Shareholder disputes

Section 994 Companies Act 2006

If a dispute arises between shareholders, after considering the small print of the Company's Articles of Association, probably the next most important legal principle for any shareholder to understand is Section 994 of the Companies Act 2006.

The most relevant part of the provision states as follows:-

'A member of a company may apply to the court... for an order... on the ground that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of its members generally or of some part of its members...' [emphasis added; a 'member' is simply a shareholder]

The section is, in itself, worded in a very legalistic manner and many lawyers find it difficult to understand, so what chance does the layman have?

What the section seeks to do is protect minority shareholders (those with a 50% shareholding or less) in circumstances where the majority shareholders seek to act in a way which is 'unfairly prejudicial' to their interests. So the provision protects minority shareholders from 'unfairly prejudicial' conduct, but what is that?

It would be impossible to accurately reduce to only a few words the many legal authorities on precisely what conduct is classed as 'unfairly prejudicial', but in very general terms it means that minority shareholders have a right to complain to the court if the majority shareholder(s) run the Company in a manner that damages their position and the worth of their shareholding, often done deliberately and often by misapplying or misusing Company assets.

But the complaint cannot be vague or trivial (e.g. 'they're managing the business badly') and must stand up to some objective analysis. Examples of 'unfairly prejudicial' conduct might be using company assets or money for the personal benefit of a shareholder or the majority shareholder(s) paying themselves far more than people in their position could objectively justify.