Negligent Financial Advice Claim: “Bolam Test” Abandoned

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Professional Negligence

In O’Hare and another v Coutts & Co [2016] EWHC 2224 (QB) (9 September 2016) the High Court held that the defendant bank had not breached its duty (in contract and in tort) to exercise reasonable skill and care when advising the claimants on making certain investments. Kerr J dismissed the claim in its entirety, although not without considerable sympathy for the claimants, considering that he preferred their evidence where it conflicted with Coutts’.

The judge decided that Coutts had not breached its duty (in contract and in tort) to ascertain the claimants’ requirements and objectives and to advise, explain and inform the claimants about investments that were suitable.

The decision is of particular interest regarding the judge’s approach to

  • Professional negligence / breach of duty
  • Damages in contract and tort
  • Evidence of the professionals involved – including attendance notes

Duty of Care

The judge held that the Bolam test did not apply to the issue of whether the defendant had breached its duty of care when advising the claimants about the investments. Instead, he preferred the approach of the Supreme Court in the Scottish medical negligence case of Montgomery v Lanarkshire Health Board [2015] UKSC 11. The judge focused on what the claimant, as an informed investor would expect to be told.

The judge did not adopt the common Bolam Test (see below) i.e. whether the defendant had advised in accordance with a practice accepted as proper by a responsible body of persons skilled in the giving of financial advice. The judge was influenced in his decision by the fact that the expert evidence indicated that there was little consensus in the industry about how to manage the risk appetite of clients. The decision suggests that the giving of investment advice is not simply an exercise of professional skill; an informed investor, like a medical patient, is entitled to decide the risks that he is willing to take and has to take responsibility for his own mistakes.

The Bolam test

The Bolam test derives from the decision in Bolam v Friern Hospital Management Committee [1957] 2 All ER 118 ( www.practicallaw.com/D-016-0979) . In that case it was held that a doctor was not necessarily negligent if he conformed to a practice accepted as proper by some responsible members of his profession, even if other members would have taken a different view. Evidence of an accepted practice must be responsible and reasonable. In other words, provided the doctor explained the risks of a given treatment, to the extent that it accorded with a responsible body of medical opinion, liability would not attach. The Bolam test applies to all professional liability cases.

The Bolam test was approved by the House of Lords in Sidaway v Board of Governors of the Bethlem Royal Hospital and the Maudsley Hospital [1985] AC 871.

The Montgomery Test

In Montogmery v Lanarkshire Health Board [2015] UKSC 11, the Supreme Court held that Sidaway (and, therefore, the Bolam test) did not reflect the reality and complexity of the way in which healthcare services were provided. It held that an adult person of sound mind was entitled to decide which, if any, of the available forms of treatment to undergo, and her consent had to be obtained before treatment interfering with her bodily integrity was undertaken. Doctors were under a duty to take reasonable care to ensure that patients were aware of any material risks involved in any recommended treatment, and of any reasonable alternative or variant treatments. The court defined materiality as:

“…whether, in the circumstances of the particular case, a reasonable person in the patient’s position would be likely to attach significance to the risk, or the doctor is or should be aware that the particular patient would be likely to attach significance to it…”

This is only when the medical professional has taken reasonable care to ensure that the patient was aware of the material risks involved in any recommended treatment, and of any reasonable alternative or variant treatments.

Decision in O’Hare

In the O’Hare’s negligent financial advice claim against Coutts, Kerr J preferred and applied the approach taken in the case of Montgomery, namely the onus is on the patient or client, as an adult with sound mind, to make their own decision about the risks involved. The O’Hares, as informed investors, were entitled to decide the risks that they were prepared to take and accept responsibility if those risks did not pay off. This standard is now likely apply more generally in financial advice claims.

The judge referred to the FCA’s Conduct of Business Sourcebook (COBS rules) which do not rule out the use of persuasion. The need for full information to be given is emphasised, and conflicts of interest to be properly managed:

“…As I read the authorities and the COBS regulatory scheme, there is nothing intrinsically wrong with a private banker using persuasive techniques to induce a client to take risks the client would not take but for the banker’s powers of persuasion, provided the client can afford to take the risks and shows himself willing to take them, and provided the risks are not – avoiding the temptation to use hindsight – so high as to be foolhardy. The authorities include mention of the adviser sometimes having to save the client from himself, but also of the principle that investors take responsibility for their investment decisions including mistaken ones. The duty of care must reflect a balance between those two propositions, which pull in opposite directions…”

Damages in contract and tort

A duty can be owed both in contract and in tort and concurrent duties of care are routinely owed by professionals (Henderson v Merrett Syndicates Ltd [1994] UKHL 5 ( www.practicallaw.com/D-000-1263) ). Accordingly, a financial advisor, who fails to exercise reasonable care in providing services to the client who retains him, can render himself liable in contract and in tort, unless tort liability is specifically excluded.

