Does a minority shareholder have a proportionate share in a company’s value? Rarely (as our earlier Newdesk item Fair shares for all or in the minority – part1 explained) but there is an exception which proves the rule. If the rights of a minority shareholder have been unfairly prejudiced and the relationship between the shareholders in the company is deemed to be a quasi-partnership, valuation of the minority shares on a pro-rata basis without discount is the norm. A Court in these circumstances can order that the minority shareholder be bought out by the majority at full undiscounted market value or that the company be wound up to provide him with adequate relief.
What is a quasi-partnership? The concept was introduced over 40 years ago in the case of Ebrahami-v-Westbourne Galleries in 1973 to address the situation where two shareholder directors owning a majority of the company’s shares voted to remove the third as a director and to exclude him from the management of the company, a position he had formerly enjoyed, to his unfair prejudice. A quasi-partnership is created in a situation where individuals agree to establish a business venture in the form of a company on the basis of mutual trust and confidence, to share its risks and rewards, to jointly manage its business and where they agree that no third party can participate as shareholder without their joint consent.
For a shareholder to attempt to invoke the quasi-partnership rules unfair prejudice must be shown. Typical examples of unfair prejudice would include:
• Exclusion from the management of the company, usually resulting from removal as a director
• Excessive remuneration paid to holders of the majority of the shares if it can be shown to be clearly high in the particular circumstances of the company
• Inadequate or no dividend payments, especially if the remaining shareholders can be shown to be receiving excessive remuneration
• Dilution through improper exercise of the power to alter Articles of Association
So it is possible in these circumstances for a minority shareholder to find an exit route from the company with a price for his shares reflecting undiscounted market value.