“I’m losing my company”

You went into a business with friends or colleagues or family members. All is well until it isn’t. You notice that slowly but surely the company is being run behind your back or steps are being taken to exclude you from the business operations. Decisions are taken contrary to the company’s articles that hurt the company or prejudice you.

What can you do?

There’s lots you can do, actually.

Minority shareholders in Scotland (any shareholder holding 50% or less of the total shares issued) can ask the court (either the Sheriff Court or the Court of Session) to make any order it considers appropriate to offer the minority shareholder relief from the acts of which they complain in terms of ss. 994 to 996 of the Companies Act 2006. Generally, the order sought by the minority shareholder will be for the “bad guy” to buy their shares for fair market value.

To persuade the court to grant orders for the minority shareholder, they must persuade the court that the director(s)’ conduct is unfairly prejudicial. “Unfair prejudice” is a unitary concept, but you must persuade the court the conduct is both unfair and prejudicial.

Examples of unfairly prejudicial conduct are excluding a shareholder and director from operating the business, breaching the relationship of trust between directors, and making decisions that are detrimental to the company’s interests/finances. These are all behaviours we tend to see in cases of disputing directors.

Often, a director and shareholder’s main concern is what happens in the interim period, i.e., who runs the company during the disagreement. There is no easy answer to this question. Sometimes the answer might be in a shareholders’ agreement or the company’s articles. In my experience, the answer often lies in who has de facto control of the company, either because they are primarily responsible for running the company or acted quickly to secure their position.

The interim period is fraught with risks for anyone as their behaviour is under a microscope.

However, the court has the power to regulate the conduct of the company’s affairs and prevent the company from continuing to act in the manner of which is complained during the interim period (an order called an “interdict”), so, carefully planned litigation can help you wrestle back, or at least influence, control of your company while you fight your corner.

A “nuclear option”, a shareholder can ask the court to grant an order for “just and equitable” winding up of the company. This is a remedy of last resort and effectively ends the company – the bank will freeze the company’s accounts and any transaction entered after a petition is presented to the court is potentially void (putting third parties at risk and doing business with the company materially unattractive).

If the company is liquidated, any surplus cash divided between or amongst the shareholders in the relevant shares.

The remedy is only available where orders under ss. 994 to 996 do not remedy the unfairly prejudicial conduct or where there is a functional deadlock (i.e., a company that cannot do anything due to the shareholder and/or balance of power). In other words, the remedy is only available where no other remedies exist.

The takeaways here should be, if you find yourself in a situation where your fellow directors are “stealing” your company, running it contrary to the agreed parameters, or generally operating the company in a way that is prejudicial to you, you have options available to you; and make sure you take time at the start of your commercial venture to invest in a proper framework for governing your company, e.g., a shareholders’ agreement and functioning, considered articles of association.

If, for whatever reasons, you find yourself in a dispute with your fellow directors and/or shareholders, BTO can help you navigate towards a resolution.