The general aim of an award of damages in tort is to put the injured party in the same position as he would have been in if the tort had not occurred. Damages in tort aim to restore the claimant to his pre-incident position. Generally, the purpose of an award of damages for breach of contract is to compensate the injured party. The general rule is that damages are meant to place the claimant in the same position as if the contract had been performed. Damages are usually awarded for expectation loss (loss of a bargain) or reliance loss (wasted expenditure).

Not all losses caused (in the factual/ “but for” sense) by a breach of contract or breach of duty are recoverable by the innocent party from the party in breach. Remoteness of damage refers to the principle by which the law determines which consequences caused by the defendant’s breach are within the scope of the defendant’s responsibility and should be brought into account.

There is a difference between the principle of remoteness in contract and in tort. In contract, generally, all foreseeable but not unlikely losses are recoverable. In tort, all losses that are reasonably foreseeable as liable to happen, even in the most unusual case, are recoverable. In Wellesley Partners LLP v Withers LLP [2015] EWCA Civ 1146 ( www.practicallaw.com/D-035-2377) , the Court of Appeal held that in cases of concurrent liability in contract and in tort, the narrower principle of remoteness of damage in contract applies.

Witness evidence

The Civil Evidence Act 1995 (CEA 1995) effectively abolished the rule against hearsay evidence in civil proceedings. In assessing the weight to be given to any hearsay evidence, the court is to have regard to any circumstances from which any inference can reasonably be drawn as to the reliability or otherwise of the evidence. The general rule is that any fact which needs to be proved by the evidence of a witness is proved by either:

  1. Written evidence at an interim application.
  2. Oral evidence at trial.

In Gestmin SGPS SA v Credit Suisse (UK) Ltd [2013] EWHC 3560 (Comm), Leggatt J analysed the approach that a judge should take when faced with evidential discrepancies between recent and sworn witness statements prepared with the help of lawyers and evidence in the form of contemporaneous electronic stored information. After emphasising the unreliability of human memory, he said that the best approach for a judge to adopt was:

“…to place little if any reliance at all on witnesses’ recollections of what was said in meetings and conversations, and to base factual findings on inferences drawn from the documentary evidence and known or probable facts. This does not mean that oral testimony serves no useful purpose – though its utility is often disproportionate to its length. But its value lies largely, as I see it, in the opportunity which cross-examination affords to subject the documentary record to critical scrutiny and to gauge the personality, motivations and working practices of a witness, rather than in testimony of what the witness recalls of particular conversations and events…”

Absence of key defence witness

Mr Shone, the O’Hares’ main contact and relationship manager did not provide evidence in court. Instead, Coutts relied upon the contemporaneous (attendance) notes written by Mr Shone. Given that Mr Shone was alleged to have persuaded the O’Hares to take a higher risk than they would otherwise have done, the judge had expected to hear direct evidence from the advisor.

Although Coutts provided hearsay evidence from other witnesses, which was accepted, the judge concluded that Mr Shone’s testimony was necessary for Coutts to prove its defence. Coutts explained that the reason for Mr Shone’s absence was that he was no longer employed by them and had told the defendant that he was too preoccupied with other business responsibilities to devote time to the current proceedings. Why the witness summons procedure to secure his attendance at trial was not adopted is not examined.

The judge devoted a significant part of his judgment to address the difference between the parties about whether the claimants had been led and persuaded by Mr Shone to take a higher risk than they would otherwise have done. It was significant that Coutts did not adduce any direct evidence from Shone. If he was not called at trial, “…he would plainly be the Banquo’s ghost at the feast…”

Mr Shone’s hearsay evidence was derived from his contemporary notes of various meetings and conversations with the claimants. This evidence was recited in the statements of witnesses called to give oral testimony at trial. The judge held that the hearsay evidence was admissible and that by setting it out in the statements of its witnesses, the defendant had complied with the requirement in CPR 33.2, that hearsay evidence is to be served in a written statement. It was for the claimants to apply under CPR 33.4 to call Mr Shone for the purpose of cross-examining him on his notes of the various meetings and telephone calls, but they did not do so. Instead, the claimants relied on the fact that Mr O’Hare gave oral evidence at trial and his evidence was in many cases uncontradicted by any other witness at trial.

