What is Minority Shareholder Oppression in England and Wales?

As a company with shareholders in England and Wales, it is useful to know about minority shareholder oppression. This is an important aspect of making sure that your shareholders feel valued, and it can also help you avoid legal action from minority shareholders. This is an issue that is most common in private companies (in other words, companies that have not yet become publicly listed), as minority shareholders are more vulnerable and can find it more difficult to trade their shares. This article will explain some key points about minority shareholder oppression, and it will touch on some of the different shareholder oppression remedies that a court may order against a corporation. 

What is Minority Shareholder Oppression?

Minority shareholders are shareholders that have less than 50% of a company’s voting shares. Minority shareholder oppression occurs when the majority shareholders vote against the minority’s best interests. They can find themselves vulnerable due to this because: 

• they cannot compel the company to act in a certain way; and
• controlling shareholders can make decisions without the minority’s consent.

This problem is more pronounced in private companies. Private companies are companies that do not trade on a public stock exchange. This means that the minority shareholders can find it more difficult to offload their shares if the majority is acting against their best interest. 

What Does Shareholder Oppression Look Like?

Shareholder oppression can manifest itself in a number of ways. 

1. Economic Harm

The majority may make decisions that cause economic harm to shareholders with minority shares. This could happen when the company looks to dilute shares. For example, the majority shareholders may issue new shares, and fix a subscription at a very high amount. This is so that minority shareholders cannot buy them. Therefore, the majority dilutes the minority’s shares in a company. Similarly, the majority may use their power to channel company income to the majority shareholders through pay rises and covering expenses. At the same time, they could also fail to pay dividends to minority shareholders.

2. Indirect Harm Through Mismanagement

Majority shareholders have the power to pass decisions without the consent of the minority. Occasionally, they can make mismanaged decisions and indirectly cause financial loss to minority shareholders. 

Mismanagement can include:

• a breach of fiduciary duties;
• souring a business relationship;
• being in breach of a condition in the company’s articles of association; or
• going against a shareholder agreement.

By mismanaging the company in this way, however, the majority shareholders could be liable for breach of duty to shareholders per the Companies Act 2006. 

3. Unfair Exclusion

Minority oppression could also involve unjustified exclusion from aspects of the company, such as company records and documents. Controlling shareholders could even pass a shareholders agreement with the effect of excluding minority members from participating in certain aspects of the business. 

What Remedies Are Available to Minority Shareholders?

A minority shareholder can bring an action against majority shareholders in a number of ways. 

1. Breach of Contract

First, they could bring a claim for breach of contract. This is most useful if the company is in direct breach of a shareholders agreement or of one of the articles of association. Usually, these contracts will outline how an individual can bring a claim against the corporation, such as an arbitration clause.

2. Unfair Prejudice Petition

Second, they could bring an unfair prejudice petition. This is a claim under the Companies Act 2006. If successful, this gives the court flexibility in providing a remedy. The remedy could require the majority to buy the minority shares. It could also involve requiring the majority to sell their own shares to the minority. 

An unfair prejudice claim requires the minority to show that the company is being run in a way that is unfairly prejudicial to at least some of the shareholders. This must be done in a way that is contrary to the minority’s ‘legitimate expectations.’ 

3. Derivative Claim

Third, they could bring a derivative claim. A derivative claim is where a minority shareholder gets permission to bring a claim on behalf of the company itself. 

Therefore, the majority shareholders (who are usually either company directors or third parties) need to have done something which harms the interest of the company on the whole. This claim can be brought even if the specific minority shareholder has not suffered because the claim is on behalf of the company. 

4. Winding Up Petition

Finally, a minority shareholder can also use the Insolvency Act 1986 to bring a winding up claim. ‘Winding up’ is when the company is made to liquidate its assets. This is granted only if it is ‘just and equitable’ to do so. It is usually only used if a company has been set up for a specific purpose that has already been completed. 

Key Takeaways

As a company with shareholders, it is important that you are aware of potential legal liability to minority shareholders as a result of shareholder oppression. Minority shareholders can bring a number of actions against your company, including for breach of contract, under the Companies Act 2006, or under the Insolvency Act 1986. 

Shareholder oppression can take many forms, such as economic harm, mismanagement, or exclusion. If you are concerned about a potential oppression remedy, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.

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