Shareholder Disputes Series (Part 1 of 10) – Common Shareholder Problems

Introduction

Proprietary companies are often controlled by a single shareholder or a group. The majority’s nominated directors will control the board and therefore the activities of the company. If the majority run the company in their own interests (whether as shareholders or with their nominated directors), the detriment to the minority can be serious. The minority shareholders have limited options because they cannot vote the directors out, in a general meeting, without the majority’s support. Getting out is difficult because they cannot force the majority to buy them out. As it’s not a listed company, they are also likely to find it hard to find a buyer of their minority stake. They are locked in with no control of their investment. It’s a difficult position to be in.[1]

Common Complaints

The following are the most common complaints made by minority shareholders[2]:

1. The majority are paying themselves excessive remuneration;
2. Little or no participation in profits;
3. The majority are diverting corporate opportunity / are operating a competing business;
4. Exclusion from management;
5. No involvement in important decisions;
6. Limited access to information about the company’s affairs;
7. Inability to prevent dilution of their equity stake;
8. No freedom to transfer shares;
9. No market for their shares;
10. Bad management by the majority.

Ten Part Series

In this 10 part series, which will be posted on our website over the coming weeks, we consider each of these complaints with recommendations on how a shareholders agreement will assist to prevent them. It is not a consideration of the legal duties and remedies that may prohibit the bad conduct or the remedies available when such conduct occurs.

If you have, or anticipate, a dispute between shareholder in your company, please call Joe Kafrouni to discuss how we can help.

Author

Joe Kafrouni, Legal Practitioner Director, Kafrouni Lawyers

Disclaimer

The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. Business people should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.

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References

[1] Lipton, Phillip; Herzberg, Abe; Welsh, Michelle, Understanding Company Law (Law Book Co, 17th ed, 2014 ), 629

[2] Cadman, John, Shareholders’ Agreements (Sweet & Maxwell Limited, 4^th ed, 2004), 190