Are you at risk when changing your company’s articles of association?

Year Published: 2015

Shareholders may amend a company’s articles of association by special resolution, provided the amendment is made in good faith and, in their opinion, for the benefit of the company.

The test for whether an amendment was made in good faith and for the benefit of the company, is whether a reasonable person could have come to the same decision. There is a risk when amending your company’s articles that a dissenting shareholder who has been outvoted could allege that there has been unfair prejudice in the decision to make the amendment. Such a shareholder could petition to the court on this basis and the court could make an order for such relief to be given to that shareholder as it sees fit. The most common being an order for his shares to be bought by other members of the company.

So, in the event one of your shareholders alleges unfair prejudice against your company, just how at risk might you be?

First of all, it is important to remember that in such a situation the burden of proof is on the petitioning shareholder. In other words, he must be able to prove that the decision to amend the articles was not made in good faith, or for the benefit of the company.

Furthermore, there is a significant amount of case law supporting the position of the voting majority. Most recently, in the case of Arbuthnott v Bonnyman & others [2015], the Court of Appeal held that amendments to the company’s articles were not invalid or unfairly prejudicial to the minority shareholder bringing the claim. In the decision, the judge cited the following principles:

  1. If the amendment to the articles brings about a prejudicial situation for a shareholder which is not a significant move away from the position in the original articles, then that shareholder will have no grounds for a claim;
  2. It is for the shareholders, not the court, to decide whether an alteration to a company’s articles is for the benefit of the company but it will be deemed not for the benefit of the company if no reasonable person would deem it so;
  3. The court will not investigate the quality of the subjective views held by the shareholders who proposed the alteration would benefit the company;
  4. The fact that the decision to amend the articles might adversely affect, even deliberately, one or more minority shareholders will not invalidate the amendment, provided it was made in good faith and for the benefit of the company as a whole;
  5. As mentioned above, the burden of proof is on the shareholder alleging unfair prejudice;
  6. The power to amend a company’s articles will be validly exercised, even if the amendment is more for the benefit of the shareholders themselves than the company, provided that the amendment does not amount to oppression of the minority shareholders or is otherwise unjust.

It is therefore important to remember that even if there is some opposition from some shareholders when proposals to amend your company’s articles of association are raised, the precedents set by case law mean that provided the voting majority are acting in good faith and in what they see as the company’s best interests, there may be little a dissenting minority shareholder can do to either prevent the amendments or claim relief.

For more information on amending your company’s articles of association or any other corporate matters, please contact our Corporate team on 0161 475 1216.

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