Minority Shareholder winding up – just and equitable?
As a minority shareholder, sometimes the only option that you can see is to try and put an end to the company. Here, we look at what this means and whether it is a suitable option for you.
When should winding up the company be considered as an option?
As a minority shareholder, it is open to you to ask the Court for a winding up order, on the ground that it is “just and equitable” to do so. That is, you believe it is the fair thing to do. “Winding up” essentially means killing the company as a very last resort method of exiting for you. Although considered archaic and to be avoided if at all possible, it’s an option and useful when negotiating an exit.
This is an option to consider where an unfair prejudice petition, or any other action that could be taken, is unlikely to succeed. We will consider unfair prejudice petitions in detail in the following article.
In summary, an unfair prejudice petition would usually be the preferred course of action by a minority shareholder and can be brought, simply, if the shareholder has been prejudiced by the other (usually majority) shareholders in a way that is unfair. The usual remedy for an unfair prejudice petition is that the Court orders the purchase of the petitioner’s (the person who starts the action) shares by the other shareholders.
Turning back to winding up the company, this manner is known as the “nuclear” option for any shareholder for obvious reasons. It is like a divorce when shareholders simply cannot agree, and therefore it is the court’s view that it is fair to bring an end to the company so that everyone can move on in their own directions.
With some basic conditions to meet, what does ‘going nuclear’ actually entail?
Is it a simple option?
In comparison to the other options available, no. The grounds for seeking the Court’s permission to wind up the company would be similar to commencing an unfair prejudice petition (we will cover this in a following article) and in fact, are so similar that they usually include that an unfair prejudice has been suffered by the petitioner. However, the Courts are reluctant to agree to the winding up if a different remedy could have been sought (i.e. an unfair prejudice petition or the purchase of the minority’s shares). Simply, the Court would need to be satisfied that the proper action to take is to wind the Company up and all other options have been exhausted. It really is a ‘final’ move and the Courts agree.
Apart from there being unfair prejudice suffered, a ‘just and equitable’ winding up petition can be brought on the basis that there has been a breakdown in communication, trust and confidence between the shareholders. The Courts, perhaps unsurprisingly, are reluctant to order this if they are shown that the reason for the discord between the parties is due to the petitioner’s actions: if you’re the one that caused the issues, the Courts are unlikely to agree that you then get to wind the company up.
In a nutshell, this is not likely to be more plain sailing or cheaper than commencing an unfair prejudice petition and shouldn’t be seen as an alternative unless all other options have been well and truly exhausted.
Should I consider this as a course of action?
As with all actions to be taken, the pros should of course be weighed up with the cons. Whilst a winding up will mean that all involved get to move on with their lives, and away from what may be a toxic commercial relationship, there are other aspects to factor in, including cost, time and of course stress.
There is nothing to stop a minority shareholder threatening the commencement of a petition to wind up, and this of course may encourage the remaining shareholders to settle any disputes. However, as the threshold is quite a high one to cross (with all other avenues needing to be exhausted first), sometimes it can be seen as a hollow threat, therefore should be treated with caution.
In summary, therefore, whilst winding up the Company may sometimes be the only option left, we will always encourage you to look into other available courses of action first.
If you have found yourself in a shareholder dispute you can get in touch with us at firstname.lastname@example.org or by calling 01233 227 355.