Minority shareholders seek to cash in

THE number of minority shareholders who are bringing claims under the Companies Act in an attempt to recoup their investment is soaring, according to one Manchester law firm.

Minority shareholders in limited companies have no legal entitlement to force their fellow directors to buy their stake once the business relationship has soured, unless they can make allegations of fault against the majority shareholders.

However, for those seeking an exit, it is possible to bring a claim under the Act by alleging their minority shareholding has been ‘unfairly prejudiced’ by the behaviour of the majority.

James Thackray, senior associate at Manchester law firm Pannone said simple procedures such as failing to file accounts on time are being used as weapons by minority shareholdes, so businesses need to ensure that they comply with all aspects of company law or face a hefty pay out.

Common allegations, which can be classed as unfairly prejudicial behaviour, include majority shareholders awarding themselves excessive financial benefits, excluding minorities from management decisions, not providing financial information, unfair division of corporate assets or opportunities, and failure to declare dividends.

Such allegations are, according to minority shareholders, tantamount to bullying and can be potent weapons to force majority shareholders into action.

Mr Thackray said the firm is seeing rising numbers of claims and enquiries, particularly from shareholders in smaller limited companies where the business was originally founded as a partnership.

He said: “It is often the case that as the business has evolved from a partnership to a limited company and therefore former partners can easily find themselves minority shareholders.

“When the time comes that they decide they want out, the majority are not in a position to buy their stake, which is increasingly the case in the current economic climate.”