Spurious allegations of ‘boardroom bullying’ from minority shareholders seeking a payout are on the increase. James Thackray, a senior associate at law firm Pannone, looks at the options for those who hold a controlling stake.
They were once perfect partnerships born from the shared vision and goals of a handful of ambitious entrepreneurs.
But in these tough economic times when founding friendships are being forgotten, cash-strapped minority shareholders are resorting to allegations of bullying and increasingly using the law as a powerful weapon to enforce payouts.
Shareholder disputes, which involve parties claiming they are being ‘unfairly prejudiced’ by the behaviour of others, are among the most expensive to defend, and those facing claims need to ensure they act quickly as failure to negotiate can be a costly mistake.
Minority ache
As a business grows and fledgling enterprises evolve in to limited companies, former partners can easily find themselves as minority shareholders. And when they decide the day has come to cash in their chips and exit the business, many find that the majority shareholders are not in a position to pay or willing to pay them out.
In the absence of a formal agreement, minority shareholders in limited companies have no legal entitlement to force their fellow shareholders to buy out their stake once the business relationship has soured. However, cash-strapped minorities are increasingly utilising the Companies Act in an attempt to recoup their investment.
For those seeking an exit it is possible to bring a claim under section 994 of the Companies Act 2006 by alleging their minority shareholding has been ‘unfairly prejudiced’ by the behaviour of the majority.
Common allegations which can be classed as unfairly prejudicial behaviour include majority shareholders awarding themselves excessive financial benefits, excluding minorities from management decisions, not providing financial information, unfair division of corporate assets or opportunities and failure to declare dividends.
Such allegations are, according to minority shareholders, tantamount to bullying and can be potent weapons to force majority shareholders into action.
Cash starved
With money now in short supply for many, we are seeing increasing numbers of claims and enquiries, particularly from shareholders in smaller limited companies where the business was founded as a partnership.
And even in cases where there can be little criticism of the conduct of the majority, with the assistance of professional advisers, a case of unfair prejudice can easily be constructed as small and medium-sized companies do not always comply with all aspects of company law.
If, for example, the majority failed to formally declare dividend payments in accordance with procedure or file accounts on time, then the minority would have a claim.
The problem is exacerbated by the fact that minority shareholders tend to throw...
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