October 29th, 2012 / Insight posted in

Minority investor given a bad deal

PC writes: Eight years ago, I formed and ran a company with three other people, all of us owning equal shares in it. Three years later, two of us left the business. Since then we have received no accounts or notices of annual meetings. The company is profitable, but dividends are rare and derisory compared with the salaries taken by the remaining directors. Although we have no shareholder agreement, the acknowledged plan was to build the business and sell it after five years to retire. We feel we have been treated unfairly and need some guidance on our rights.

The Companies Act 2006 no longer requires private companies to hold annual meetings. However, as the creation of your company pre-dates the Companies Act 2006, its articles of association should be examined to see if the requirement to hold annual meetings has been included, writes Jon Sutcliffe, partner at Kingston Smith LLP. If there is such a provision, the meetings must be held — otherwise the company and its officers will be liable to a fine.

If the directors tried to move the factory, other assets and goodwill of the business to a new company, it would be sufficient to bring a “derivative action”, which is available for dealing with company directors who breach their statutory duties. As a minority shareholder you have a number of rights you can fall back on to stop abuses by directors. The courts have ruled that unfair conduct can include: excluding owners from management in a firm formed as a quasi partnership; taking excessive remuneration; not paying dividends; and misuse of fiduciary powers.

The remedy most often sought is that the other shareholders buy out their shares for a fair value. However, this is not the only potential outcome of a petition, as the court has complete discretion as to the remedy it grants. It can order repayment of any monies found to have been wrongfully taken out of the company and, as a last resort, has the power to wind up the firm.