If a fellow director is a shareholder, even a minority shareholder, you have to exercise caution in the event of disagreement. If a dispute arises between shareholders, the Company’s Articles of Association should be consulted to ascertain the procedure laid down for disputes. If the Articles provide no answer probably the next most important legal principle for any shareholder to understand is Section 994 of the Companies Act 2006.

A member of a company may apply to the court by petition for an order under this Part on the ground:

(a) that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or
(b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.

What the section seeks to do is protect minority shareholders (those with a 50 per cent shareholding or less) in circumstances where the majority shareholders seek to act in a way which is ‘unfairly prejudicial’ to their interests. What conduct is classed as ‘unfairly prejudicial’ is a moot point, but in very general terms it means that minority shareholders have a right to complain to the court if the majority shareholder(s) run the company in a manner that damages their position and the worth of their shareholding, often done deliberately and often by misapplying or misusing company assets.

But the complaint cannot be vague or trivial (e.g. ‘they’re managing the business badly’) and must stand up to some objective analysis. Examples of ‘unfairly prejudicial’ conduct might be using company assets or money for the personal benefit of a shareholder or the majority shareholder(s) paying themselves far more than people in their position could objectively justify.

Court Orders protecting shareholders

Any complaint alleging a minority shareholder has been ‘unfairly prejudiced’ is a law suit brought against the other shareholders in their personal capacity. Where ‘unfair prejudice’ can be established, the Companies Act provides that the court ‘may make such order as it thinks fit’. Although this means the court has very wide powers to make almost any order, by far the most common order made by the court is an order that one or more of the shareholders should purchase the shareholding of the other shareholder(s).

Normally, the court will order the majority shareholders must purchase the shareholding of the minority shareholder(s) at a ‘fair value’ (although as the company has only been trading a short time fair value may not be a great deal).

So it is best to take legal advice about this remedy (and other potential remedies) and how much it is likely to cost. This will largely depend on the circumstances of the case. It might be that by taking legal advice, your fellow director / shareholder might be prepared to negotiate to avoid having to pay legal fees to defend the action. You should be prepared to ‘buy-out’ the other shareholder so you also need to consider what a ‘fair value’ for the shares might be and whether you can access the finance to make the necessary settlement.

See also: Shareholders’ agreements: What they are and why they are necessary