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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
United Kingdom | Publication | 3月 2024
In addition to seeking contractual protections under the terms of a shareholders’ agreement and the articles of association of the company, a prospective minority shareholder of a joint venture company would be well advised to understand the statutory rights and protections available to it under English law.
The principal protections are to be found in the Companies Act 2006 (CA 2006) and the Insolvency Act 1986 (IA 1996) and in this briefing we discuss how they may operate in the context of a minority shareholding in a joint venture.
Under s.994 CA 2006, a shareholder or shareholders may apply to court where:
It is worth noting that, whilst the members of a limited liability partnership may, by unanimous written agreement, exclude the right to apply to the court for relief on the grounds of unfair prejudice, no such ‘opt out’ right exists for shareholders of a private limited company.
The shareholder must prove that the conduct or proposed conduct amounts to unfair prejudice (in relation to its interest as a shareholder). Both ‘unfairness’ and ‘prejudice’ must be proven, without which the petition will fail1. Prejudice will generally be financial loss, but this is not a strict requirement.2 As far as the ‘unfairness’ element is concerned, this may arise where there has been a breach of the express terms on which the parties have agreed the company’s affairs will be conducted (for example, a breach of a shareholders’ agreement), or where there are wider considerations that make it unfair to rely on a party’s strict legal rights.3
Because of these requirements, an unfair prejudice petition cannot be used to seek a ‘no fault divorce’ and, whilst it is not necessary for a claimant to seek relief with ‘clean hands’, it may influence the court in determining what, if any, remedy may be appropriate, where the petitioner is ‘part of the problem’.4
A broad range of circumstances can amount to unfair prejudice, such as the misuse of company assets, serious mismanagement, exclusion from management5 and the improper dilution of minority shareholdings. However, considering some of the cases where unfairly prejudicial conduct has been alleged, reveals why it is advisable to underpin the position of the minority shareholder in a joint venture with appropriate contractual protections. Whilst conduct might satisfy the ‘unfairly prejudicial’ test in the circumstances of one case, such conduct will not necessarily meet that test in the circumstances of a different company. Against this backdrop, the review below also highlights some of the contractual positions commonly adopted to protect minority shareholders:
Under s.996 CA 2006 the court can “make such order as it thinks fit for giving relief in respect of the matters complained of” and s.996(2) CA 2006 sets out various non-exclusive categories of relief, including regulating the conduct of the company’s affairs or requiring the company to do or refrain from doing a specific act. The court does not have power under s.996 CA 2006 to make an order for the winding up of the company and so, to seek this remedy, an application under IA 1986 would be needed.
In most cases, the behaviour complained of is part of a pattern of behaviour representing an irretrievable breakdown in relations, especially since the court cannot regulate the affairs of the company on an ongoing basis. In practice, therefore, the most common remedy is that the members (or, occasionally, the company itself) must buy out the shares of the minority shareholder.14
After some doubt on this point, the Court of Appeal confirmed in a 2024 case15 that the limitation periods set out in the Limitation Act 1980 apply to unfair prejudice claims so that a claimant typically has 12 years after the claim accrues to take action (assuming the claim is for a share buy out since this is a claim treated as a speciality and accordingly subject to a 12 year limitation period). Where a claim is a monetary claim (for example, because it is contractual or is based on breach of directors’ duties) a limitation period of 6 years will apply.
If the relief sought or ordered by the court is a buy out of the minority shareholder’s shares, contested valuation issues may arise.
Such issues may include the effective date of the valuation because the breakdown in relations between the shareholders may result in a deterioration in the company’s value. The basis of the valuation, and whether the shares should be valued on a pro rata basis without a discount to reflect the fact that the shares represent a minority holding, may also be contentious. The valuation will typically be referred for expert valuation with a direction from the court on such critical matters. The question of whether a discount should be applied has seen a variable judicial approach. Of course, for a minority shareholder, there can be a significant disparity in value according to whether the shareholding is valued as a minority shareholding or as a pro rata share of the company’s overall value. Recent authority suggests that a minority discount should be applied in the absence of express provision to the contrary.16
Having regard to some of these uncertainties, a shareholders’ agreement will often address the detailed circumstances in which one shareholder may be entitled (or obliged) to buy out the shares of the minority shareholder. Detailed valuation mechanisms and bases would be set out with the appointment of a mutually acceptable expert to determine any dispute which arises.
