Exit remedies for minority shareholders in close companies (IVOR nr. 82) 2011/4.4.5.2:4.4.5.2 The starting point- Breach of the articles of association and shareholder agreements

Exit remedies for minority shareholders in close companies (IVOR nr. 82) 2011/4.4.5.2

4.4.5.2 The starting point- Breach of the articles of association and shareholder agreements

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Breach of the articles of association and shareholder agreements is the most clear and least troublesome conduct to be characterized as unfairly prejudicial. In Saul D Harrison,1 Hoffmann L. J proposed that the starting point in any case under s. 459 (s. 994) would be to ask whether or not the conduct is in accordance with the articles of association.2 In that case, the court ruled that the board had enforced the articles in good faith and mere disappointment of the shareholder by management is not a cause to allege unfair prejudice.3 In analysing the case, he traced the 20 years development of the term unfairly prejudicial, tried to clear the air and gave guidance on how to apply the term. He stressed:

"In deciding what is fair or unfair for the purposes of s. 459, it is important to have in mind that fairness is being used in the context of a commercial relationship. The articles of association are just what their name implies: the contractual terms which govern the relationships of the shareholders with the company and each other. They determine the powers of the board and the company in general meeting and everyone who becomes a member of a company is taken to have agreed to them. Since keeping promises and honoring agreements is probably the most important element of commercial fairness, the starting point in any case under s. 459 will be to ask whether the conduct of which the shareholder complains was in accordance with the articles of association.4

As a result, monitoring compliance with the articles of association is the first step under s. 994. In special situations, however, even if the conduct is in accordance with the articles, minority shareholders can still ask the court to look beyond the agreement to support their legitimate expectations.5 In Saul D Harrison, the court held that the conditions to insert equitable considerations beyond the articles had not been met. All the shareholders could expect was good faith management, and no evidence could prove otherwise in this case.6 The special situations allowing the court to intervene are discussed in the following part.

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