There are two main organs of a company; the directors who make the day to day decisions, and the shareholders who vote in general meetings and have overall ownership of the company. The company itself is distinct from the shareholders and directors as it has separate legal personality. This means that the company itself can own assets, issue and receive legal proceedings and it can continue to exist even if the shareholders change.
Unlike company directors, shareholders do not owe a fiduciary duty to the company and can act in their own interests. We have prepared this guide to explain the various rights and remedies that are available to shareholders.
The three main shareholder remedies include:
- Derivative Actions
A derivative action may be brought for negligence, default, breach of duty or breach of trust by a director. The cause of action must be vested in the company and the relief must be sought on behalf of the company. A shareholder may therefore wish to take a claim against a director on the company’s behalf. It doesn’t matter if the director has not profited from their negligence. Such actions can also be taken against shadow directors and former directors. However, the complicated process often deters shareholders from seeking the remedy. The court must be satisfied that:
- A member seeking to promote the success of the company for benefit of members would not continue the claim; and
- The conduct has not been subsequently approved / authorised by the Company.
The member must be able to prove that the company has suffered a financial loss.
2. Unfairly Prejudicial Actions
A shareholder can apply to the Court for rectification if they feel the company is being run in a manner that is unfairly prejudicial to the interests of its members, or some of them. The prejudice must be substantial, and can either be financial, involve a member’s rights, such as creating more shares to reduce a minority’s decision-making power, or poor management or failure to abide by the company’s articles of association or the Companies Act 2006.
However, it is important to note that if the shareholder has enough decision-making power to solve the problem then the application will not succeed.
The options available to a court include making an order to:
- Restrain the doing of some act; or ordering an act to be done;
- Authorise a claim on behalf of the company;
- Change or prohibit a change in the company’s articles of association;
- Regulate company affairs/ future business; or
- Enforce a sale of shares.
The court also has a general power to make any orders it thinks fit to give relief to the members.
3. Winding up on Just and Equitable Grounds
The court can wind up the company where it has just and equitable reason to do so, on the application of a shareholder. Invariably, reasons for this include deadlocks in decision making, mismanagement, exclusion from management decisions or an inability for the business to continue.
Conclusion
Whilst there are three main remedies for shareholders, each of the remedies are limited by the strict criteria required under the legislation and are at the court’s discretion. Shareholders should therefore obtain legal advice if they are considering exploring any of the remedies mentioned above.
If you require any advice or assistance, please do not hesitate to contact us by e-mail at [email protected] or by telephone on 028 9043 4015.
