Diluting Shareholding against Shareholders will.
Discussion
Guys, asking for someone else rather than myself.
The directors and majority shareholders of a small private limited company are planning to try and save a supposedly insolvent company by issuing new shares to raise capital to inject into the business.
The real reason is to dilute the shareholding of a minority shareholder who has left the business and doesn't want to invest further, and indeed would like to sell her shares in the business.
Until the credit crunch the business was extremely profitable, and will be again, but doesn't have any assets.
At the back of my mind I remember something in company law that would stop majority shareholders disadvantaging minority shareholders, and that the directors of a company would have a duty, not only to cease trading if the company was truly insolvent, but also to treat each shareholder fairly.
I've done a bit of googling, but have drawn a blank so far on the disadvantaged minority shareholders part, and no doubt someone on here has the relevant info in his head anyway.
Any info welcome.
Cheers,
Tony
The directors and majority shareholders of a small private limited company are planning to try and save a supposedly insolvent company by issuing new shares to raise capital to inject into the business.
The real reason is to dilute the shareholding of a minority shareholder who has left the business and doesn't want to invest further, and indeed would like to sell her shares in the business.
Until the credit crunch the business was extremely profitable, and will be again, but doesn't have any assets.
At the back of my mind I remember something in company law that would stop majority shareholders disadvantaging minority shareholders, and that the directors of a company would have a duty, not only to cease trading if the company was truly insolvent, but also to treat each shareholder fairly.
I've done a bit of googling, but have drawn a blank so far on the disadvantaged minority shareholders part, and no doubt someone on here has the relevant info in his head anyway.
Any info welcome.
Cheers,
Tony
There is a bit here about it
http://www.shareholderrights.co.uk/disputes_nf.htm
To be honest I think your friend would be better off taking up their rights than spending money on legal fees fighting that action. If it is being done at a very dilutive valuation surely it shouldn't cost too much ?
The other shareholders can stand up in court and say they are proceeding with the rights issue to raise working capital. Depending on how well documented the dispute between the shareholders is I don't think your friend would have much chance of fighting that.
I suppose playing devils advocate if the company is losing money who is paying for that ? Does the company have enough retained earnings to survive for 12 to 18 months without doing this rights issue?
http://www.shareholderrights.co.uk/disputes_nf.htm
To be honest I think your friend would be better off taking up their rights than spending money on legal fees fighting that action. If it is being done at a very dilutive valuation surely it shouldn't cost too much ?
The other shareholders can stand up in court and say they are proceeding with the rights issue to raise working capital. Depending on how well documented the dispute between the shareholders is I don't think your friend would have much chance of fighting that.
I suppose playing devils advocate if the company is losing money who is paying for that ? Does the company have enough retained earnings to survive for 12 to 18 months without doing this rights issue?
Edited by Beardy10 on Tuesday 16th March 00:11
From my understanding of your post (apologies if I'm wrong) the company is insolvent and therefore the shares your friend holds are worthless. The company needs the further investment to survive, and the only way it can get this is to issue new shares. Your friend will be diluted, but at least he/she will own shares in something with some value, whereas before they had more shares but in a worthless entity.
10% of something is better than 50% of nothing.
I don't think there is much of a case for unfair prejudice here. Even if there was, these actions can be (and generally are) extremely expensive - probably £50k minimum and no guarantee of success. Can your friend afford to spend this sort of money over a shareholding which on the face of it appears to be worthless?
What alternative can your friend offer the company instead of the rights issue?
ETA - as your friend is being offered the shares the same as everyone else, then they would appear to be treating all shareholders equally.
10% of something is better than 50% of nothing.
I don't think there is much of a case for unfair prejudice here. Even if there was, these actions can be (and generally are) extremely expensive - probably £50k minimum and no guarantee of success. Can your friend afford to spend this sort of money over a shareholding which on the face of it appears to be worthless?
What alternative can your friend offer the company instead of the rights issue?
ETA - as your friend is being offered the shares the same as everyone else, then they would appear to be treating all shareholders equally.
Edited by therealpigdog on Tuesday 16th March 12:21
Thanks Guys,
Taking the pragmatic view like yourselves I'd also advise the young lady just to sit tight and if the company is in such a state the shares are worth nought anyway. Its certainly not worth putting any of her money into.