The judge assessed the weight to be given to the evidence by reference to the factors in section 4(1) of the CEA 1995. He concluded that the defendant needed Mr Shone’s testimony to assist its defence and without him, significant parts of the claimants’ account remained uncontradicted, except by notes that were disputed and not defended by their maker. In the circumstances, the judge was not prepared to accept that the notes were to be preferred, or that Mr O’Hare’s evidence contradicting them was to be rejected.

In this case Mr O’Hare’s oral evidence at trial, that Mr Shone had used persuasion on the claimants to induce them to take higher risks /that than they otherwise would have done, was accepted by the judge over and above the documentary evidence. He asserted that the judge in Gestmin had not suggested that oral testimony served no purpose. He remained of the view that the general rule (that any fact which needs to be proved by the evidence of witnesses is to be proved at trial, by their oral evidence) still applies.

Comment

  • The decision emphasises that undocumented witness evidence can be important. The reliability of contemporaneous documents is generally preferred to uncorroborated recollections, but there are occasions where oral testimony is required to support such documents.
  • The decision is of particular interest because of the approach of the judge to breach of duty. He held that the Bolam test did not apply to the issue of whether the defendant had breached its duty of care when advising the claimants about the investments. Instead, the judge preferred the approach of the Supreme Court in the Scottish medical negligence case of Montgomery v Lanarkshire Health Board [2015] UKSC 11. The judge focused on what the claimant, as an “informed investor”, would expect to be told and not on whether the defendant had advised in accordance with a practice accepted as proper by a responsible body of persons skilled in the giving of financial advice.
  • The judge was clearly influenced in his decision by the fact that the expert evidence in the case indicated that there was little consensus in the industry about how to manage the risk appetite of clients.
  • The decision suggests that the giving of investment advice is not simply an exercise of professional skill; an informed investor, like a medical patient, is entitled to decide the risks that he is willing to take and has to take responsibility for his own mistakes.
  • Finally, the judge’s obiter (non binding) comments are also of interest: that, if the negligence claim had succeeded, he would not have allowed the claimants to benefit from the more generous measure of damages in tort, in circumstances where their concurrent claim in contract was statute-barred.

First Published 20 September 2016 – http://social.luptonfawcett.com/blog/negligent-financial-advice-claim-bolam-test-abandoned

 

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Conflict of Interest: Accountants Penalised for Breach

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Professional Services Sector  – Lessons from critical High Court ruling:

Read my featured article highlighting the latest case law regarding Accountants’ duties,  client confidentiality & conflicts of interest, of wider interest to Professional Service Firms:

This was a salutary and expensive lesson (US$11.6M) on when instructions should be declined or consent sought from clients where conflicts of interest might arise.   The piece summarises the key issues for accountants’ firms from December 2016’s 987 paragraph High Court judgement, where the court was highly critical of failures by the Defendant top tier accountant firm in relation to client confidentiality.

Case:

Harlequin Property (SVG) Ltd and another v Wilkins Kennedy (a firm) [2016] 3188 EWHC (TCC)

Link to judgement: http://www.bailii.org/ew/cases/EWHC/TCC/2016/3188.html

The article covers:

  • What is acceptable practice
  • The Defendant firm’s practical failings
  • What constitutes an adequate information barrier
  • Recommendations

 

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Directors & Shareholder Claims: 3

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Understanding the options – 5 tips

As discussed in previous posts, Boardroom and shareholder disputes arise for many reasons. When they do, it is important to understand the legal rights of all parties and the options available. The consequences of allowing things to drift and potentially get worse shouldn’t be ignored. There are options which help make life easier.

  • If you are a minority shareholder in a company, what happens if you have a disagreement with the majority shareholder, or a group which has more control?
  • How do you solve the problem, or even avoid a dispute?
  • In the third of this series, here are five important tips:

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1] Shareholder Agreements

The House of Lords in Russell v Northern Bank Developments Corp Ltd[i] emphasised the practical utility of Shareholder Agreements. These are used for a wide variety of purposes, adding significantly to the company’s constitutional regime of Memorandum and Articles. This includes providing personal rights to minority shareholders who otherwise have no control over fundamental points.  The minority shareholder’s concerns would be more difficult to deal with unless specifically covered as an enforceable private contract between members.

