{"id":268941,"date":"2025-06-02T17:13:08","date_gmt":"2025-06-02T17:13:08","guid":{"rendered":"https:\/\/peraltafinancing.com\/business\/legal\/wide-but-not-limitless-protection-undergraduate-laws-blog\/"},"modified":"2025-06-02T17:13:08","modified_gmt":"2025-06-02T17:13:08","slug":"wide-but-not-limitless-protection-undergraduate-laws-blog","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=268941","title":{"rendered":"wide, but not limitless, protection \u2013 Undergraduate Laws Blog"},"content":{"rendered":"
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This post has been contributed by Professor Christopher Riley<\/em>, Module Convenor for Company law.<\/p>\n
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Minority shareholders who feel they are being mistreated by the majority have a number of remedies they might pursue: derivative claims, proceedings to enforce the company\u2019s articles, a petition for unfair prejudice under s994 Companies Act 2006, and asking the court to wind up the company on the \u2018just and equitable\u2019 ground.\u00a0 Of these, a petition for unfair prejudice seems now to be the most popular.\u00a0<\/p>\n
There are both legal and practical reasons for the popularity of the s994 regime.\u00a0 The court has much wider remedial powers following a successful s994 petition; it can make any order it sees fit, including a buy-out of the minority\u2019s shares which will often provide the most effective long-term solution to the shareholders\u2019 disagreements.\u00a0 Moreover, the range of misconduct that a shareholder can complain about under s994 is also much wider than under the alternative forms of action listed above.\u00a0 Like derivative claims, it includes wrongs done to the company itself, such as breaches of directors\u2019 duties.\u00a0 Unlike derivative claims, however, it is not limited to such wrongs; a shareholder can use s994 to complain about harm which only they, and not the company, have suffered, such as their removal from the board.\u00a0 And whilst misconduct complained about under a s994 petition may amount to a breach of the company\u2019s articles, it need not do so.\u00a0<\/p>\n
Given these advantages, s994\u2019s popularity is unsurprising. However, it is important to remember that the range of misconduct that minorities can complain about under s994 is not unlimited.\u00a0 A s994 petition can cover only \u2018conduct in the affairs of the company\u2019 or \u2018an act or omission of the company\u2019.\u00a0 In simple terms, the proceedings must be about the way the company is being run; it cannot be about the \u2018private conduct\u2019 of the shareholders.\u00a0 A minority shareholder\u2019s dissatisfaction with the way the shareholders are acting outside of the company will not generally fall within s994.\u00a0<\/p>\n
This limit on the complaints that a shareholder can raise under s994 is now being treated by the courts as excluding many disputes about the ownership of the company.\u00a0 In Graham v Every [2014] EWCA Civ 191<\/em>, for example, the court held that a shareholder\u2019s decision to sell her shares (even if that sale would breach a pre-emption provision in the company\u2019s articles) would be considered \u2018private\u2019 and not, ordinarily, concerned with the conduct of the company\u2019s affairs.\u00a0<\/p>\n
Another example of this approach is seen in the more recent case of Brierley v Howe<\/em> [2024] EWHC 2983 (Ch)<\/em>. The High Court struck out (from a s994 petition) a minority\u2019s allegation that the majority shareholder had failed to honour a promise to transfer to the minority shareholder a proportion of the shares owned by the majority; such a failure, even if true, was not connected to the running of the company itself.\u00a0<\/p>\n
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In smaller companies, it will not be uncommon for agreements (and then disputes) around share ownership to arise.\u00a0 Pre-emption agreements will be common, reflecting existing shareholders\u2019 desires to keep ownership of the company in the hands of the existing, and trusted, members.\u00a0 And valued employees may be offered the lure of a future ownership stake in the company to discourage them from leaving.\u00a0 It is a significant limitation on the scope of s994 that it cannot ordinarily be used to address such ownership disputes.<\/p>\n
If breaches of these understandings cannot be raised as part of s994 proceedings, then how else might the minority shareholder protect their position?\u00a0 The obvious answer is that the minority should simply enforce the agreement which the minority says the other shareholders are breaching.\u00a0 If, for example, the majority are failing to follow a pre-emption obligation in the articles, or in a shareholders\u2019 agreement, then the majority should enforce the articles or the shareholders\u2019 agreement.\u00a0<\/p>\n
There are, however, at least two problems with this reasoning.\u00a0 First, the promises made by the shareholder may not be independently enforceable, say for a lack of consideration. Second, as already noted, one of the advantages of s994 is that the court has more remedial discretion, including the ability to order a buy-out.\u00a0 This may be a more attractive remedy to the minority than enforcement of whatever share-related promises the majority shareholder has made.\u00a0 There may, then, be a case for the courts revisiting their refusal to address the sort of misconduct that arises in cases like Graham v Every <\/em>and Brierley v Howe<\/em>.\u00a0<\/p>\n
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