.

In a situation where a resolution is passed under s 168 CA 2006, (ie by a simple majority), but without the required unanimity and therefore contrary to the terms of a shareholders’ agreement, the resolution would still be valid, and the director would be removed from office. But the director would have a claim against the other shareholders for breach of the shareholders’ agreement (ie a claim for breach of contract under usual contract law principles) or alternatively could apply to the court for an injunction to prevent a breach of the terms of the agreement.

Question 22

Will the director be entitled to any compensation for loss of office?

Answer 22

Any such payment by a company to a director of its holding company must also be approved by that company. However, no approval is required under s 217 CA 2006 from the shareholders of a wholly-owned subsidiary (s 217(4) CA 2006).

Directors cannot avoid these provisions by the payment being made to a third party rather than directly to the director themselves - under s 215(3) CA 2006 payments made to a person connected to a director, or made to any person at their direction, or for the benefit of, a director or a connected person, will be treated as a payment to the director and will also require shareholder approval.

A memorandum setting out particulars of the payment must be made available to shareholders for 15 days before the ordinary resolution is passed, ending with the date of the general meeting (s 217(3) CA 2006).

The legislation also includes provisions requiring shareholder approval for:

• any payment for loss of office made by any person to a director in connection with the transfer of the whole or part of the undertaking or property of a company (for example, on a share or business sale of the company) (s 218 CA 2006); and
• any payment for loss of office made by any person to a director in connection with a transfer of shares in the company, or one of its subsidiaries, resulting from a takeover bid (s 219 CA 2006).

Question 23

Derivative claims

Answer 23

A derivative claim is one where the shareholder’s right of action is not one which is personal to that shareholder but instead it is one which is derived from the company’s right of action, which the company has not exercised.

Before the enactment of CA 2006, this claim was a common law remedy established under the exceptions to the rule in the case of Foss v Harbottle, which established the important principle that in situations where a wrong has been done to a company, the company is the proper claimant (acting through the board or in some circumstances the majority shareholder(s)). Limited exceptions to this rule developed under the common law, where the court recognised that shareholders should be allowed to bring a claim on the company’s behalf.

The rule in Foss v Harbottle: a minority shareholder is not allowed to sue for a wrong committed against a company of which they are a member, even if the company is refusing to take action.

The procedure for bringing a derivative claim is now set out under s 260 CA 2006.

Derivative claims under s260 CA 2006: what are they?

Section 260 CA 2006 allows shareholders to bring a derivative claim where directors have breached their statutory duties.

Section 260 CA 2006 was a new provision introduced by CA 2006. It provides an express right to bring a derivative claim in certain circumstances. It is therefore a statutory exception to the rule in Foss v Harbottle.

Section 260 provides a wider range of circumstances in which a derivative claim may be brought by a shareholder compared with the previous common law rules.

The statutory right to bring a derivative claim supports enforcement of the directors’ wider duties. Note that any remedy granted is granted to the company itself and not to the shareholder bringing the claim.

Section 260(1) CA 2006 defines a derivative claim brought under s 260 CA 2006 as one initiated by a member of a company, rather than by the company itself:

a) in respect of a cause of action vested in the company; and

b) seeking relief on behalf of the company.

Question 24

When can a derivative claim be brought?

Answer 24

Section 260(3) provides that a claim:

“… may be brought only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company.”

Note that a ‘breach of duty’ will also encompass breaches of common law duties not falling within CA 2006.

Importantly, there is no requirement that the director has to have benefited personally from the breach before a derivative claim can be brought.

For the purposes of s 260 CA 2006, ‘director’ includes shadow directors as well as former directors. Note that s 260(3) CA 2006 extends to all statutory duties of directors under ss 170-177 CA 2006 (including, for example, the s 174 CA 2006 duty to exercise reasonable care, skill and diligence).

Question 25

Against whom can the derivative claim be brought?

Answer 25

Under s260(3) the cause of action may be brought against ‘the director or another person (or both)’. However a cause of action will only arise in respect of the actions or omissions of a director.