However, the original shareholders may well be painting the picture blacker than it truly is to create a need for a paper raising of cash and in reality will not be investing any of their own money in any event. Only she really knows the midset of the original shareholders and if they will be doing this.
As the shares were free anyway, what she's never had, she can't lose, but if the company is trading insolvently the Directors will be treading a very fine line.
Cheers,
Tony
Taking the pragmatic view like yourselves I'd also advise the young lady just to sit tight and if the company is in such a state the shares are worth nought anyway. Its certainly not worth putting any of her money into.
However, the original shareholders may well be painting the picture blacker than it truly is to create a need for a paper raising of cash and in reality will not be investing any of their own money in any event. Only she really knows the midset of the original shareholders and if they will be doing this.
As the shares were free anyway, what she's never had, she can't lose, but if the company is trading insolvently the Directors will be treading a very fine line.
Cheers,
Tony
Also if they are making misleading statements to other shareholders about the financial state of the company I suspect they would get into an awful lot of trouble. Certainly they would be banned from being directors again etc.
If I was your friend I would tell her to say she is happy to invest but that she wants to see an up to date copy of the accounts together with some form of updating trading statement which has been signed off by the accountant. Entirely reasonable to ask for and something that listed companies would provide when doing a rights issue...as an example the Pru are putting together such information now for shareholders in respect of the proposed acquisition of AIG's Asian Life Insurance business.
If I was your friend I would tell her to say she is happy to invest but that she wants to see an up to date copy of the accounts together with some form of updating trading statement which has been signed off by the accountant. Entirely reasonable to ask for and something that listed companies would provide when doing a rights issue...as an example the Pru are putting together such information now for shareholders in respect of the proposed acquisition of AIG's Asian Life Insurance business.
Tony427 said:
Thanks Guys,
Taking the pragmatic view like yourselves I'd also advise the young lady just to sit tight and if the company is in such a state the shares are worth nought anyway. Its certainly not worth putting any of her money into.
However, the original shareholders may well be painting the picture blacker than it truly is to create a need for a paper raising of cash and in reality will not be investing any of their own money in any event. Only she really knows the midset of the original shareholders and if they will be doing this.
As the shares were free anyway, what she's never had, she can't lose, but if the company is trading insolvently the Directors will be treading a very fine line.
Cheers,
Tony
To be honest I don't know why they don't just start up a new business. If it's got no assets there's nothing worth saving. Does it have IPR or contracts that are worth keeping?Taking the pragmatic view like yourselves I'd also advise the young lady just to sit tight and if the company is in such a state the shares are worth nought anyway. Its certainly not worth putting any of her money into.
However, the original shareholders may well be painting the picture blacker than it truly is to create a need for a paper raising of cash and in reality will not be investing any of their own money in any event. Only she really knows the midset of the original shareholders and if they will be doing this.
As the shares were free anyway, what she's never had, she can't lose, but if the company is trading insolvently the Directors will be treading a very fine line.
Cheers,
Tony
If I were advising I'd suggest keeping quiet and offering to sell. There's a chance some money could be recovered...there could easily be nothing.
Tony427 said:
the directors of a company would have a duty, not only to cease trading if the company was truly insolvent, but also to treat each shareholder fairly.
If the company is insolvent, and is not realistically capable - or likely to be capable - of paying its debts then, yes, ceasing trading would be the usual course, so as to avoid a charge of wrongful trading or trading whilst insolvent."Insolvent" is a difficult thing to characterise, however; many (most, even?) small businesses are technically insolvent all of the time on a balance sheet test, for instance, due to directors' loans and other niceties. So long as the Directors are able to look at the numbers, take professional advice if needs be, and hold a reasonable belief in the viability of the business then all is well.
Raising additional capital is a reasonable way to avoid insolvency; believing that this will be possible can be a reasonable belief that the company's viability is more rather than less likely.
In reality, these issues (of wrongful trading and so on) only really become relevant if the company really does founder in a messy way - those who have lost money may prompt further investigation and censure.
As regards treating shareholders fairly then, yes, there is that duty; but also note the various other duties included in the Companies Act 2006. As regards the case you've outlined, if the Directors are going to - in effect - launch a rights issue, and your friend has the option to take up the rights or not, I don't understand what the issue is? The other Directors cannot take up their slice of the rights without putting money in, so all should be fair? Or am I missing something here?
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