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I am a shareholder, and the company has taken a loan without my consent or approval. What can I do?

Taking a loan without shareholder consent can be a serious matter requiring urgent attention. 

Steps such as the removal of monies or unlawful, unauthorised lending on behalf of a company secured against a company, or shares in a company, can be the first sign of broader shareholder or Director misconduct.

We often deal with these situations — where a shareholder has suffered unfair prejudice due to these steps or where a derivative claim (a claim by the company itself) needs to be considered to make everyone whole.

An initial suggestion is to discreetly check which decisions require shareholder approval by referring to the company’s articles of association and especially any shareholder agreement. 

The most common decisions requiring shareholder approval are changes to the articles of association, a grant of authority to issue new shares, or the removal of a director. 

For obvious reasons, anything related to money is also very often highly regulated and agreed upon in advance between shareholders. Suppose there has been a deviation from any earlier agreement, plans or shareholders’ agreements. In that case, this can be a clear indication that the shareholder has a claim that needs to be investigated further — often urgently — to avoid further losses. 

Typically, a shareholders agreement will make provision for ‘reserved matters’, items so important they need to be dealt with differently. Reserved matters often require unanimous consent between shareholders. Borrowing by the company of large sums of money will usually be a reserved matter. If a shareholder acts in breach of the shareholders’ agreement, it will almost always amount to a breach of contract. Depending on the circumstances, it may constitute unfair prejudice, entitling the shareholder carrying loss to pursue an s.994-996 petition under the Companies Act 2006.

Shareholder consent is always required if the company makes a loan to one of the directors.

If shareholder consent should have been sought formally, shareholders can challenge the directors’ decisions and conduct. Steps can include issuing an unfair prejudice petition as above, including an application for an injunction if/as appropriate to protect against further unlawful conduct and to preserve the company and value in the company for the shareholders.

If a company obtains a loan to increase working capital or fund a legitimate project, there may be no requirement to seek shareholder approval and, therefore, no right of shareholder challenge.

Suppose the articles of association and any shareholder agreement do not make provision for shareholder approval (for the loan). In that case, the company can act by its Directors and board, and there is little direct action a disgruntled shareholder can take immediately.

However, options are still open to a shareholder in these circumstances — not least as it is shareholders who ultimately own a company, not the board of Directors who merely have authority for the day-to-day business operations. Shareholders with a minimum of 5% of the voting capital can require the directors to call a general meeting of the shareholders to consider a resolution to overrule the directors’ decision.

Obviously, without more than 50% of the voting rights, a resolution to reverse the decision is unlikely to be passed at a subsequent meeting.

This is a situation where an unauthorised loan can indicate broader misconduct, especially in a small to medium size company. Obtaining lending is not straightforward. Lenders (and brokers), and the solicitors instructed by the company and lenders, will have various requirements and formalities before they consider lending. Applications with evidence in support, resolutions and detailed company information are all likely to be required. 

If a shareholder has had no awareness of the loan itself, it’s extremely likely that there is a whole swathe of underlying evidence of dishonesty in support of the loan application. It should go without saying that there can be a need for urgent specialist advice to protect a company and a shareholder from further harm and losses being caused and suffered.

Posted by:

Alex Cook

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