Judge Imposed Sweeping Orders To Protect Minority Shareholder And Company

To what extent can the court effectively protect a company’s minority shareholders? In the wake of an unfair prejudice petition brought by a minority shareholder, a court didn’t hold back in taking swift interim action to protect him – and the company itself. The commercial litigation lawyers at ParrisWhittaker in The Bahamas advise and support directors and shareholders on their corporate rights and responsibilities.

A minority shareholder holds fewer than 50% of voting shares in a company. They are therefore more vulnerable to potential oppression on the part of the majority shareholders/directors. Where the majority shareholders abuse their power and the minority shareholders lose out as a direct result, legal action can be taken for unfair prejudice.

Typically, the minority shareholders’ shares will be devalued as a result of unfair prejudice. An unfair prejudice petition to the court is made, in the Bahamas, under the Companies (Amendment) Act 2019.

If the action succeeds, it is common for the respondent/s to be ordered to buy out the petitioner’s shares at a fair price. But that is far from the only remedy potentially available to minority shareholders in such circumstances.

A recent decision from the UK’s High Court illustrates the scope of judicial discretion to order appropriate relief on an unfair prejudice petition – including (in this case) removing the company’s chief executive officer from his role. The decision has persuasive authority on the Bahamian courts.

What’s the background?

Two shareholders – P and R – owned around 41.35% each of the company shareholding. One of them (R) was also a director of the company, which manufactures, distributes, and sells luxury perfume.

They had entered into a relationship agreement which required both to exercise reasonable endeavours to promote the success of the business. The agreement gave P free rein with running the business without undue interference.

P presented an unfair petition, arguing that R had knowingly been violating UK sanctions regulations by causing the company to illegally sell perfume products to Russia – and without P’s consent. It was, on the facts, quite an extraordinary case which led to equally unusual and far-reaching relief.

The alleged conduct, said P, threatened the company’s reputation and future viability of the company; breached R’s fiduciary duty; and breached his obligations under the relationship agreement.

The petition led to at least two hearings. At the first hearing, held ex parte (without notice to R), the judge concluded that there was a ‘very high degree of assurance’ that P would succeed at trial; and an “exceptionally strong prima facie case that there had been unfair conduct.”

Remedies

The judge’s approach incorporated several remedies. His orders included:

The removal of R from the board and P’s management team was appointed as directors. This effectively changed the constitution of the board itself. One reason for doing so was that the judge recognised the company itself was in danger of facing criminal prosecution given the case against R. On that basis, there was a “highly persuasive case” that distancing R from the company and its cooperation and full disclosure with the authorities was the most effective way to protect the company from any suggestion of being associated with such trading.
An imaging order in respect of electronic documents belonging to R and his wife (also a respondent).
An order for the delivery up of company books and records; and R was to deliver up his passport.
At a later hearing, the judge upheld R’s removal from the board and that would remain in force until the trial (or earlier order). He further concluded there was a strong prima facie case – a higher standard than the standard test of ‘a serious issue to be tried’ – that he was deliberately trading or causing the companies to trade in breach of sanctions.

There was an “existential danger to the companies” if R was to remain in or to be reinstated.

What does this mean?

Majority shareholders/directors are in a position of power and responsibility which must not be misused to the detriment or loss of minority shareholders. Any conduct and decisions they take, which could have a detrimental impact on them could to lead to a costly unfair prejudice claim. It’s clear the court is willing to use its discretion to impose a range of orders to protect the petitioner – and the company itself if necessary.

For advice and representation on protecting your rights as shareholder, or any issues relating to company matters, contact the award-winning corporate and commercial lawyers on +1.242.352.6112.

Valorem¹ [2024] EWHC 1737