Rupert D’Cruz (Barrister, Littleton Chambers) 12 April Ekaterinburg SHAREHOLDERS’ RIGHTS - OBTAINING RELIEF FROM THE ENGLISH COURTS

Categories of Shareholder Disputes 1.Breach of a shareholders’ agreement and articles of association  Articles = contract between shareholders + company and between each shareholder and every other  Common law claim for breach of contract 2. “Unfair Conduct”  Claims for unfair prejudice  Claims to wind-up the company  Derivative claims

(1) Breach of Shareholders’ Agreement and Articles of Association

Available relief  declaration that an action based on a breach of the agreement or the articles is invalid - wrongful exclusion by one shareholder of director nominated by another - setting aside improper allotment of shares  specific performance - requiring one shareholder to purchase the shares of another - right to receive a dividend  injunction (including interim relief) to restrain the breach of the agreement or the articles - preventing sale of share to third party in breach of pre-emption rights - TNK-BP  damages

(2) Unfair Conduct: (i) u nfair prejudice petition (ii) winding-up the company (iii) derivative actions

(i) Unfair Prejudice s.994(1) of the Companies Act 2006 (“CA”): A [shareholder].. may apply.. for an order that: (a) the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of [shareholders] generally or of some part of its [shareholders] …, or (b) an actual or proposed act or omission of the company … is or would be so prejudicial. Aim: to protect minority shareholders where the majority act in a way that is 'unfairly prejudicial’to their interests.

Examples of unfair prejudice  exclusion from management (where (legitimate) expectation of participation);  diversion of business to another company;  using company assets for personal benefit;  award excessive financial benefits;  abuses of power/breaches of the company’s articles

Unfair prejudice and “quasi-partnership companies”  Small companies  Although operating as limited company in practical terms run as a partnership  Courts more willing to recognised additional rights of minority shareholders  particularly protection from being excluded from management of the business (without good reason).

Remedies for Unfair Prejudice s.996, CA: (1) … the court may make such order as it thinks fit for giving relief… (2).. the court's order may: (a) regulate the conduct of the company's affairs in the future; (b) require the company to — (i) refrain from doing or continuing an act complained of, or (ii) do an act that … it has omitted to do;

(c) authorise civil proceedings to be brought in the name and on behalf of the company by such.. persons and on such terms as the court may direct; (d) require the company not to make any, or any specified, alterations in its articles without the leave of the court; (e) provide for the purchase of the shares of any [shareholders] … by other [shareholders] or by the company itself …

Costs  Company cannot fund legal fees of majority shareholders in unfair prejudice dispute.  Where necessary, court will grant an order restraining company from doing so.  If the minority shareholder is successful, the respondent shareholders will pay minority’s costs.

(ii) Winding Up the Company s.122(1)(g), Insolvency Act 1986: “A company may be wound up … if the court is of the opinion that it is just and equitable that the company should be wound up”.

 Wronged shareholder may apply to wind up the company.  Must have a ‘tangible interest’ in doing so:  e.g. when the company is wound up and its debts are repaid, there will be a surplus  Does not include:  benefiting a competing business in which the applicant has an interest  preventing the company from continuing litigation against him  In practice, often occurs in small businesses (2/3 shareholders working together in a quasi-partnership).  Court will not wind-up the company if another remedy is available (e.g. order that other wrongdoer buys his shares) and wronged shareholder refuses  Remedy of last resort.

 Court will not wind-up the company if another remedy is available (e.g. order that other wrongdoer buys his shares) and the wronged shareholder refuses to pursue that remedy  In practice, often occurs in small businesses (2/3 shareholders working together in a quasi-partnership).

(iii) Derivative Claims General Rule: Only the company (through its board of directors) can bring proceedings for a wrong done to the company Exception: If the wrongdoers are the directors themselves who use their control over the company to suppress a claim by the company

s.260(3), CA: (1).. applies to proceedings … by a [shareholder]: (a) in respect of a cause of action vested in the company, and (b) seeking relief on behalf of the company. (3) A derivative claim … may be brought only in respect of a [claim] … involving negligence, default, breach of duty or breach of trust by a director …. The cause of action may be against the director or another person (or both).

(4) It is immaterial whether the cause of action arose before or after the [shareholder] became a member of the company. (5) (a) “director” includes a former director; (b) a shadow director is treated as a director

Directors’ Duties Under the CA (1) s.171(1): “.. [to] “a) act in accordance with the company's constitution: and (b) only exercise powers for the purposes.. they are conferred. s.172(1): “.. [to] act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its [shareholders] ….” s.173(1): “.. [to] exercise independent judgment.”

Directors’ Duties Under the CA (2) s.174(1): “.. [to] exercise reasonable care, skill and diligence. s.175(1): “.. [to] avoid a situation in which he has.. a direct or indirect interest that conflicts … with the interests of the company.” s.176(1): “not [to] accept a benefit from a third party conferred by reason of his (a) being a director, or (b) doing (or not doing) anything as director.”