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Minority Shareholder Rights – High Court Ruling

Minority shareholders are entitled to expect that their rights will be respected by the majority and that they will be kept informed of decisions that might affect their interests. However, as one High Court case showed, compensation for breach of such rights is only payable where a real financial loss is established.

A software company had for some time worked closely with another, smaller, company to the extent that the latter was largely financially dependent on the former. The software company came to own 33 per cent of the smaller company’s shares. However, their ways parted following a series of disputes and the smaller company ultimately arranged alternative financial backing from a third company.

The software company launched proceedings against the smaller company and its directors under Section 994 of the Companies Act 2006 on the basis that its position as a minority shareholder had been unfairly prejudiced. In particular, the software company focused on a special resolution by which its shareholding was diluted from 33 per cent to 5.3 per cent.

The end result was that the third company became the owner of the overwhelming majority of the smaller company’s shares. In those circumstances, the software company alleged that the directors had breached their fiduciary duty and acted without a genuine belief that the special resolution was in the best interests of shareholders as a whole.

The Court found that the directors had breached their duty under Section 171 of the Act in failing to give the software company proper notice of the meeting at which the special resolution was passed. They had been intent on the improper purpose of keeping the software company in the dark until after the special resolution became a fait accompli.

In dismissing the software company’s claim, however, the Court found that it had suffered no unfair prejudice. A 76 per cent majority of shareholders had been in favour of the special resolution and it would have passed even had the software company been notified as it should have been. The smaller company had made historic losses and, had it not raised funds from the third company, it would not have survived. The software company’s shares thus had no value as at the date of the special resolution.

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