Exit rights of minority shareholders in a private limited company (IVOR nr. 72) 2010/3.3.12.4:3.3.12.4 Roundabout route or exit route

Exit rights of minority shareholders in a private limited company (IVOR nr. 72) 2010/3.3.12.4

3.3.12.4 Roundabout route or exit route

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In order to avoid problems concerning reflective loss, a shareholder can also first start a derivative action and subsequently start proceedings under S. 994. An illustration of this can be found in the Law Commission's Consultation Paper. In this Consultation Paper, a case is described in which the assets of the company had been misappropriated, which led to a decrease in value of the shares.1 The minority shareholder started proceedings under S. 994 in order to seek a buy-out order. During the proceedings, an order was given to start proceedings on behalf of the company to recover the assets, pursuant to S. 996 (2) (c) CA 2006. It was the court's intention to value the shares after recovery by the company. Nonetheless, the case was settled before the roundabout route was walked through. If the roundabout route was followed, the reflective loss issue had not arisen.

However, as the Law Commission points out, this route is little used because it is impractical, as it requires two full sets of proceedings. Usually, the minority shareholder only wants an exit route. A roundabout route is not necessary, while, as the law stands, a petitioner is entitled to personal relief, even if the facts entitle the company to claim damages. The Law Commission did not favour to alter this possibility and to create a sharp distinction in relief between the personal and derivative actions.2 From the perspective of the minority shareholder, a buy-out order, which includes compensation, seems as an appropriate and für form of relief.3

In the recent case of Franbar Holdings Ltd v Patel and Others, three claims where brought before the court, being (i) a claim for breach of a shareholders' agreement, (ii) a petition onder S. 994, and (iii) a claim seeking permission to continue as a derivative claim.4 The petitions were related to Medicentres, a company originally set up by Franbar. In 2005, Franbar sold 75% of the shares in Medicentres to Causalty Plus. Furthermore, Franbar and Casualty Plus concluded a shareholders' agreement including, inter alia, a put option for Franbar to sell his shares to Casualty Plus, and a call option for Casualty Plus for the same shares. Both shareholders were entitled to appoint two directors.

Franbar alleged that the directors appointed by Casualty Plus had breached their duties as directors by diverting business opportunities from Medicentres to Casualty Plus. Moreover, Franbar complained that the directors appointed by Casualty Plus provided insufficient financial information. William Crower QC held that all allegations could possibly amount both to breaches of directors' duties and to unfürly prejudicial conduct. He considered that the principal relief sought in the Section 994 petition was a buy-out order. The judge took into consideration that s. 263 CA (3) 2006 lists several circumstances the court must take into account when considering permission to proceed a derivative action. One of these circumstances is whether the act or omission in respect of which the claim is brought gives rise to a cause of action that the member could pursue in his own right rather than on behalf of the company (included in S. 263 CA (3) (f) 2006).

According to William Crower QC, this particular circumstance had central significance in this case. Whereas the acts that were the subject of the complaint could constitute both unfürly prejudicial conduct and a breach of a director's duties, and taking into consideration that eventually the petitioner wished for a buy-out order, the derivative claim was dismissed. The judge put forward:

"I can see no reason why Franbar should not be granted such relief on the unfür prejudice petition as may be necessary to ensure that the interest which it seeks to realise is valued on a basis which takes full account of the value of the complaints it wishes to pursue on behalf of Medicentres in the derivative claim."5

If in the future, courts follow the Franbar Holdings Ltd v Patel and Others judgment, which is likely in my opinion, the roundabout route will not be available if the exit route is what the shareholder wishes for.

Deze functie is alleen te gebruiken als je bent ingelogd.