PROTECTION FOR MINORITY SHAREHOLDERS

DIRECTORS’ ADVISORY SERVICE FACTSHEET

These Guidance Notes offer an outline of the relevant provisions, but they are
not comprehensive and should not be relied on as authoritative. Specific
advice should be obtained on any particular issues.

Introduction

Shareholders have ultimate control of a company. However the directors run the
company's business and are responsible for its management. In general shareholders
cannot interfere, although they can appoint and remove directors.

Some constitutional matters, such as changes of the company's name, or to its

Memorandum or Articles of Association, or to put it into liquidation (when solvent),
require approval by special resolution, i.e. a 75% majority, which can therefore be
blocked by shareholders with 25% or more.

Other shareholders' resolutions require only a simple majority, i.e. more than 50%
voting in favour.
The Companies Act 2006 (CA 06) gives some protection to minority shareholders.
However it is always preferable to have a shareholders' agreement, which can
include more extensive and effective minority protection.

General protection - BIS investigation

The Secretary of State for Business, Innovation and Skills (BIS) may appoint inspectors
to investigate the affairs of a company (s.431 Companies Act 1985 – CA85).

Application for a s.431 investigation may be made by:

 not less than 200 shareholders or holders of not less than one-tenth of the shares
issued, or
 in the case of a company not having a share capital, one-fifth in number of the
members, or
 in any case, on application of the company (i.e. by decision of its directors).

The application must be supported by evidence to show good reason for the request.

The applicants may have to pay for the expenses of a s.431 investigation (CA 85 s.439)
and may be required to provide a deposit of up to £5,000 in advance as security for
such payment (CA 85 s.431).

The Secretary of State can also appoint inspectors to undertake an investigation under
CA 85 s.432 where fraud or illegality is suspected, or where the company's
shareholders have not been given adequate information about the company's affairs.

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In general the BIS will only order an investigation in very serious circumstances where
there is an element of major public concern. Usually these only arise in the case of
large public companies.

A BIS investigation will not provide any direct redress for aggrieved shareholders.

Further information about BIS investigations can be found on the Insolvency Service
website, http://www.bis.gov.uk/insolvency/companies/company-investigation

General protection - against unfair prejudice

A shareholder may apply to the court by petition on the ground that the company's
affairs are being or have been conducted in a manner which is unfairly prejudicial to
the interests of its shareholders generally or some of them (including at least the
applicant), or that any proposed act or omission of the company would be so
prejudicial (CA 06 s.994).

If the petition is successful the court has wide powers to order redress for a minority
shareholder who has suffered unfair prejudice (CA 06 s.996). Among other things the
court may make an order:
 regulating the conduct of the company's affairs in the future,
 requiring the company to refrain from doing or continuing an act complained of, or to
do an act it has omitted to do,
 authorising civil proceedings on behalf of the company, as appropriate,
 providing for the purchase of the shares of any shareholder by other shareholders
or by the company itself.

In practice, the court will usually order that a minority shareholder is bought out by the
majority, at a fair price which may be determined by the court.

Examples of unfair prejudice include failure to give accurate accounting information,

serious mismanagement, diverting business to another company in which the minority
have no shareholding, co-option by the board of a director who has been
overwhelmingly rejected by the shareholders, or a demonstrably incompetent member
of a controlling family remaining in charge of a company despite protestations by the
minority shareholders.

It is not enough that a minority disagree with decisions of the majority: there must be an
unfair adverse effect on the minority.

The unfairly prejudicial conduct must affect the shareholder in that capacity not, for
example, solely as a director or creditor of the company.

Specific protection

There are numerous provisions allowing minority shareholders to apply to the court on
particular issues, which the court will then decide whether to approve or disallow. In
most cases there is a fairly short time limit for making the application. The following list
is not comprehensive.

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1. Alteration of the Articles of Association

Any shareholder can apply to the court for a special resolution to alter the Articles of
Association to be set aside if it is not bona fide for the benefit of the company as a
whole. (This is a common law right, not under the Companies Acts.)

2. Variation of class rights

Where shares in a company are divided into separate classes (e.g. ordinary shares
and preference shares), CA 06 s.630 makes provision for varying the rights of a
class. The holders of at least 15% of the issued shares of the class so varied may
apply to the court to have the variation cancelled. The applicants must not have
consented to or voted in favour of the variation. (CA 06 s.633)

3. Re - registration as a private company

A public company may by special resolution be re-registered as a private company

(CA 06 s.97). Holders of not less than 5% of the shares, or of any class of shares,
or not less than 50 of the company’s shareholders, may apply to the court to have
the resolution cancelled (CA 06 s.98).

4. Striking off the register

The directors of a private company which has ceased to trade may apply for the
company to be struck off the register (CA 06 s.1003). Shareholders must be notified
of the application and any shareholder or other interested party can object on
various grounds. Subsequently any shareholder (or creditor, or the company itself),
may apply to the court for the company to be restored to the register (CA 06
s.1030) although this must generally be done within 6 years.

5. Company voluntary arrangement (CVA)

Part 1 of the Insolvency Act 1986 (IA 86) makes provision for company voluntary
arrangements, in the form of a composition with a company’s creditors or a scheme
of arrangement of its affairs. Any shareholder may apply to the court if unfairly
prejudiced by the CVA or if there has been a procedural irregularity. (IA 86 s.6).

6. Other insolvency procedures

Where a company is involved in insolvency procedures IA 86 makes provision for

various issues on which any shareholder may (in appropriate circumstances)
apply to the court or take certain procedural steps. In practice these are rarely
invoked.

Other minority rights

Accounts – CA 06 s.431-2 entitles any shareholder to demand a copy of the

company's last annual accounts and directors' report and a copy of the audit report,
without charge.

Shareholders Meetings – Shareholders with at least 10% of the voting rights (5% if no
shareholders’ meeting has been held for more than 12 months) may require the
directors to convene a shareholders’ meeting (CA 06 s.303). The requisition must state
the objects of the meeting. Shareholders with 5% of the voting rights are entitled
to

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propose resolutions at shareholders’ meetings and to have statements in support
circulated to the shareholders (CA 06 s. 314).

Private companies are no longer required by statute to hold AGMs (CA 85 s.366
repealed by CA 06 from 1 October 2007). However a private company may still have to
hold AGMs if it’s Articles continue to include this requirement.

This Factsheet is one of a series produced by

the IoD Directors’ Advisory Service.
It is intended as a general introduction to
the subject, and is not a definitive guide.

If you would like specific advice, please contact

the Directors’ Advisory Service on
020 7451 3188, businessinfo@iod.com.
The service is free and is exclusive to members
of the IoD.

IoD Information Centre

123 Pall Mall, London SW1Y 5EA
March 2013

©2013 Institute of Directors. All rights reserved. 4