Minority Shareholder and right to audit and board

Minority Shareholder and right to audit and board

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Hi All

Belated Happy New Year...

Unfortunately not a great start for one of my clients...they have a minority shareholder holding 13%, a relatively new investor but who wants to sell their stake on.

They are making things slightly difficult for my client due a personal issue and have now demanded an audit claiming the company is not being run properly and the sole Director has not been carrying out his duties properly.

I understand an audit can imposed by a minority shareholders: under S476, notice must be given not before the year end in question and must be given no less than 1 month before the year end.  In this instance the Y.E. is 28/2/16 so she needs to wait it out?  

However (not a question often asked?!) How can the majority shareholder be protected from having to waste resources, time and money in such a situation?  An audit is obviously costly and unnecessary but can this be blocked?  

Also she is concerned as the minority shareholder is advising the new owner (her sister) to get on the board, my client has been told articles could be changed as she is a 75% plus shareholder or even a dilution but she is quite concerned now.

Thanks

Smithie

Replies (9)

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paddle steamer
By DJKL
05th Jan 2016 12:30

Tread carefully

"I understand an audit can imposed by a minority shareholders: under S476, notice must be given not before the year end in question and must be given no less than 1 month before the year end.  In this instance the Y.E. is 28/2/16 so she needs to wait it out?  "

 I would state it per the 2006 Act,  476(3) The notice may not be given before the financial year to which it relates and must be given not later than one month before the end of that year"  Not sure about the waiting it out, surely the shareholder has already given notice?  Must admit I see little prospect of avoiding the audit except by the larger shareholder purchasing the shares of the minority shareholder.  I am a bit confused with your narrative,the he/she bits confused- not sure if two shareholders (both she) neither of whom are directors at present and a director (he) who is not a shareholder, reference to "new owner" etc.  If I were you I would ensure that I knew exactly to whom I owed a legal duty of care  re my instruction (the company itself, perhaps) to ensure I did not stray into "siding" with one party or the other. (Cannot get this post into paragraphs, shows fine on screen but when I submit displays as a slab of text)

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By Roland195
05th Jan 2016 13:18

Alternatively

While I agree you should not be drawn into providing what would effectively be company law, I would consider trying to explain to the shareholder in question that an audit will be a futile but expensive act and will not likely touch on any of the concerns they may have. If they have a specific issue, it would be better to question this matter specifically.

To be honest, assuming there are funds to pay them, this sounds like the sort of case company law solicitors dream of.  

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Replying to Wilson Philips:
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By smithie
05th Jan 2016 13:34

minority s/h audit demands

Roland195 wrote:

 

Thanks Roland195,

While I agree you should not be drawn into providing what would effectively be company law, I would consider trying to explain to the shareholder in question that an audit will be a futile but expensive act and will not likely touch on any of the concerns they may have. If they have a specific issue, it would be better to question this matter specifically.

To be honest, assuming there are funds to pay them, this sounds like the sort of case company law solicitors dream of.  

The shareholder seems to be at the stage of "its not going to cost me so who cares.."

Unfortunately the funds aren't really available, the company isn't in the most healthy situation but the price the minority shareholder wanted for the majority shareholder to buy back the shares isn't realistic to say the least.  Hence the loggerheads and the break down in coherent communication..

I'd very much like things to be resolved without lawyers but that ship may have sailed...

 

regards

Smithie

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By smithie
05th Jan 2016 13:28

Thanks DJKL and Basil,

Apologies for the ambiguity caused, to clear this up:

By "she" (I was referring to the sole Director and majority shareholder).

The "new" owner refers to the new shareholder i.e. the party the shares are being transferred to is the sister of the current minority shareholder.

There is only one director and she is the majority shareholder i.e. 87% shareholder.

Regarding the audit they have not formally requested this and I believe this was being sounded out due to issues the parties have with each other but no formal request has been made to the company or the Director.

Re: (4) Basil - thanks I appreciate your pointer but I'm in no way advising on the legal side of things, as everyone knows these things can be very messy and need an expert.

regards

Smithie

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Replying to Arthur Putey:
paddle steamer
By DJKL
05th Jan 2016 14:23

In the circumstances

[quote=smithie]

Regarding the audit they have not formally requested this and I believe this was being sounded out due to issues the parties have with each other but no formal request has been made to the company or the Director.

[/quote

Here I would be careful interpreting what to date has / has not been requested, your original post says,

"and have now demanded an audit claiming the company is not being run properly and the sole Director has not been carrying out his duties properly."

In the circumstances matters might be made a lot worse if a request has been made , maybe lacking some formality, but is then ignored.Section 476 is not itself clear what form the "notice" should take (Maybe elsewhere in the Acts). At the end of the day the director will need to sign the accounts stating no request for an audit has been made so needs to be really sure this is the case.

Whilst in theory minority shareholdings should have a discounted value I know from experience that often the annoyance factor can inflate what one is willing to pay to be rid of the issue, (been there, done that, got the T shirt) which possibly may well be the tactic presently being employed by the minority.

I suspect the majority shareholder should think long and hard re the requested price and if you are to be auditor and possibly later third party share valuer you want to ensure you act for the company not one or other shareholder.

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By Roland195
05th Jan 2016 13:45

New owner

I suppose you have considered explaining to the purchaser of the shares, especially if a family member of the seller, that pursuing an audit will effectively reduce the value of the shares she is acquiring?

I can understand them willing to act in spite towards the majority shareholder but would they still do it to their sister?

 

 

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Replying to Software Seeker:
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By smithie
05th Jan 2016 13:54

Yes, although difficult to fathom, I've tried that but its become such a personal issue that this doesn't concern them...

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By Tim Vane
05th Jan 2016 14:39

It's all just another inevitable consequence of the 1870 married women's property act. When business and money matters are left to the husband, rationality and common-sense prevails and this sort of overly excited and emotional nonsense is left out. Perhaps you should advise the poor dears to pass the matter to their respective husbands to be sorted out over a glass of port.

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Replying to johngroganjga:
By cheekychappy
05th Jan 2016 14:44

Penguin

Tim Vane wrote:

It's all just another inevitable consequence of the 1870 married women's property act. When business and money matters are left to the husband, rationality and common-sense prevails and this sort of overly excited and emotional nonsense is left out. Perhaps you should advise the poor dears to pass the matter to their respective husbands to be sorted out over a glass of port.

You will now feel the wrath of ShirleyM.

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