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Unfair Prejudice: Minority Shareholder's Win


A former director and shareholder, who was summarily dismissed as director and employee, has succeeded in his petition to the court claiming relief for unfair prejudice under s. 994 of the Companies Act 2006 (which replaced s.459 of the Companies Act 1985). [i]

The court found that the company was operating on the basis of a “quasi partnership”, and that it was unfair for him to have been dismissed as he was, whilst still being responsible for the debts of the company under a personal guarantee, and with no offer to buy his shares. He was effectively excluded, whilst still being “locked in”.

“Unfair Prejudice”

Section 994 CA 2006 states:

"A member of a company may apply to the Court by petition for an order...... on the ground (a) that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or (b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial."

Both elements constituting unfair prejudice must be proved:

  • the conduct must be “prejudicial” by causing prejudice or harm to the interest of the member / shareholders, and
  • it must be unfair.

Prospects of Success

Over recent years the Courts have been inclined to limit the extent to which relief is given for unfair prejudice. The Claimant / Petitioner needs to prove an actual breach of terms that have been agreed as to how the Company will be run, or show that such terms were being used in a way which offends equitable considerations.

Background

In this case, the Claimant Mr Crowley had originally run the care homes business which operated under a Partnership. Subsequently, after some eight years the business was incorporated in to a limited company, BC&G Care Homes Ltd (the Company)

The partners were appointed as directors and members of the Company, each with one-third of the shares. There was no separate shareholders’ agreement. Some 10 years later, following a dispute, Mr Crowley was summarily dismissed.

Decision

The court considered whether the actions against Mr Crowley were proportionate and justifiable regarding complaints against him. It was important that this was without any offer being made to buy his shares.

The court decided that the shareholders had continued to run the business effectively along the lines of the original Partnership. That was irrespective of the formation of the Company. The Company’s Articles of Association dealing with removal of Mr Crowley as a director were subject to considerations of equity. Removing Mr Crowley, but not offering to buy his shares was regarded as clearly prejudicial’ to his interests as a shareholder. Mr Crowley had been deprived of his employment and removed as a director. Consequently, he was unable to protect his investment, or participate in managing the care homes or running the company.

Exclusion from management in circumstances where there is a legitimate expectation of participation is generally regarded as one example of unfairly prejudicial conduct.

The Judge decided that this was contrary to the “quasi partnership” basis of the company, which had been run and arose out of the original partnership agreement. Despite allegations against Mr Crowley, these did not justify him being excluded from participation. This, coupled with his investment being locked in, and there being no offer to buy him out amounted to unfair prejudice. It was against the fundamental understandings and agreements constituting his role as member, shareholder and quasi partner.

Except for such "quasi-partnerships", it can be difficult to establish legitimate expectations beyond the member's strict legal rights. Where there are reasonable expectations of participation, the Claimant has to prove abuse by the directors of their powers, or breach the shareholder's strict legal rights under the Company's Articles or Company law.

Remedies

The court has a general discretion to make any order it thinks fit, but s. 996 of CA 2006 lists categories of order which may typically apply where the court decides that there has been unfairly prejudicial conduct. The court can:

  • regulate the conduct of the Company's affairs in the future;
  • require the Company to refrain from doing or continuing an act complained of, or to do an act which the Claimant has complained that it has omitted to do;
  • authorise civil proceedings to be brought in the name and on behalf of the Company by such person/s and on such terms as the Court may direct;
  • require the Company not to make any, or any specified, alterations in its articles without the leave of the court; and
  • provide for the purchase of the shares of any members of the Company by other members or by the Company itself and, in the case of the purchase by the Company itself, the reduction of the Company's capital accordingly.

As happened in Mr Crowley’s case, a frequent remedy awarded to a successful Claimant is to order that their shares be purchased by the party responsible for the unfairly prejudicial conduct. Valuing the shares can be the source of disagreement, depending on the approach taken to valuation.

The court may order that the valuation should be on the basis that the unfairly prejudicial conduct hadn’t occurred, if the shares had been devalued. The court can also decide that the shares should be valued at whatever date as is fair to the Claimant, often being when the Claimant began to suffer the prejudice complained of.

In Mr Crowley’s case, the court utilised the common means of valuing Mr Crowley’s shares in quasi-partnerships, and no minority discount was applied. The valuation date applied was before he was excluded, and interest was awarded.

New Automatic directions in unfair prejudice petitions

The requirement for detailed pleadings as in Mr Crowley’s case has been reinforced. With effect from 1 May 2015, automatic directions now apply in unfair prejudice petition proceedings. This follows a report of the Chancery Modernisation Review Implementation Committee. The major changes include emphasising the importance of exchanging detailed pleadings in such cases, and also requiring the parties to provide a non-binding estimate of the value of the shares in issue

The rationale is:

(a) in a significant number of cases the directions given on the first return date of the petition are in standard form and are often agreed; automatic directions may therefore save costs as well as court time;

(b) there can be no meaningful costs management until the issues between the parties have been defined, which requires, at least, an exchange of pleadings;

(c) the court cannot engage in meaningful costs management without having some regard to what the parties believe the value in issue in the proceedings might be; for that reason the directions require the parties to provide a non-binding estimate of the value of the shares in issue.

Paul Sykes is a Director in Dispute Management. This article should not be relied upon as legal advice and you should contact us for advice on your specific circumstances. For further information on unfair prejudice claims and company disputes, please contact paul.sykes@lf-dt.com


[i] Re BC&G Care Homes Ltd; Crowley v Bessell & Ors EWHC 1518 (Ch)

Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.


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