Taken From: http://www.allanjanes.com/

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High Court Steps in To Compensate Defrauded Minority Shareholder

Minority shareholders have only a limited say in how companies are run, but they do have a legal entitlement to be treated fairly and honestly. One case in which that patently did not happen concerned a thriving clothing company, the value in which was fraudulently hived off by its director and majority shareholder.

The minority shareholder took no part in the day-to-day management of the company and his stake derived from his father, who had worked in the rag trade for over 30 years. The majority shareholder had employed an intricate structure of bogus overcharging suppliers, false invoices and false credit notes in order to extract value from the company and transfer it to a new corporate vehicle that he controlled.

He managed to convince the minority shareholder that the company was struggling, when in fact it was highly profitable, and the latter eventually agreed to close it down. As a result of the comprehensive stripping exercise, the company’s assets were by then valued at just £2 and the minority shareholder’s stake was valueless.

In ruling that the company’s affairs had been conducted in a manner that was unfairly prejudicial to the minority shareholder’s interests, within the meaning of Section 994 of the Companies Act 2006, the High Court found that the majority shareholder had engaged in a furtive and fraudulent cash laundering scheme with a view to transferring the company’s whole value to his new vehicle.

He had made a series of untruthful statements, and had suppressed facts, so as to persuade the minority shareholder to close down a business that in reality had an annual turnover in excess of £3 million and had, for many years, generated an income for his family of more than £100,000 a year. By doing so, the majority shareholder had acted in wholesale breach of his duties as a director.

In the circumstances, the Court ordered the majority shareholder and his corporate vehicle to buy out the minority shareholder’s stake in the company. The sum payable remained to be assessed, but would be calculated at full market value on a date before the majority shareholder’s nefarious activities commenced.

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