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Spotlight on Corporate Democracy as Small Shareholders Take Crushing Loss

Concerns that small shareholders are the victims of a deficit in corporate democracy, having little influence over the direction taken by the companies in which they invest, were highlighted by a High Court case concerning a troubled mining company.

Tens of thousands of private and relatively unsophisticated investors were believed to have bought shares in the company, often at a price in excess of 20 pence per share. Following a funding crisis, however, the share price fell to just three or four pence. The company's board had in those circumstances recommended acceptance of a takeover offer at a price of 5.5 pence per share.

The company had 4,628 registered members, a number of whom were stockbrokers, pension funds, ISA providers or others who held shares as nominees for individual investors. Although the investors were the beneficial owners of those shares, they had no right to vote at a meeting of members, the majority of whom voted in favour of a scheme of arrangement which opened the way for the takeover.

After the company launched proceedings seeking the Court's final sanction of the scheme, a number of individual shareholders objected. It was submitted that the price on offer was too low and would result in a grievous loss to thousands of investors. The restriction of voting rights to registered members was said to have resulted in a legion of small investors being unfairly disenfranchised.

Ruling on the matter, the Court noted the power of the shareholders' arguments. The case raised a genuine issue concerning shareholder democracy and there was a strong movement to change the law. As the law stands, however, only members of the company had voting rights and the company was under no duty to communicate with its beneficial shareholders. The Court was required to apply the law as it is, not as it might be if changes were made in the future.

In approving the scheme, the Court noted that, although many small investors would lose money if the takeover went ahead, the company's directors advised that it was the only offer on the table. If the scheme were blocked, the company was expected to swiftly run out of cash. If it went into administration, shareholders would be likely to receive nothing.

Of the 1,314 members who were present at the meeting, in person or by proxy, 812 voted in favour of the scheme and 502 against. The votes in favour represented over 80 per cent of the value of the shares voted. The statutory requirements of 50 per cent of shareholders voting and 75 per cent of value were therefore both achieved.

The meeting was held in accordance with a court order and it was apparent from the sizeable number of speakers and votes against the scheme that the dissenting voice was clearly heard. The Court observed that, if sufficient numbers of small investors had instructed their nominees to oppose the scheme, the outcome could have been different. The company, however, could not be blamed for that. There was no defect in the scheme or any legal impediment to its approval.

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