These should be provided in the Shareholder Agreement, covering similar areas to partnership agreements.

The benefits include avoiding future misunderstandings and practical difficulties in running the business.

A Shareholder Agreement typically deals with issues such as:

  • restrictions on transferability of shares
  • lack of a market for sale of shares
  • establishing a purchaser
  • formulas for valuation and funding
  • pre-emption rights
  • compulsory transfer or option arrangements
  • protection of minority members by permitting a veto
  • preserving confidentiality
  • efficient transfer on death, disability, retirement
  • estate planning
  • regulating management and involvement of investors
  • mechanisms for dealing with stalemate.

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2] “Unfair Prejudice” Petition
Section 994 of the Companies Act 2006 permits a shareholder to petition the court on the basis that the shareholder’s interests have been unfairly prejudiced in the conduct of the Company’s affairs due to e.g. breach of:

  • the Articles of Association
  • the Shareholder Agreement
  • fiduciary duties by directors
  • exclusion of a minority from the running of the company in small “quasi-partnership” companies.

The Court has wide discretion to grant the relief it decides is appropriate. This is often an order that the aggrieved minority shareholder’s shares are purchased for ‘fair value’. This may include a premium on the actual value of the shares as recompense to the petitioner for any wrongdoing by the majority.

3] What is a ‘derivative claim’ – S.260 of the Companies Act 2006?

In certain circumstances a shareholder can ask the court to prevent action being taken by the Directors which is harmful to the company, or make a claim against the Directors for any loss suffered by the company as a result of their action.  The claim must be made by the shareholder on behalf of the company. The shareholder’s right to bring a claim “derives from” the company. This is a claim made in a “representative capacity” by the individual shareholder, not on the shareholder’s own behalf. It is the company which is suffering the harm.  The damage to the company may also harm the shareholder indirectly, e.g. if there is a reduction in profits or other damage suffered.

Derivative claims are relatively unusual because although it is the member who issues the court proceedings as claimant to launch the action, the court must give permission for the claim to continue to trial.  A number of tests have to be satisfied before the court will give permission.

The shareholder runs a risk on costs and at least initially has to fund the claim themselves. It is possible to obtain an order that the company indemnify the member, although they may obtain no immediate benefit themselves by launching the court case. However, if the claim succeeds, the company will have been protected. Ultimately, that should benefit the shareholder because it protects their investment in the company.

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4] What is a claim under S.122(g)  of the Insolvency Act 1996?

Any shareholder may apply to have a company wound up on “just and equitable grounds” including in quasi-partnerships, involving the shareholder’s right to manage the company – Ebrahimi  v Westbourne Galleries Ltd[ii]. The sole remedy here of winding up is draconian, available only in specific circumstances. This is the “nuclear option” in shareholder disputes – the aggrieved shareholder petitions the court for a winding up order to terminate the company.

Usually the shareholders’ differences have become irreconcilable and a ‘commercial divorce’ is the only way to move forward. When a company is wound up, if there is anything left after paying the creditors and the liquidator the proceeds are divided amongst the shareholders.

Not every aggrieved shareholder will be able to justify a winding up petition to the court. There must be compelling reasons showing that the company can no longer continue.  The aggrieved shareholder has to prove there will be a concrete benefit in making a winding up order.  If there is some alternative remedy, which would allow the company to continue, the court may refuse to make the order.

A typical scenario where a winding up may be justified is where there is deadlock or stalemate between two or more shareholders in a quasi-partnership company which can’t be resolved. Where there is an aggrieved minority shareholder, experience shows that the majority shareholder will seek to dispute:

  • the complaints by the minority that there was any “quasi-partnership” in the first place
  • the circumstances of any alleged unfairly prejudicial conduct
  • the alleged value of the business
  • the aggrieved minority shareholder’s share

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5] Finally

The sooner informed negotiations start, the more likely it is that a private business will survive a shareholder dispute. A comprehensive Shareholder Agreement can help to preserve operations and resolve matters quickly.

