A Focus on Purchase Orders under the Companies

Minority shareholder protection in UK private companies - Company Law- UK Company Law

Unfairly prejudicial conduct in a private company can take many forms, including mismanagement, misappropriation of company assets, taking financial benefits from minority, exclusion from management of the company, non-payment of dividends, and improper allotments of shares. Remedies against such unfairly prejudicial conduct are provided under Section 996 of the Companies Act 2006, read with Section 994. One of the common remedies is that of purchase order which allows the court to ensure the purchase of the petitioner’s shares. Indeed, one of the vulnerabilities of the private companies’ shareholders is that they are not able to sell out their shares at any time and exercise an exit option, because they can only sell their shares to the other members of the company and may be restricted under the articles from transferring their shares to people outside the company. If in case you are facing challenges with such kinds of issues, seeking business dissertation help provides the most valuable insights in navigating through these complex matters related to the area of legal aspects.

For small private companies in particular, the common remedy is the unfair prejudice remedy wherein Section 994 provides that any member of a company may petition for an order on the ground that company’s affairs are conducted in an unfairly prejudicial to the interests of members or that an actual or proposed act or omission would be prejudicial. It has been said that one of the principal and significant remedies for minority shareholders is the unfair prejudice remedy, which was explained in O Neill, as a remedy that a minority shareholder may seek if removal from directorship is established as unfair to his interests as a member. This principle was also upheld in Brownlow. The question is whether the current regime of protection of minority shareholders is adequate or whether there is a requirement of a new definition and separate regime for private companies for better legal protection for minority shareholders in small private companies. This question is based on the thesis that there are some differences between small private companies and public companies that necessitate a different approach to the protection of minority shareholders’ rights. This is discussed briefly below.

First, the language of Section 994 allows the application of broad for protection of minority shareholders in different instances. In part, this flexibility is due to the application of certain terms in the provision itself. The provision speaks of ‘interests’ as opposed to legal rights of shareholders. Courts have used the member’s legitimate expectations as the basis for determining the scope of these interests of the minority shareholders. The difference between the public and private companies is that while generally informal agreements are not recognised as legitimate expectations in public companies, legitimate expectations is generally recognised as existing in informal agreements among members in small private companies. Thus, in private companies, Section 994 would apply to situations of illegality as well as mere breach of an informal agreement in the absence of illegality, which is a different approach to how legitimate expectations are derived in public companies. The remedy on ground of unfair prejudice under Section 994 has been used mostly in private companies, where the shareholder can prove that when entering in the company he had legitimate expectations that have not been met.

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1. Bhullar v Bhullar [2003] 2 BCLC 241; Anderson v Hogg [2002] BCC 923.
2. AJ Boyle, Minority Shareholders’ Remedies (Cambridge University Press 2002) 132.
3. O Neill v Phillips [1999] 2 BCLC 1.
4. Brownlow v GH Marshall [2000] 2 BCLC 655.
5. Re a Company [1986] BCLC 376, per Hoffman J.
6. Xiaoning Li, A comparative study of shareholders’ derivative actions (Kluer 2007) p 37.
7. A Keay, ‘Company directors behaving poorly: disciplinary option for shareholders’ (2007) JBL 656, p. 678.

Second, private companies ae structured very differently to the public companies, which also has implications for minority shareholders. Private companies can operate with a single nominated director. Directors in private companies may be sole shareholders and outside the scope of internal constitutional or legal challenges. Private companies ‘ board of directors are also not bound to conduct Board Meetings other than the mandatory first Board meeting which means that the directors can continue to act “as unchallenged ‘lone rangers.” Combined with the restrictions on minority shareholders in private companies to sell their shares, this makes for a difficult environment for minority shareholders in private companies.

Thus, potential for oppression of minority shareholders may be more than in public companies. In this context, it has also been argued that the law fails to mitigate the corporate agency cost of majority and minority because there are several features of the company law that exacerbate agency cost for minority shareholders in general and private companies’ minority shareholders in particular. Thus, ostensible protections for the minority shareholders may fail to mitigate these issues in private companies in the UK and therefore, raises questions regarding whether law should provide additional minority protections especially to the shareholders of small private companies in the UK. Even where private companies have diverse shareholding, shareholder activism is demonstrated to be unlikely and very cumbersome. This is because of the legalities involves in derivative actions and the shareholders needing judicial approval to proceed and even when they do manage to get the judicial sanction, and the case is decided in their favour, any damages awarded would be for the company. Considering these aspects of law related to minority shareholders’ protection in private companies, it then becomes pertinent to critically engage with the law in order to understand whether there is a need to redefine protection for the private companies’ shareholders.

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8. Companies Act 2006, Section 154(1).
9. Margaret Flynn, In Search of Accountability: A review of the neglect of older people living in care homes investigated as Operation Jasmine (Welsh Government 2015).
10. Alex Griffiths, Laura Pritchard-Jones and Margaret Flynn, Response concerning Corporate Criminal Liability, p. 37.
11. Jonny Hardman, ‘The plight of the UK private company minority shareholder’ (2021) European Business Law Review.
12. Andrew Keay, ‘Applications to continue derivative proceedings on behalf of companies and the hypothetical director test’ (2015) 34(4) Civil Justice Quarterly 346.
13. Joan Loughrey, Directors' Duties and Shareholder Litigation in the Wake of the Financial Crisis (Edward Elgar Publishing Inc. 2013).