The relationship between shareholders and the company that they hold shares in is a complex one. Shareholders sometimes have rights over and above the mere passing of resolutions and to collect a dividend. Equally, there are times when the Court finds that certain people ought to be directors, even when they are not on the board of directors.
The case of McKillen v Misland (Cyprus) Investments Ltd, [2012] EWHC 521 (Ch) involved questions over unfair prejudice to a shareholder, Sir David Barclay, and whether the same shareholder was also a shadow director of a company – even though he was not on the board of directors.
Unfair Prejudice
Unfair Prejudice is where a shareholder of a company is concerned about conduct (or intended conduct) of the company that is unfair and will / has caused prejudice to his interests as a shareholder of that company. The definition of Unfair Prejudice is found in the Companies Act 2006, section 994.
Firstly, it must be an act of the company that is the cause of the concern. The Court will look at the business realities, rather than a technical approach and has in the past included the affairs of a wholly-owned subsidiary which had common directors.
Secondly, there must be prejudice; this must be to the individual in his capacity as a member (shareholder) but the prejudice is not to be strictly confined to damage to the value of his shareholding. For example, it could be in the form of damage to the value of the shares or removal from participation in the management of a company and the resulting loss of income or profits from the company in the form of remuneration. The prejudice need not be financial in character, although, if the acts complained of have no adverse financial consequence, it may be more difficult to establish it.
Finally, fairness, this is where the conduct complained of is inconsistent with the way that the company was intended to be run. Although fairness is a notion which can be applied to all kinds of activities, its content will depend upon the context in which it is being used. Conduct which is perfectly fair between competing businessmen may not be fair between members of a family. So the context and background are very important.
In this case, it was argued that one of the parties had been put in a position of being a permanent minority because directors appointed by others had other interests and formed a majority. It was noted in the professionally drafted Articles and Shareholders Agreement that there was nothing which entitled the directors to more votes at board meetings than those conferred on them by the Shareholders Agreement.
Shadow Directors
A shadow director is a “person in accordance with whose directions or instructions the directors of the company are accustomed to act. Although it is not necessary that all the directors on the board should so act; it is sufficient if it is a majority of the directors on a company board that do.
Further, professionals such as lawyers and accountants are not shadow directors by reason only that the directors act on advice given by them in a professional capacity.
In this case, it was found that Sir David Barclay was not a shadow director. If he had been, it would have meant that he had duties to the company (pursuant to the Companies Act 2006 sections 170 to 177) and if that company had been liquidated, he could have been responsible for the company debts.
At Benchmark Solicitors, we can assist you in regard to questions over the rights of shareholders and duties of directors. This is a complex and challenging area of the law – professional legal advice is critical.
Chris Tuckett, Solicitor – 7th September 2012