Therefore, provided the cause of action is in respect of a relevant breach by a director (including shadow directors), third parties may be defendants to the derivative claim, either in lieu of the director or in addition to the director.

According to the Explanatory Notes to CA 2006, derivative claims against third parties are only to be permitted in very narrow circumstances, for example against a third party to a contract entered into in breach of the director’s duties, where that third party knew about the breach. The cause of action against a third party is not set out in CA 2006, but derives from the common law rules relating to the concept of ‘knowing assistance’ in respect of a breach of duty by a director.

Question 26

Who may bring a derivative claim?

Answer 26

Derivative claims brought under s 260 CA 2006 must be brought by a member. However, pursuant to s 260(4) CA 2006 it is immaterial whether the cause of action arose before or after the person bringing the claim became a member of the company.

A member may, therefore, bring a claim in respect of events that occurred before they became a member of the company. This underlines the fact that the cause of action is vested in the company, rather than the member.

By contrast, a former member cannot bring a claim even in relation to events which occurred when they were a member.

Question 27

Requirement for court approval

Answer 27

There are two stages to bringing a derivative claim.

At the first stage,the member must obtain the permission of the court to continue a derivative claim (ie once the claim form has been issued) – s 261(1) CA 2006. The onus is on the member to make out a prima facie case in order to obtain permission.

There are certain circumstances set out in s 263(2) CA 2006 where permission to continue the claim must be refused by the court. These include where the court is satisfied that a person acting in accordance with s 172 CA 2006 (the duty to promote the success of the company) would not seek to continue the claim.

If the circumstances are not such as to be an absolute bar to the continuation of the derivative claim, the court must then take in to account the factors listed in s 263(3) in determining whether to allow the claim to continue. These include whether the member is acting in good faith and whether the act or omission which gave rise to the cause of action would be likely to be ratified by the company.

Requirement for court approval – Stage 2

If the application is not dismissed at the first stage then the court will consider the claim at the second stage, when it must consider particular criteria. The court must have “particular regard” to any evidence it has before it as to the views of the members who have no “personal interest, direct or indirect, in the matter” – s 263(4) CA 2006. This provision was introduced to make it harder for a single member to bring proceedings against the wishes of the general body of shareholders and is considered to be an important safeguard against the bringing of tactical litigation by disgruntled shareholders.

The requirement to obtain court permission to continue a derivative claim and the safeguards built into s 263 CA 2006 were designed as a counterbalance to the extension of the rights to make a derivative claim under s260 CA 2006. It was thought that the new statutory provisions would be easier to use than the exceptions to the rule in Foss v Harbottle and thus lead to more tactical action by minority shareholders. However, the anticipated increase in successful derivative claims has not materialised. The courts have generally adopted a restrictive approach in denying permission to continue derivative claims in a large number of cases.

Question 28

Unfair prejudice – s 994 CA 2006

Answer 28

Section 994 CA 2006 allows a member to bring an action on the grounds that the company is being run in such a way that they have suffered unfair prejudice.

This is a long-established provision which is preserved under CA 2006. Examples of conduct that may be held to be unfairly prejudicial to the interests of members include:

• the granting of excessive remuneration to directors;
• directors’ dealing with associated persons; and
• non-payment of dividends.

Note that under s 994 CA 2006 the shareholder sues for themselves, whereas unders 260 CA 2006 (derivative actions) the shareholder sues on behalf of the company in respect of the company’s loss.

Section 994(1) CA 2006 provides that:

A member of a company may apply to the court by petition for an order….on the ground:

(a) 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 that shareholder), or

(b) 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.

If the shareholder can show that the company’s affairs are being conducted in a manner unfairly prejudicial to their interests, or that some act or omission of the company has unfairly prejudiced them, in terms of the reasonable bystander (objective) test – (Re Guidezone Limited), the court will decide what remedy is appropriate in the circumstances.

