This post has been contributed by Professor Christopher Riley, Module Convenor for Company law.
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’s articles, a petition for unfair prejudice under s994 Companies Act 2006, and asking the court to wind up the company on the ‘just and equitable’ ground. Of these, a petition for unfair prejudice seems now to be the most popular.
There are both legal and practical reasons for the popularity of the s994 regime. 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’s shares which will often provide the most effective long-term solution to the shareholders’ disagreements. 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. Like derivative claims, it includes wrongs done to the company itself, such as breaches of directors’ duties. 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. And whilst misconduct complained about under a s994 petition may amount to a breach of the company’s articles, it need not do so.
Given these advantages, s994’s popularity is unsurprising. However, it is important to remember that the range of misconduct that minorities can complain about under s994 is not unlimited. A s994 petition can cover only ‘conduct in the affairs of the company’ or ‘an act or omission of the company’. In simple terms, the proceedings must be about the way the company is being run; it cannot be about the ‘private conduct’ of the shareholders. A minority shareholder’s dissatisfaction with the way the shareholders are acting outside of the company will not generally fall within s994.
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. In Graham v Every [2014] EWCA Civ 191, for example, the court held that a shareholder’s decision to sell her shares (even if that sale would breach a pre-emption provision in the company’s articles) would be considered ‘private’ and not, ordinarily, concerned with the conduct of the company’s affairs.
Another example of this approach is seen in the more recent case of Brierley v Howe [2024] EWHC 2983 (Ch). The High Court struck out (from a s994 petition) a minority’s 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.
In smaller companies, it will not be uncommon for agreements (and then disputes) around share ownership to arise. Pre-emption agreements will be common, reflecting existing shareholders’ desires to keep ownership of the company in the hands of the existing, and trusted, members. And valued employees may be offered the lure of a future ownership stake in the company to discourage them from leaving. It is a significant limitation on the scope of s994 that it cannot ordinarily be used to address such ownership disputes.
If breaches of these understandings cannot be raised as part of s994 proceedings, then how else might the minority shareholder protect their position? The obvious answer is that the minority should simply enforce the agreement which the minority says the other shareholders are breaching. If, for example, the majority are failing to follow a pre-emption obligation in the articles, or in a shareholders’ agreement, then the majority should enforce the articles or the shareholders’ agreement.
There are, however, at least two problems with this reasoning. 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. This may be a more attractive remedy to the minority than enforcement of whatever share-related promises the majority shareholder has made. 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 and Brierley v Howe.