Expert legal advice early on could keep the process out of prolonged, expensive and destructive litigation. This is by providing the facts, insight and information to allow all parties to make informed decisions quickly. This would ultimately be to the benefit of the company as a whole and the shareholders individually.

For further information regarding minority shareholder / business disputes and unfair prejudice petitions contact Paul.Sykes@lf-dt.com

[i] [1992] 1 WLR 588

[ii] [1972] 2 All ER 492

Unfair Prejudice & Drag Along

Minority Shareholder wins Quasi Partnership claim

8 Ways to avoid a Business Dispute

Are you a Shadow or de facto director?

Service of a Claim Form on a Director

WHEN DIRECTORS FALL OUT

Disclaimer

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Directors & Shareholder Claims: 2

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Resolving Boardroom Conflict  – 5 More Tips

Disputes between shareholders of private companies are often emotional and can be as complicated as a personal divorce. The disruption to any business can be extremely damaging. Knowing what remedies are available to resolve matters quickly could be the key to survival.

  • What if the majority is taking unfair advantage of you?
  • What if you suspect co-shareholders are stealing from the company?
  • In the second of a series, here are five further important pointers to be aware of:

1/ Protecting the Minority

There is a common misconception that the complex laws and regulations relating to companies should achieve a just and fair relationship between a minority shareholder and the majority. However, there is very little law which protects the minority, unless the parties have agreed beforehand.

Differences between shareholders don’t always arise because of power struggles or personal animosity. Frequently, disputes are down to differences in approach where one party wants to retire or withdraw their investment. Disagreements may centre on

  • timing
  • valuation issues
  • the direction of the company

The public courts are unlikely to be the ideal venue for resolving shareholder disputes. Proceedings are in the public domain and the procedure can be expensive and slow.

Particularly where private companies are concerned, there are effective alternatives, including: negotiation, mediation and arbitration.

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2/ Shareholder Agreement

An effective way to address potential problems before they arise is a Shareholder Agreement. This sets out ground rules for the shareholders in given circumstances. Many potential and predictable problems can be addressed in advance in a Shareholder Agreement. This leaves the shareholders to concentrate on managing the business, rather than a future internal dispute.

Amongst other things, the agreement can cover:

  • management responsibilities
  • non-competition restrictions
  • bonus and remuneration formulae
  • approval/decision process for major corporate decisions
  • buy/sell provision – e.g. a “shotgun clause” to force a transaction
  • how a shareholder can realise his or her investment in the company
  • whether to impose any restrictions on selling shares
  • criteria on valuing the shareholding
  • exit provisions – timetable for sale
  • appointment of an independent third party to value the shares
  • a detailed dispute resolution framework

 

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3/ What is an “Unfair Prejudice” claim?

The majority shareholders are in a powerful position, even where there is a Shareholder Agreement. However, the court will protect the position of minority shareholders from being abused in certain circumstances.

Section 994 of the Companies Act 2006 allows a shareholder to apply to the Court for an order declaring that the affairs of the company are being conducted in a manner unfairly prejudicial to the minority shareholder’s interests. If the court agrees, it will usually order that the shares of the minority shareholder are bought for fair value. However, the Court has a very wide discretion as to what it can order, including:

  • purchase of the shares of any members of the company by other members or by the company itself and, in the case of the purchase by the company itself, the reduction of the company’s capital accordingly
  • conduct of the company’s affairs in the future
  • company to refrain from doing or continuing an act complained about, or to do an act about which the petitioner has complained that it has omitted to do
  • civil proceedings to be brought in the name and on behalf of the company by such persons and on such terms as the court may direct
  • company not to make any, or any specified, alterations in its articles without the court’s permission

4/ When might a court find “unfair prejudice”?

Where a minority shareholder believes that the company is being run in a way which is unfairly prejudicial to some of the shareholders, the aggrieved shareholder can make an application to the Companies Court for a remedy. Unfairly prejudicial conduct may include for example:

  • majority shareholders paying themselves excess remuneration
  • majority shareholders failing to pay dividends
  • breach of duty by diverting business to majority shareholders or their connected companies
  • directors selling or buying assets at an unfair price
  • failing to pay declared dividends
  • undertaking activities which are not permitted under the company’s Articles
  • doing something which might result in the company’s insolvency
  • failure to follow company law or proper procedure on meetings.
  • failure to issue annual accounts

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5/ “Quasi-Partnership”

