The case of Kohli v Lit and others serves as a recent reminder that directors must consider how their decisions may affect the interests of minority shareholders. 

Ms Kohli was a minority shareholder in Sunrise Radio Limited.  She asked the court for an order requiring the directors (who owned the majority of the shares in the company) to buy out her minority shareholding, alleging that their conduct:

  • in issuing new shares at nominal value;
  • in failing to disclose their remuneration in the company's accounts;
  • in preparing and filing the company's accounts and other returns late; and
  • in failing to obtain shareholder approval for the sale of a property belonging to the company to one of its directors

amounted to unfair prejudice against her in terms of section 994 of the Companies Act 2006.

The directors had issued new shares to a company connected with one of their number in 2005, for which only nominal (par) value was paid.  A further issue of shares had been considered in 2007 but was not completed.  It was found that the directors, by ignoring the discrepancy between the price that was paid (or was to be paid) for the shares and their true value, had breached their fiduciary duties in a manner that was unfairly prejudicial to Ms Kohli.

While the court accepted that the omission of the directors' remuneration from the accounts had been unintentional, the court found it understandable that such "improper accounting" would cause Ms Kohli to lose all confidence in the competence and integrity of the board", and might destroy any possibility that "she should regain trust and confidence in the board". Although the accounts had been prepared by the company's auditors, the court pointed out that they "were the responsibility of the board".

When taken together with the failure to prepare and file accounts and other returns timeously, and the failure to obtain shareholder approval for the sale of a property belonging to the company to one of its directors, the court decided that "the case of unfair prejudice is amply made out" and that Ms Kohli was entitled to "conclude that life as a Sunrise shareholder is intolerable".  The court granted an order requiring the directors to buy Ms Kholi's entire shareholding on an undiscounted basis, and the judgment helpfully sets out eleven reasons why this was appropriate in the circumstances.

The case is a reminder of some of the pitfalls that directors may encounter when taking decisions that affect the interests of minority shareholders.  In giving its judgment, the court acknowledged that "the degree of regulation can catch even the most sophisticated of directors unawares".

© MacRoberts 2010

Disclaimer

The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.