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Minority Shareholders Win Unfair Prejudice Claim

No smokingInvestors who feel that their financial interests have been damaged by directors of companies in which they have a stake are not without legal redress. In one case, the High Court came to the aid of three men who were regarded with utter contempt by the principal director of a company in which they had minority shareholdings.

The company was formed to exploit the ban on smoking in confined spaces. The plan was that advertising space would be sold on thousands of waste bins set up near office blocks where workers were required to go outside to smoke. The company was not a success, however, and it eventually ceased trading.

Before that happened, the director had taken the view that the company’s business model was unviable and a dead duck. In those circumstances, advertising space on the bins had been sold at a low price, and eventually provided for free, to another business of which he was chairman until it was taken over.

By so doing, the Court found that the director had abandoned entirely the best interests of the company in favour of the best interests of the other business. He had committed the grossest possible breach of his duty to act in good faith in the company’s interests and had caused unfair prejudice to the minority shareholders.

Describing the director as arrogant and intransigent, the Court ordered him buy out the minority shareholdings pursuant to Section 994(1) of the Companies Act 2006. The value of those shares would be the subject of further argument. However, the Court observed that the minority shareholders’ expectations were unrealistic and that the shares were unlikely to be worth anything like what they hoped they would be.