In small to medium sized private companies, the court might be persuaded that a “quasi-partnership” exists. The aggrieved party may complain that there is a breach of their ‘legitimate expectations’ about what the company was set up to do, and how it would be run. E.g.

it was agreed, or a common intention is proved:

  • the company would carry on a particular business
  • all would be entitled to an equal say in how the company is managed
  • a mutual expectation of continued employment
  • the directors would be fair when deciding on the salaries to be paid, the amounts to be kept in the company to fund growth, and the dividends to be paid out

If the court decides that a quasi-partnership exists, termination of that arrangement or unfair prejudice to the minority may result in the majority being obliged to buy out the shares of the aggrieved minority shareholder. If the majority acts in breach of such

“legitimate expectations”

the court may intervene.

Where an aggrieved shareholder has cause for complaint, urgent action is required. The court may refuse to interfere if a minority shareholder let the matter slide. The court will treat this as acceptance of the action taken by the majority:

“delay defeats equity”.

The court will consider all of the background circumstances on an application, including the minority shareholder’s own conduct.

These applications are rarely straightforward and are often settled by negotiation before the court is asked to make a final decision.  Quite often, one or more of the shareholders leave with a package.

For further information regarding minority shareholder / business disputes and unfair prejudice petitions contact Paul.Sykes@lf-dt.com

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Directors & Shareholder Claims: 1

Unfair Prejudice & Drag Along

Minority Shareholder wins Quasi Partnership claim

8 Ways to avoid a Business Dispute

Are you a Shadow or de facto director?

WHEN DIRECTORS FALL OUT

Disclaimer

 

 

 

 

Directors & Shareholder Claims: 1

How to break the deadlock – 8 tips

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Boardroom and shareholder disputes can arise for many reasons. When they do, it’s important to understand the legal rights of all parties and the options available as well as the consequences of allowing things to get worse. However, there are some options which can make life easier:

  • If you are a minority shareholder in a company, what happens if you have a disagreement with the majority shareholder, or a group which has more control?
  • How do you solve the problem, or even avoid a dispute?
  • In the first of a series, here are seven important pointers to be aware of:

1/ Minimal Influence

In company law, a minority shareholder (anyone with 49% or less) has minimal influence over the management of the company or the distribution of its profits.  The standard constitution of a company and rules under the Companies Act give little protection to a minority shareholder.

Differences can and do arise as the business evolves and personal circumstances change:

  • there may be differences on strategy or the direction of the company
  • power struggles and poor personal relationships may develop
  • shareholders may wish to retire or disagreements occur on service contracts and remuneration.

There are ways in which the minority shareholder’s interests can be protected, either by agreement with the other shareholders or as a last resort by taking action through the courts.  It is easy for entrepreneurs to preference the initial brokering of a deal, and getting the new business up and running, over longer term, but equally important considerations.  But it’s always advisable to consider these scenarios at the beginning.

2/ Shareholder Agreements

A shareholder agreement is a must for a private company, especially where there are a relatively small number of shareholders who also manage the business. These don’t always arrive without (you) the minority shareholder/s pressing for one. You need to proactively pursue this as part of the start up, or failing that, you should put it at the  top of the agenda.  In a Shareholder Agreement, the majority shareholder usually gives up some rights to the minority.

The process of preparing the Agreement helps shareholders address points which could become potential problems. This encourages the key players to work through the issues early, when everyone is positive and communications are still good.

It’s much more straightforward and economic to deal with this as part of the start up, rather than risk the expense and uncertainty of going to court later.  All concerned will know where they stand where there is a Shareholder Agreements. It reduces the risk of conflicts arising or getting out of hand.

An existing businesses can certainly set up a Shareholder Agreement at whatever stage in its evolution, for example when one of the main shareholders is considering retiring or their circumstances have changed.

It is also worth remembering that a Shareholder Agreement

  • is confidential
  • doesn’t have to be filed at Companies House
  • sits behind the company’s public face
  • is a private document between the shareholders.

 

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3/ Points to Cover

A Shareholder Agreement can go a long way to ensuring disputes are avoided or at least, provide the mechanism that allows them to be settled quickly. An agreement identifies shareholders’ specific responsibilities and outlines how and where disputes are to be resolved. For example, it can specify forced buy/sell provisions during a dispute and even include a formula or other means to determine the transaction price.

