Shareholder oppression regards the actions and abuses of power by majority shareholders that unfairly prejudice minority shareholders. Minority oppression occurs where the majority act in a way that goes against the best interests of the minority. It is the imbalance of bargaining power (minority shareholders hold less than 50% of a company’s voting shares) that renders minority shareholders particularly vulnerable to oppression, with majority shareholders able to vote for, and make, decisions without the consent or agreement of the minority (often in their own best interest, and not in the minority’s).
The issue is more pronounced with private companies compared to public ones, particularly where a private company is rendered even more vulnerable by the lack of a public market for their shares, making selling up and escaping such oppression more difficult.
What does this oppression look like? It can take countless forms and some examples are listed below. It is also important to note that some of these acts of shareholder oppression exist outside of an individual’s capacity as a shareholder - they can also be treated unfairly in their roles as a manager or director (who holds shares).
Majority shareholders may abuse their powers for financial gain, and to the economic harm of minority shareholders, including the dilution of minority shares. The Companies Act issues the right to shareholders to subscribe for shares under any new share issue. However, in some instances, majority shareholders may fix subscription prices at a high rate, preventing shareholders from acquiring them and therefore diluting their existing shares.
Another abuse of power regards the failure to pay dividends, which may be coupled with a diversion of company income to majority shareholders via other mediums, like pay raises and expenses.
Serious mismanagement by majority shareholders can cause significant financial losses, to the detriment of minority shareholders. Mismanagement can take many forms, but often includes breaches of:
Certain duties (for example, fiduciary)
Any shareholder agreement
Minority shareholders may also find themselves unfairly excluded from accessing corporate records and documents, which leave these parties in the dark about the company’s finances and inner workings. In extreme cases, minority shareholders may even be locked out of corporate premises in a bid to exclude their input.
There are three different kinds of claims a minority shareholder can make in these instances to vindicate their rights. It is important to note that the first two of these claims - unfair prejudice and derivative claims - can only be brought by persons to whom shares have been transferred in a company, be it by law or otherwise. A petition for winding up can be brought about not only by shareholders but by the company itself, as well as directors and creditors.
This is available where the affairs of the company are being, or have been, conducted in a manner that is unfairly prejudicial to the interests of some or all of the shareholders. It also relates to where an actual or proposed act or omission of the company would be prejudicial. This might be the case, for example, where company assets have been misappropriated or shares have been allotted to dilute a minority’s interests.
If the court is satisfied that the unfair prejudice claim is made out, it has a wide range of options making this a very popular route. The most common order is for the shares of the minority member to be bought out. However, in exceptional circumstances, an order may be made requiring the majority members of a company to sell their shares to the minority shareholder, who has petitioned.
The courts will take into consideration the seriousness of the prejudicial conduct identified alongside the interests of other shareholders and creditors when deciding the case. However, there exists bars to relief in these circumstances, namely where:
The minority shareholder refuses a fair offer to be bought out of the company
The company is insolvent, bar where the insolvency was a result of the prejudicial conduct or the prejudicial conduct impacts the minority shareholder’s status in some way other than share value
Minority shareholder misconduct
Delay in bringing a claim regarding the prejudicial conduct
It may also be possible to bring a derivative claim (so in your own name on behalf of the company). These can be brought against directors and third parties (or both) whose acts or omissions have been negligent, default, or otherwise constitute a breach of duty or trust. In order to bring a derivative claim, the claim must not be contrary to the duty to promote the success of the company and the act or omission must not have been authorised or ratified.
Where a claim is made out, the court can give permission to the applicant to bring or continue their claim brought on behalf the company, or otherwise continue a claim commenced by the company itself or another member that pointed to an abuse of process but did not prosecute. The court may also order that the respondent indemnifies the minority shareholder or applicant for their legal costs in instances where:
It would be reasonable for the company’s directors to have pursued that claim
The claimant’s sole interest is as a shareholder
The company would receive benefit from the action taken by the applicant
The Courts will take into consideration a variety of factors including:
Good faith on the part of the minority shareholder
The acts or omissions carried out were authorised, or otherwise likely of being authorised
The company’s decision to pursue the claim
The existence of an alternative, personal remedy
Views of shareholders with no personal interest in the claim (be it direct or indirect)
A company is wound up where it is be found just and equitable, by the courts, to do so. The circumstances in which this may be the case often include shareholder deadlock, but also include instances of shareholder oppression (for example, mismanagement and exclusion). However, an individual is not able to make such a petition if they are otherwise unable to identify a tangible benefit to them if the company were to be wound up.
Again, the courts consider the seriousness of the matter identified, in conjunction with the interests of shareholders, creditors and the company’s affairs as a whole. The courts will also consider the availability of alternative remedies and may bar an order if the petitioner refuses to consider such an alternative where unreasonable to do so.
The information on this website is intended as a guide and does not constitute legal advice. Vardags do not accept liability for any errors in the information on this website, nor any losses stemming from reliance upon the statements made herein. All articles and pages aim to reflect the legal position at time they were published, and may have been rendered obsolete by subsequent developments in the law. Should you require specialist advice, tailored to your situation, please see how Vardags can help you.