Minority shareholders – Can the majority shareholders change Articles of Association to your detriment?

You hold a minority shareholding in a private company. The majority shareholders change the articles of association to your detriment. Is that legal? Is that fair?

Well that is exactly what was discussed by the Court of Appeal in the recent case of Arbuthnott v Bonnyman & others. The majority had amended the articles of the company to provide that if they decided to sell their shares, they could force the minority to sell their shares at the same time.

Most companies can change the terms of their articles of association by passing a special resolution. That is a resolution passed by those holding at least 75{ba3215b0bf35eaeb06be458b3396ffbfc50bb9db10c9ff1594dfc3875e90ea48} of the voting share capital of the company. This gives scope for majority shareholders to make changes which may be detrimental to those holding less than 25{ba3215b0bf35eaeb06be458b3396ffbfc50bb9db10c9ff1594dfc3875e90ea48}.

In the absence of a shareholder agreement, a minority shareholder does have some protection under the Companies Act. This provides that a shareholder may apply to the court for an order if:

“the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself.)”

The Decision

The court of appeal in the above case decided that the change was not unfairly prejudicial. The court stated that changes to articles could be challenged as invalid, even if passed by a special resolution, but the following factors need to be taken into account:

1. The court must look at the purpose of the change. The power of the majority to bind a minority is not without limitation.
2. If such power is exercised in good faith in the interests of the company it will be valid.
3. Whether a course of action is in the best interests of the company is for the shareholders to decide.
4. The fact that an amendment adversely affects a minority (even if intentionally) does not invalidate the change provided it is made in good faith in the interests of the company.
5. It is for the minority to prove that the change is invalid.

What to Do

If you are, or are intending to become, a minority shareholder it is in your interests to enter into a shareholder agreement. The rights and protection you receive will depend upon your negotiating position but you are likely to be given greater rights than those contained in the Companies Act. It may also prevent the other shareholders from acting without your consent in certain situations and may prevent lengthy, risky and costly litigation proceedings.

If you would like further information on shareholders agreements or your rights as a shareholder, please contact me.