Shareholders — rights & protection (incl. unfair prejudice, derivative claims)

BLP.06 — Shareholders: Rights & Protection

Membership and voting

• Shareholders' voting, dividend and capital rights depend on the class rights, terms of issue and articles. A shareholder owns shares, not the company's assets. A right to participate in profits does not mean the member can demand any dividend they choose.
• An ordinary resolution needs a simple majority; a special resolution needs at least 75%. At a meeting the relevant denominator is the votes cast; for a written resolution it is the total voting rights of eligible members (ss.282–283, Companies Act 2006). A holding above 25% can block a special resolution if the votes are used against it; exactly 25% does not defeat a 75% majority. Check class rights and weighted voting.
• For meeting notice, proxies, written-resolution procedure and filing, see BLP.04. The percentage alone does not establish that the correct procedure was followed.

Minority procedural rights

• Require a general meeting (ss.303–305): in a company with share capital, the threshold is 5% of the paid-up capital carrying general-meeting voting rights, excluding treasury shares. Without share capital, it is 5% of the relevant total voting rights. The authenticated request must state the general nature of the business and may include a proposed resolution. Directors must call the meeting within 21 days after becoming subject to the requirement, for a date no more than 28 days after the notice convening it. If they fail, the requesting members, or any of them representing more than half of the requestors' total voting rights, may call it for a date within three months after the directors became subject to the requirement. The company must reimburse reasonable expenses caused by the default.
• Circulate a meeting statement (ss.314–316): a statement of up to 1,000 words about a proposed resolution or other meeting business can be required by members with at least 5% of the relevant total voting rights, or 100 members with a relevant right to vote whose shares have an average paid-up amount of at least £100 per member. The authenticated request identifying the statement must reach the company at least one week before the meeting. Requestors normally pay, unless the company resolves otherwise; unless it has previously so resolved, the company need not comply without a sufficient deposit or tender by that deadline. For a public company's AGM, requestors need not pay if sufficient requests arrive before the end of the preceding financial year. Paying the cost does not create a separate right below the threshold.
• Require circulation of a written resolution (s.292): members of a private company with 5% of the total voting rights of members entitled to vote on it, or a lower percentage specified in the articles, may require circulation of a properly movable written resolution and an accompanying statement of up to 1,000 words. Do not confuse this with requisitioning a meeting.
• Demand a poll: the articles supply the right; s.321 invalidates restrictions that would make ineffective a demand by five members entitled to vote, members with at least 10% of the voting rights on the resolution, or members holding voting shares paid up to at least 10% of the total paid-up amount on those shares. The statutory protection excludes polls on electing the chair or adjournment. Private Model Article 44 also permits a demand by the chair, directors or two persons entitled to vote.
• Prevent deemed auditor reappointment (s.488): in a private company, members with 5% of the relevant total voting rights, or a lower percentage specified in the articles, can give authenticated notice before the end of the accounting reference period immediately preceding the deemed reappointment. This is not the same as removing an auditor during the term of office.
• Consent to short notice (s.307): for a private-company general meeting, a majority in number of members entitled to attend and vote must also hold at least 90% in nominal value of the shares carrying that right, or the higher percentage specified in the articles up to 95%. In a company without share capital, the percentage is measured by voting rights. For a public company's non-AGM meeting under s.307 the percentage is 95%; public AGMs have a separate rule. Do not count only heads or only capital.

Unfair prejudice: ss.994–996

• A member may petition where the company's affairs are being or have been conducted in a manner unfairly prejudicial to members' interests, generally or to some members including the petitioner. An actual or proposed act or omission of the company that is or would be so prejudicial is also covered. Section 994 includes a person to whom shares have been transferred or transmitted by operation of law.
• Both unfairness and prejudice must be shown. Apply the parties' legal rights and any equitable considerations arising from their understandings; there is no free-standing power to impose whatever outcome seems fair (O'Neill v Phillips [1999] 1 WLR 1092). A breakdown of trust and confidence, without more, does not entitle a member who has not been excluded to require a buyout: there is no right of unilateral withdrawal (O'Neill).
• Exclusion from management can be unfair in a quasi-partnership company. Relevant features may include personal relationships involving mutual confidence, an understanding that some or all shareholders will participate in management, and restrictions on transferring shares. These are not an inflexible checklist (Ebrahimi v Westbourne Galleries Ltd [1973] AC 360).
• Withholding dividends while diverting profits into excessive remuneration for those in control can be unfairly prejudicial (Grace v Biagioli [2005] EWCA Civ 1222). A fall in value or loss of distributions does not automatically establish unfairness, but it must not be dismissed simply because the company also suffered a wrong.
• The court has broad powers under s.996, including regulating future affairs, requiring or restraining acts, authorising company proceedings and ordering a purchase of shares. A buyout is common. In a quasi-partnership exclusion case, fair value will ordinarily be a proportionate share of the business without a minority discount; valuation depends on the case, not an automatic rule for every petition.
• In an exclusion case the unfairness lies in exclusion without a reasonable offer. If the respondent has plainly made a reasonable offer, the exclusion as such is not unfairly prejudicial and the petition may be struck out (O'Neill). A reasonable offer is ordinarily to buy at a fair, pro-rata value without a minority discount; if the value is not agreed, it is fixed by a competent expert acting as expert; both sides have equal access to information bearing on value and may make submissions to the expert; and costs are addressed: once the majority has had a reasonable opportunity to make an offer, an offer made after a petition is on foot normally needs to cover the petitioner's costs. An offer labelled “fair” is not enough.

