On 1st October 2007, the new provisions of The Companies Act 1986 came into effect in relation to Shareholder disputes. Under The Companies Act 1985 this section was known as Section 459 Applications and under the new CA 2007 it appears in Section 994.
The Companies Acts first recognised the need for shareholders to have protection from their own companies in 1948. Like much company law, this law derived from partnership law and recognised that there may be dominant shareholders in a company or that a shareholder may be prejudiced, individually or as a class, by the board of directors’ decisions and actions who have control of the company.
The courts have made clear in various judgements, that a shareholder should resolve their grievances with a company by way of either the contract they have with the company, i.e. the Articles of Association, or by way of a shareholders agreement that is in place between the shareholders and the company.
In the absence of such agreements and where a shareholder cannot exert a level of control by way of his own shareholding, then The Companies Acts have recognised that there is a need for a shareholder to have recourse against a company to ensure that the shareholders, or a class of shareholders are not unfairly prejudiced.
The reason that the courts do not wish to overrule any agreements reached between the company and shareholders, unless the company (via its directors) are deliberately prejudicing the rights of a shareholder, is that the courts do not wish to be embroiled into the management or the judgement of the directors of a company’s decisions just because a proportion of the shareholders disagree with their decisions or actions. The courts’ view is that shareholders should form a view before investing in such a company.
The most common situations which relate to shareholder disputes are where there are normally two directors who both hold 50% of the equity of the company thus resulting in deadlock and no decisions being made to move the company forward. Both directors have the ability to block the decisions but not to make positive decisions to move the company forward. As a result of this, relationships between the two directors disintegrate further and the company value is slowly eroded. The other common position is where there is a shareholder who holds less than 50% of the company and is not on the board of directors. They will not have the ability to place themselves on the board of directors and, indeed even if they did, they would often be outnumbered and therefore voted down on any resolution that is raised at board level.