Amongst other things, the Agreement can cover:

  • key objectives
  • financing and borrowing
  • dividends, directors’ fees and salaries / profit distribution
  • controls on the appointment of Directors
  • major expenditure
  • exit mechanisms – for shareholder deaths, misconduct, divorce, incapacity, etc.
  • fair valuation process for transfer of shares
  • succession arrangements – insurance of key persons
  • dispute resolution

The Shareholder Agreement gives minority shareholders a say in the business and some security. Without one, the minority would have little impact on decisions regarding the company and protecting their interests.

4/ How to enforce my rights as a shareholder?

Negotiation is the key, this should be explored first, rather than threatening legal action. However it is important to know your legal rights, and the provisions of the Company constitution.

  • How do these apply to your position and the other interested parties?
  • It may be necessary for you to obtain details or documents as part of the process, which the company is reluctant to provide.
  • Take legal advice early on as to the pros and cons, the likely outcome, and the likely timescales and costs

Even where proceedings are issued, frequently a solution is reached through negotiation. This is usually much quicker and cheaper than having a decision imposed by the court. However, it may be necessary to exercise leverage by relying on your strict legal rights to achieve any progress.

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5/ Solutions

There are various options, including:

  • proposing a resolution at a general meeting which redresses the situation
  • complaining to the police of any criminal acts
  • asking the board of directors to take action in the company’s name against an individual director (because the shareholders can’t sue in the company’s name)
  • using a mediation service to settle a dispute.

6/ Mediation

A mediator will be someone who is experienced in this area of law.  If agreement is reached with the help of the mediator, the compromise can be recorded in a legally binding document which can be enforced in the court, if one of the parties breaks it. The advantages of mediation include its relative cheapness compared to going to court, privacy (there is no public record) and speed.

If it isn’t desirable or possible to achieve an accommodation where the aggrieved shareholder stays in the company, other solutions include:

  • the other shareholders buy out the aggrieved shareholder at a fair price
  • the company buys back the aggrieved shareholder’s shares at a fair price
  • Make a reasonable offer to the aggrieved shareholder.

7/ Further Options

Where the Company refuses to cooperate, further options include:

  • applying to the court for an order that the company is acting or has acted unfairly (an “unfair prejudice” action under s.994 Companies Act 2006)
  • applying to the courts for the company to be wound up under s.122 of the Insolvency Act 1996
  • suing the directors for negligence by means of a Derivative Action under s.260  of the Companies Act 2006:

The courts encourage settlement of all disputes, including shareholder disputes. Where the majority has made a reasonable offer to the aggrieved minority shareholder to buy them out on reasonable terms, it is unlikely that the majority will have acted ‘unfairly’. Then it wouldn’t be ‘just and equitable’ to wind the company up. It is essential to take advice on the terms of any offer you make.

If you offer to go to mediation or alternative dispute resolution, you are also unlikely to have acted unfairly. However if the company is in financial difficulties a creditor may issue a petition under S.122 of the Insolvency Act, irrespective of the shareholders’ wishes.

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8/ Finally

Where the Court decides that a minority shareholder has been oppressed or unfairly prejudiced and the appropriate remedy is for the majority buy the minority shares, this is often done at a “fair value” i.e. fair market value, without deduction for a minority discount.

Where the majority gives an undertaking to buy the shares of the aggrieved minority at fair value, usually the court will adjourn the unfair prejudice petition.  However, the fundamental battle ground is frequently

  • the basis of the business valuation
  • the underlying assumptions
  • the data and criteria on which it is based.

The valuation of a private company is an area of potential significant difference between the parties. These can be quite complex disputes, but qualified and experienced legal advisors and valuation experts hired early in the process will help you through this potentially sensitive and difficult area.

paul.sykes@luptonfawcett.law

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LINKS

Unfair Prejudice & Drag Along

Minority Shareholder wins Quasi Partnership claim

8 Ways to avoid a Business Dispute

Are you a Shadow or de facto director?

 

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Update: Professional Negligence Pilot

Adjudication Scheme Re-launched

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My original post on the Scheme is here at

https://jpaulsykes.com/2015/02/05/new-professional-negligence-pilot-adjudication/

The Pilot has now been expanded and revised, my review is at

http://www.luptonfawcett.com/index.php?cID=2287

The Scheme Pilot Pack Documents are at:

Professional Negligence Bar Association: Professional Negligence Adjudication Pilot Pack – Launch date 25 May 2016.

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