Claims under s.944 CA 2006 may be determined by an arbitrator if the parties have agreed that any disputes will be subject to arbitration rather than being subject to the jurisdiction of the courts.17 However, there may be constraints on the relief to be granted by an arbitrator, particularly where third parties (such as creditors) are affected since they are not parties to the arbitration.
Under s.122 (1) (g) IA 1986, the court may order a company to be wound up if “the court is of the opinion that it is just and equitable” to do so.
The court has a wide discretionary power and can take into account all the circumstances when deciding whether to make a winding up order. For example, if there is a practical deadlock in the management of the company or where the management and conduct of the company make it unjust and inequitable for the petitioner to remain a member of it.18 A recent Privy Council case19 identified two categories of deadlock: firstly a ‘functional deadlock’, i.e. a complete impasse at board or shareholder level in relation to corporate decision-making; and secondly an irretrievable breakdown in trust and confidence between the members of a corporate quasi-partnership. Where there is a shareholders’ agreement in place, a ‘functional deadlock’ may arise by virtue of the inclusion of certain matters (‘reserved matters’) that the minority may veto or requiring unanimity. For both categories of ‘deadlock’, the court will examine all of the circumstances to determine whether the deadlock is such that a winding up order is appropriate.
Parties wishing to enter into a shareholders’ agreement typically consider at length those matters which are considered so fundamental as to justify inclusion on a list of reserved matters. Further, a shareholders’ agreement may stipulate the remedies or actions that will follow if there is deadlock on such matters. At one end of the spectrum, the shareholders’ agreement may simply state that a failure to agree on a reserved matter will result in no action being taken. In other words, the proposed matter will not be effected. At the other end of the spectrum, structural remedies may be activated, for example, entitling one party to buy out the other. The commonly identified danger for a minority shareholder in accepting such structural mechanisms, is that they may favour the party with the greatest financial resources. Although the court’s jurisdiction to order a winding up cannot be excluded, a court may be reluctant to order a winding up where a shareholders’ agreement prescribes contractual outcomes in the event of a deadlock.
A winding up order will generally lead to a shareholder receiving only his pro rata share of the net assets of the company, which will often be below the ‘fair value’ of its shares in the company Further, putting the company into liquidation is a far-reaching and draconian step.
An arbitrator cannot order a winding up because this is within the exclusive jurisdiction of the court.
An important principle of English company law is that the company is the proper person to bring an action for wrongs done to the company. Derivative claims are an exception to this principle. A derivative claim is an action brought by one or more shareholders of the company against a director or a third party, for and on behalf of the company for wrongs done to the company. In this way, a derivative claim allows minority shareholders to bring an action on behalf of the company that the company’s management has not pursued.
Statutory derivative claims are governed by Part 11 CA 2006 and are brought by a member of a company under s.260 (1) CA 2006 in respect of a cause of action vested in the company seeking relief on its behalf.
It is important to note that there are certain hurdles associated with statutory derivative claims which do not apply to other claims due to the requirement for the court’s permission to proceed (s.261 CA 2006). For instance, permission will be refused if the conduct has been authorised/ratified by the company or where a person acting in accordance with the statutory duty to promote the success of the company would not seek to continue the claim.
A fundamental shortcoming for a minority shareholder is that any remedy or compensation is for the benefit of the company rather than for that shareholder. In addition, success in such a claim may not address the breakdown in relations between the shareholders or directly put the minority in a better position, for example by requiring a buy out of the minority shareholder’s shares. Accordingly, minority shareholders will often prefer to pursue an unfair prejudice petition rather than a statutory derivative claim against the majority shareholder.
It is important for a minority shareholder to understand the benefits and constraints of the statutory framework. This will inform how it should protect itself contractually, ensure fair treatment by the other shareholders and optimise its position should a dispute arise.
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