Derivative claims: ss.260–264

• A member brings proceedings concerning a cause of action vested in the company, seeking relief on behalf of the company. The cause must involve an actual or proposed act or omission by a director amounting to negligence, default, breach of duty or breach of trust. The claim may be against the director, another person, or both. “Director” includes a former or shadow director; statutory standing includes certain persons to whom shares pass by operation of law. The cause may pre-date the claimant's membership (s.260).
• The member is the claimant, and the company must be made a defendant (CPR 19.14(3)). This differs from proceedings authorised in the company's name under s.996(2)(c).
• Permission is required to continue. At the initial stage the court dismisses the application if the applicant's evidence does not disclose a prima facie case for permission (s.261(2)). Otherwise the application proceeds to consideration of the statutory criteria.
• Mandatory refusal (s.263(2)): refuse if a person acting in accordance with s.172 would not seek to continue; if a future act or omission has been authorised; or if an act or omission that has occurred was authorised beforehand or ratified afterwards. Authorisation and ratification must be legally effective.
• Discretionary factors (s.263(3)): the member's good faith; the importance a s.172-compliant director would attach to continuing; whether future conduct could and likely would be authorised or ratified; whether past conduct could and likely would be ratified; any company decision not to pursue the claim; and whether the member has a cause of action in their own right. Give particular regard to the views of members with no direct or indirect personal interest (s.263(4)).
• Ratification (s.239): for a meeting resolution ratifying a director's negligence, default, breach of duty or breach of trust, disregard votes in favour by the director and connected members. For a written resolution they are not eligible members. They can still attend a meeting, count towards its quorum and participate. Section 239 preserves rules making conduct incapable of ratification and its separate rule about unanimous member consent; do not treat a vote as curing every wrong.

Just and equitable winding up

• Under s.122(1)(g), Insolvency Act 1986, the court may wind up a company where it is just and equitable, including appropriate deadlock or quasi-partnership breakdown cases. Winding up ends the business, so consider alternatives.
• Check standing under s.124. A contributory normally needs shares originally allotted to them, shares held and registered in their name for at least six of the preceding 18 months, or shares devolved through a former holder's death; the section contains other exceptions.
• Where members petition as contributories, s.125(2) requires a winding-up order if they are entitled to relief and, absent another remedy, winding up would be just and equitable, unless another remedy is available and they act unreasonably in seeking winding up instead. An available buyout is relevant; mere availability of some alternative does not by itself decide the issue.

Distinguish the loss and the remedy

• A shareholder cannot recover personally for a fall in share value or distributions that merely reflects loss suffered by the company where the company has a cause of action against the wrongdoer (Sevilleja v Marex Financial Ltd [2020] UKSC 31). The company's claim belongs to it and may be pursued through a permitted derivative claim.
• The routes can overlap: the same director misconduct may support unfair prejudice, and s.996(2)(c) permits the court to authorise proceedings in the company's name. Availability of a personal claim is a factor in derivative permission (s.263(3)(f)). Identify whose right was infringed and what relief is sought; do not assume that a corporate wrong excludes s.994.

Class rights

• Under s.630, follow the articles' procedure for varying class rights. If they contain none, obtain either written consent from holders of 75% in nominal value of the issued shares of the class, excluding treasury shares, or a special resolution at a separate class meeting. Other restrictions remain relevant; a company-wide special resolution is not itself a substitute for the class procedure.
• Non-consenting holders of at least 15% of the issued shares of the class, disregarding treasury shares, may apply within 21 days to cancel the variation (s.633). If they apply, the variation has no effect unless and until the court confirms it. The court assesses unfair prejudice to the represented class shareholders.

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