When minority shareholders are at loggerheads with the company, tough decisions often have to be made in short timescales and the relationship can quickly become poisonous.
Three judgments in seven days from different courts and very different sized businesses have all been in support of the company seeking to resist an interventionist shareholder trying to use powers in the Companies Act (CA) to gain an advantage in their disputes with the business. Together they illustrate a range of tools in company law which are available to directors and shareholders:
1) JKX Oil v Eclairs involved shareholders whom the directors believed were trying to destabilise the company (JKX) for the purposes of purchasing it more cheaply. The directors used the power in Companies Act s793 to send requests to the shareholders for clarification of the ownership of certain shares in order to understand whether nominee/ trustee arrangements were being put in place for voting and a potential hostile takeover. They considered the responses received to those questions to be evasive and inadequately clear. Using a power in the company's articles of association (a non-model /bespoke article) they then refused the shareholders the right to attend or vote at the Annual General Meeting (AGM) for failure to comply with the request for information.
The High Court agreed that the CA s793 responses from the shareholders were inadequate but considered that directors could not rely upon their power under the articles for the apparently ulterior motive of preventing hostile shareholders seeking to acquire the company. The Court of Appeal has overturned this. In its view the reason for using s793 and the subsequent power of exclusion under the articles is not relevant provided that the formal rights arise. The renegade shareholders could consequently be excluded and their votes ignored.
Take away points:
- CA s793 gives a powerful tool to demand information about ownership and potentially (indirectly) the intentions of hostile shareholders.
- It appears on the strength of this case that, depending on additional powers provided for in the Articles of Association, it might sometimes also be tactically used to outmanoeuvre voting tactics at an AGM provided the directors are nominally acting in the interests of the company.
2) In Charterhouse v Bonnyman the directors and all but one shareholder accepted an offer to buy the company. Part of the offer included an agreement that the sellers would vote to change the articles of association to introduce a ‘drag-along’ provision such that the remaining shareholder could be required to sell his (minority) shares at the same price. The dissenting shareholder brought a claim for ‘unfair prejudice’ against him by the majority in forcing him to sell in this way. Various factual allegations of prejudice were rejected leaving the key contentious issue of whether the power of the majority of shareholders to amend the articles by special resolution had been exercised equitably and for the benefit of the company as a whole (in the opinion of the shareholder).
- The court noted that it was for the person claiming that shareholder power has not been used equitably to prove that. Here, the power had been exercise equitably as everyone including independent shareholders were getting the same price so there was no particular detriment to the one remaining objecting shareholder.
- A drag provision ensured all shares in the company would be acquired, which would avoid future instability in the company and could therefore have been considered as being in the best interests of the company as a whole.
Take away points:
- Offers can be made dependent on a change of articles to introduce a drag-along provision.
- Drag-along provisions can be used to prevent the sale and purchase being held hostage by a ‘ransom shareholder’.
- This course of action is capable of amounting to unfair prejudice, however it is a matter of fact whether it is unfair in each case.
3) In Burry & Knight v Knight a shareholder sought to gain access to the list of members (shareholders) of a family company. Under CA s116 the register of members must be open to inspection by any member (free) or any other person (on payment of a fee). If a request is made for access, CA s117 allows the company to refuse to provide the register of members if the request is not for a proper purpose. The company must however make an application to court within seven days to avoid the need to hand over the register.
Mr Knight was pursuing a long-running disagreement with members of his family through the ownership and control of a family company in which he held a minority shareholding. He applied for the register of members of the company so he could:
- “Study the current membership”.
- Write to all members to tell them about alleged mismanagement by the directors in the 80s, 90s and 00s.
- Write to warn members to be careful about any future valuations of the company.
The Court considered that items 1 and 2 were improper purposes. Item 3 was potentially a proper purpose. However, the test under s117 was that access to the register did not have to be given if one of the purposes of the request was not a proper one. The Court therefore ordered that the register should not be provided and ordered costs against Mr Knight. It also ordered that the company did not have to comply with future such requests from him.
Take away points:
- Shareholders normally have a right to see the list of members.
- The company needs to act rapidly (seven days) with a court application to resist providing it.
- Improper purposes would appear to include access for the purposes of a wider ‘vendetta’.
- However, if any of the shareholders’ reasons (other than de minimis) are improper reasons, then the request can be refused with costs, even if other reasons are not improper.
These tools together govern the ability of shareholders and directors to resolve disputes between them about their respective interests in the business.
The author Lloyd Nail is a member of Burges Salmon’s Disputes and Litigation team led by David Hall advising companies and shareholders on contentious issues and disputes.