Don't Trample On Minority Shareholders (Unless You Have Deep Pockets)

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...