Pride and Unfair Prejudice Protecting Shareholders Rights

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Pride and Unfair PrejudiceProtecting
Shareholders Rights

• David Clark
• Corporate and Commercial

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Protecting shareholders rights

• Caveat Emptor
• let the buyer beware
• Cost of getting it wrong
• Capital locked in
• No dividends
• Excluded from management
• No exit

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Protecting shareholders rights

• Getting it right
• 2 stage process
• Appropriate due diligence
• Contractual protection

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Protecting shareholders rights

• Due diligence process
• Purpose
• Relationship with accountants
• Methodology
• Areas typically covered
• Report

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Protecting shareholders rights

• Need for contractual protection
• Scope of Shareholders Agreement
• Objectives
• Funding
• Dividend policy
• Right to financial information
• Right to place on board
• Anti dilution provisions
• Matters requiring consent
• Exit mechanism

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Exit Routes for Shareholders

• Paul Kite
• Commercial Dispute Resolution

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When things go wrong the issues

• No right to unilaterally withdraw investment
• Articles of association
• Shareholders Agreement
• Consent of all parties
• Statutory remedies - litigation

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Terminating the relationship

• Winding up the company
• Application to the Court for relief (s.459 CA
  1989)
• Usual remedy, share purchase order
• Company continues to trade
• Establishing the grounds (the fault concept)
• Unfairly prejudicial conduct
• Consider the articles of association
  (infringement)
• Consider expectations how is company run?

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Examples of unfairly prejudicial conduct

• Exclusion from management
• Award of excessive benefits
• Diversion of business / funds
• Allotment to increase holding in breach of
  articles / statute
• Failure to hold AGMs and lay accounts
• Bad decisions?

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The solution and its implications

• Application to the Court for a suitable remedy -
  usually a share purchase order
• Shares valued by an independent valuer, on a pro
  rata basis, without discount for minority holding
  (or premium)
• Date of valuation
• Conduct of the parties may be relevant
• Costs
• Offers to settle

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Practical advice

• Prevention
• Tailor-made articles of association and
  shareholders agreement
• Satisfactory exit route
• Cure
• Seek a practical solution agreement for sale
  purchase of shares
• Focus on the objective, not fault
• Offer to settle
• Take advice!