Question 29

Key principles of unfair prejudice

Answer 29

The meaning of unfairly prejudicial conduct has been developed through case law and you should note the following principles:

• Negligent or inept management of a company – this will not amount to unfairly prejudicial conduct unless that conduct amounts to serious and/or repeated mismanagement which puts at risk the value of the minority shareholder’s interest;
• Disagreements as to company policy - such as a change in direction of the business, will also not afford grounds for a petition under s 994 CA 2006;
• Bad faith – there is no need to show either bad faith or conscious intent for the conduct to be unfair;
• Breaches of the articles of association – see Lord Hoffmann in O’Neill v Philips:“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… [However,] there will be cases in which equitable considerations make it unfair for those conducting the affairs to rely upon their strict legal powers”;
• Claimant’s conduct – although the conduct of the claimant may be relevant in deciding whether the prejudice was unfair, there is no overriding requirement that the claimant come to court with “clean hands;
• Excessive remuneration –the courts will take a wide view of the prejudice that may be suffered by a minority shareholder;
• Legitimate expectation – in terms of certain small private companies (which are often referred to as quasi-partnerships, case law has established that shareholders may have a legitimate expectation that they be involved in the management of the company, and the prevention of such involvement may equate to unfairly prejudicial conduct.

Question 30

Unfair Prejudice - Remedies

Answer 30

Under s 996(1) CA 2006 the court has the power to grant such order as it thinks fit to provide relief.

Section 996(2) CA 2005sets out a list of particular types of order that may be made. These include orders regulating the future conduct of the company’s affairs and requiring the company to do or refrain from doing certain acts.

The most commonly made order is to provide for the purchase of the petitioner’s shares by the wrongdoer(s) (only rarely does this result in an order entitling the minority shareholder(s) to purchase the shares of the majority shareholder(s)).

The value at which such shares are to be purchased is a fundamental issue and usually a matter which is argued.

Question 31

Valuation Principles

Answer 31

The court has a wide discretion in relation to valuation matters and its aim is to set a fair price. The following principles apply to valuations generally, although the court will look at all the circumstances of the case:

• Shareholders should first attempt to use a valuation mechanism set out in the articles (if any) provided that it is fair. However, if there is no fair method then a court valuation will be necessary.
• The courts will generally not impose a discount on the value of a minority shareholding in a private company, on the basis that the minority shareholder is being forced to sell their shares because of the unfairly prejudicial conduct of the majority shareholder. This is particularly the case where the company has been controlled and operated by all the shareholders playing major roles (a quasi-partnership). However, the court may order a discount to be applied if the shareholding is viewed as an investment or the company is operated along more commercial lines.
• As a general rule the valuation date is that on which the court order was made in respect of the sale shares.
• The behaviour of the claimant/petitioner may be relevant eg if they previously rejected a reasonable offer.

Question 32

Unfair prejudice – s994 CA 2006 Commercial Points

Answer 32

In practice, where one side is willing to buy out the shares held by the other and the dispute centres around the valuation of those shares, the court will encourage the parties to settle out of court by means of a binding third-party valuation of the shares. If the petitioner objects to such an out of court settlement, the court will usually require them to give reasons for their objection.

Therefore, if a shareholder wants to avoid the situation where the court makes an order for the purchase of their shares, a petition under s 994 CA 2006 may not be a suitable course of action.

Section 994 petitions are likely to be expensive, time-consuming and complicated to bring. Since the court has discretion to make such order as it thinks fit, such petitions also bring with them a great deal of uncertainty for the petitioner.

Generally, a negotiated settlement will, therefore, be the preferred option.

Question 33

Just and equitable winding up Section 122 Insolvency Act 1986

Answer 33

The final, and most drastic, remedy available to any shareholder is the right to bring a petition to the court for the company to be wound up (liquidated) on the grounds that it is just and equitable to do so.

The right for a disgruntled shareholder to apply for the company to be wound up on the grounds that it is just and equitable to do so arises under s 122(1)(g) Insolvency Act 1986.

When a company is wound up its life is effectively brought to an end. This is therefore a rather drastic solution for a disgruntled shareholder. In such cases the court has discretion to decide whether it is just and equitable for winding up to take place.

As there is a degree of overlap between the sections, it is common for a s 122 IA 1986 and a s 994 CA 2006 petition to be made at the same time.