Issues for Minority Shareholders

Issues for Minority ShareholdersNaomi is a nonage-shareholder in Run For Your Life (RFYL) Ltd.DividendsUnfair Prejudicial chooseThe first issue that will be looked at in this scenario is whether Mehmet and Lucys mischance to pay dividend amounts to inequitable prejudicial canalise. Under the Companies Act 2006 s.9941(CA 2006) Naomis appeal should relate to how the unions conduct unfairly prejudiced her interests as a instalment. A members interests are not limited to the strict legal rights granted to them by agreements but also handle the legitimate expectations, such as expectations of profit and management, arising from the conduct of the company and any understandings between the parties (ONeill v Phillips)2. In order for such expectations to occur, the company has to be a quasi-partnership company, which arises from the basis of personal kind involving mutual confidence and an agreement that all of the shareholders/members would be involved in management to some degree ( Ebrahimi v Westbourne Galleries Ltd)3. Applying Ebrahimis examen to RFYL Ltd, it can be said that it is a quasi-relationship company as Naomi was initially a partner even before the company incorporated and was brought on as a director during the incorporation. Share restrictions can also be considered to exist, (though we are never really told) since RFYL Ltd is a private company that cannot trade its shares in macrocosm markets. It should be noted, that Naomi has expressly tell her dis-interest in RFYL Ltd which means that it may make it difficult to prove the quasi-relationship between the members and that in Irvine v Irvine4, the judges found that in a quasi-relationship company, the failure to pay dividends does not always amount to a legitimate expectation. However, this shouldnt deter Naomi from arguing that a quasi-relationship exists as there may a be chance to reconsider and revoke his resignation if it was effected hastily and in a manner and circumstances which did no t strike too profoundly at mutual trust and confidence, and that a failure to permit this might amount to unfair prejudice (Re Flex Associates Ltd)5 and that though the Judges may not find a legitimate expectation, it can still be argued that the non-payment of dividends amounts to an unfair prejudicial conduct.Regardless of whether she is a director or not, Naomi as a member has a vested interest in receiving dividends from RFYL Ltd, (Re Coroin Ltd6). For Naomis entreat to succeed, she should objectively and individually prove that her interests have been prejudiced and that conduct was unfair7. In Re surface-to-air missile Weller Sons Ltd8thoughGibson J states that he does not intend to suggest that a shareholder who does not receive an income from the company except by way of dividend is always entitled to complain whenever the company is controlled by persons who do derive an income from the company and when profits are not fully distributed by way of dividend he does go to i ndicate that it will depend on the facts of the case which means that it will remain in the judges discretion to patch up on whether the facts of the case amount to unfair prejudicial conduct. Lucy and Mehmet decide to stop Naomis salary and fail to pay dividends, leaving her with no form of financial generate for her investment and accordingly a lack of financial return can be considered prejudicial (Re Coroin Ltd)9. Moreover, Naomi needs to also prove that the conduct was unfair. The House of Lords in ONeill v Phillips10effectively limited the definition of unfairness to breaches of the terms of lawfully enforceable agreements and to where equitable considerations make it unfair for those conducting the companys affairs to rely on the strict legal rights brooked to them. In relation to the non-payment of dividends to Naomi, it can be considered unfair peculiarly when both Mehmet and Lucy are still receiving substantial salaries11 all while Naomi receives no form of remunerat ion.Naomi seems to have a good chance at succeeding with a petition under s.99412. If the judges find in favour of Naomi, she can claim for remedies under s.99613. The most common remedy is an order to purchase shares of the minority member. It in the case that order to purchase the shares is made, the valuation date will be on the same day as that of the order, unless a quasi relationship is found, in which case the valuation will be pro-rata and without a minority discount.Just and Equitable Winding-upNaomi also can also bring a petition through the Insolvency Act 1986 s. 122(1)(g)14, though its chances of success are comparatively much lower. Harman J in Re a Company (No 00370 of 1987)15 found that a failure to pay dividends may amount to sufficient reasoning for air current up of a company. Nonetheless, in accordance with IA 1986 s. 125(2)16 the courts have been less abandoned17 to grant an order for winding up if there are less severe remedies available (i.e. offer to purchas e or unfair prejudicial conduct). Winding up under s.122(1)(g)18 is commonly reserved for more difficult situations where no clear member holds a majority (Re Yenidje Tobacco Ltd)19.Therefore, it would not be viable for Naomi to bring a petition for winding up as it would most certainly be struck out by the court.Offer to Purchase If the offer to purchase made by Mehmet and Lucy is found to be fair, then it will most probably change Naomis course of action. As it stands, if a fair offer is made regarding the purchase of the petitioners shares, an unfair prejudicial conduct petition would also be struck out. Similarly, if a petition for winding up is made the courts will also be inclined to strike it out in favour of a fair offer. An offer to purchase is sometimes seen as the ideal remedy in such cases as it limits the possibility of future complications and allows to petitioner to step away from the company20 The real issue with the offer to purchase, is determining whether the off er is reasonable and fair. Lord Hoffman in the case of ONeill21 stated that a reasonable offer must be to purchase the shares at a fair value on a pro rata basis without a minority discount determined by a competent expert. It should also include submissions by both parties to an expert. In our scenario, it is not very clear whether the offer is considered to be reasonable since the integrity of the auditor is in question. Having the company auditor value the shares would probably be considered unfair since he is not considered adequately independent22. Although a court will usually consider offers to purchase as the best form of remedy it will still allow a petition to pass away depending on the merits of the case.Directors DutiesThough this question deals more with minority shareholder remedies, a look at Naomis possible breaches as a director and whether Mehmets and Lucys claim that Naomis inattention is a cause for the fall in profits should be made. The general directors duti es that are owed to RFYL Ltd. are found in CA 2006 ss.171-7723.The issue to consider in relation to Naomis possible breach of directors duties is Naomis failure to attend board meetings. The relevant sections of the CA 200624 that pertain to our argument are ss. 172 174. Under s.172 a director has a duty to promote the success of the company and act in good credence for the benefit of the company. In order to prove that the directors actions were in good faith subjective test must1 Companies Act 2006 s.9942 ONeill v Phillips 1999 1 WLR 10923 Ebrahimi v Westbourne Galleries Ltd 1973 AC 3604 Irvine v Irvine (No 1) 2006 EWHC 406 (Ch) 2007 1 BCLC 3495 Re Flex Associates Ltd 2009 EWHC 36906 Re Coroin Ltd 2013 EWCA Civ 7817 Hawks v Cuddy 2007 EWHC 29998 Re Sam Weller Sons Ltd 19909 Re Coroin Ltd 2013 EWCA Civ 78110 ONeill v Phillips 1999 1 WLR 109211 Re Sam Weller Sons Ltd 1989 5121314 Insolvency Act 1986, s. 122(1)(g)15 Re a Company (No 00370 of 1987) 1988 1 WLR 1068 (Ch).16 Insolvenc y Act 1986, s. 125(2)17 Re Sam Weller Sons Ltd 199018 Insolvency Act 1986, s. 122(1)(g)19 Re Yenidje Tobacco Ltd 191620 Grace v Biagoli 2006 2 BCLC21 ONeill v Phillips 1999 1 WLR 109222 North Holding Ltd v Southern Tropics Ltd 19992324