Saul d harrison sons plc 1995

Company Law LLM
University College London

The “Unfair Prejudice” Petition
Seminar Objectives:

1. To critically understand the statutory regime for protection of minority shareholders against “unfair prejudice”

2. To explore the remedies available to minority shareholders under the regime

3. To briefly look at the regime for shareholders to petition for just and equitable winding up of the company under s122(1)(g), Insolvency Act.

Essential Reading

Pettet ch 11, Hannigan ch 19; Gower and Davies ch20; Kershaw ch 16

Sealy and Worthington where specified

Roadmap for Discussion
Contents

1 Roadmap for Discussion

1 Protection of Minority Shareholders

1 The Unfair Prejudice Remedy

1 How is the Petition Carried Out

1 A. Petitioners under s. 994

2 B. Respondents under s. 994

2 C. In what Capacity Must the Petitioner be complaining?

2 D. In what Capacity Must the Respondent be acting?

2 E. Must the Petitioner come with Clean Hands?

2 F. Funding the s. 994 Action

2 What Is Unfairly Prejudicial Conduct?

3 Where There Is No Quasi Partnership

3 Quasi-Partnership

4 Section 996 Remedial Orders

4 Valuation of Shares

5 Other Orders

5 Just and Equitable Winding Up

5 When has s122(1)(g) been applied?

5 Relationship with s994

Protection of Minority Shareholders
Under our theoretical framework of company law it was posited that one function of company law is to reduce oppression risk. This risk flows from majority rule which is accepted in the decision-making processes in the organs of the company. Consider how minority shareholders are protected in (a) private companies and (b) in publicly traded companies.

There are two main statutory remedies that shareholders can use to deal with oppression, usually in a private company, to wit, the s.994 Companies Act 2006 remedy and the s 122(1)(g) Insolvency Act 1985 remedy.

The Unfair Prejudice Remedy
This is provided for under s994, Companies Act 2006. This remedy is a personal remedy for the minority shareholder and is not on behalf of the company, like in the derivative claim. It can relate to how the minority shareholder is treated, as well as how affairs are conducted in the company generally. S994 is very wide and we will examine its elements.

How is the Petition Carried Out
A. Petitioners under s. 994
(a) a member or members;

(b) a person to whom shares have been transmitted by operation of law;

(c) the Secretary of State.

Hence a former member and an unregistered transferee of shares have no locus standi: Re a Company [1986] 2 All ER 253 and Re Quickdome Ltd [1988] BCLC 370

B. Respondents under s. 994
(a) Controlling shareholders and/or directors

(b) The company (usually on a nominal basis)

C. In what Capacity Must the Petitioner be complaining?
Re Alchemea Ltd [1998] BCC 964 but see different position in Wootliff v Rushton-Turner [2016] EWHC 2802

Gamlestaden Fastigheter AB v Baltic Partners [2007] UKPC 26

Shepherd v Williams [2010] EWHC 2375 (Ch)

D. In what Capacity Must the Respondent be acting?
Re Unisoft Group Ltd (No.3) [1994] 1 BCLC 609

E. Must the Petitioner come with Clean Hands?
Re London School of Electronics [1986] Ch 211, Sealy,

Shepherd v Williams [2010] EWHC 2375 (Ch)

Arrow Nominees Inc v. Blackledge [2001] BCC 591

Sprint Electric v Buyer’s Dream Ltd and Potamianos [2018] EWHC 1924 (claimant’s prevention of access by company to source code was poor conduct but did not prevent his exclusion from directorship from being established as unfairly prejudicial)

Note- poor conduct can affect remedy- cf Boughtwood v Oak [2010] EWCA Civ 23; Interactive Technology Corp v Ferrester & Ors [2016] EWHC 2896

F. Funding the s. 994 Action
Corbett v Corbett [1998] BCC 93

Re a Company, ex p Johnson [1992] BCLC 701

What Is Unfairly Prejudicial Conduct?
The starting point: The principles upon which the court decides that conduct is unjust, inequitable or unfair were stated by Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd and others [1972] 2 All ER 491, 499ff (on what is now section 122(1)(g) of the Insolvency Act). These principles have guided the courts in their approach to s 459:

“The foundation of it all lies in the words ‘just and equitable’ and, if there is any respect in which some of the cases may be open to criticism, it is that the courts may sometimes have been too timorous in giving them full force. The words are a recognition of the fact that a limited company is more than a mere judicial entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act 1948 and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The ‘just and equitable’ provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.”

See Hoffmann LJ (as he then was) in Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, 17ff. But Harrison’s case raised issues with the interpretation of what the petitioner’s ‘legitimate expectations’ are. Finally, see Lord Hoffmann in O’Neill v Phillips [1999] BCC 600 .

What are the 2 limbs of unfair prejudice?

Where There Is No Quasi Partnership
The breach of provisions in the constitution forms the basis of the petition.

See Brett v Migrant Solutions et al [2016] EWHC 523 (Ch)

Moxon v Litchfield & Ors 2013] EWHC 3957 (Ch)

Quasi-Partnership
Many petitioners try to establish quasi-partnerships as the scope for looking at conduct is wider. What is a quasi-partnership?

Wider scope of ‘understandings’ and ‘arrangements’- Cobden Investments v RWM Langport [2008] EWHC 2810

Birdi v Specsavers [2015] EWHC 2870 (Ch)

Factors the court looks for in establishing a quasi-partnership, but often these are not difficult to satisfy. Consider Sprint Electric v Buyer’s Dream Ltd and Potamianos [2018] EWHC 1924

-whether a quasi-partnership depends on relations from the outset of the business, and can a subsequent buyer of a large stake claim that there is a quasi-partnership?

-intensity of involvement such as in management and day-to-day operational tasks

-restrictions on transferability of shares

-this decision is mostly upheld on appeal see Prescott v Potamianos [2019] EWCA Civ 932 on the quasi partnership point and the s996 buyout order, see below for further coverage.

See application in Brown v Bray & anor [2019] EWHC 2304 (where elements of setting up the business together as equals in shareholding and in undertaking management roles were important, although parties entered into formal agreements such as shareholder agreements later)

Cf Michel v Michel [2019] EWHC 1378 on a quasi partnership being a ‘personal’ rather than a company phenomenon. Hence, a company characterised as quasi-partnership when certain persons were shareholders together could cease to be so characterised when the shareholding structures change.

Family companies are not always quasi-partnerships, see Dinglis v Dinglis [2019] EWHC 1644

Examples of Unfair / prejudicial Conduct
These examples show a range of what may be unfair prejudicial, from conduct vis a vis the company as a whole, as well as conduct that is targeted at minority/particularly affects the minority.

· Breaches of directors’ duty, Dinglis v Dinglis [2019] EWHC 1644

· Exclusion and removal from the board without a reasonable offer for the petitioner’s shares: What counts as a reasonable offer?

Croly v Good [2010] EWHC 1 (Ch)

Shepherd v Williams [2010] EWHC 2375 (Ch)

But see Dinglis v Dinglis [2019] EWHC 1644- exclusion is unfair only if based on mutual understanding of equitable constraint on majority shareholder’s power.

· Excessive Remuneration or breach of remuneration agreement: Anderson v Hogg [2002] BCC 923, Interactive Technology Corp v Ferrester, above,

· Domineering conduct and improper seizure of power on Board, see Boughtwood v Oak [2009] EWHC 176 (Ch)

· Improper allotment of shares: Re a Company (No 005134 of 1986) ex p Harries [1989] BCLC 383, Dilution through a rights issue: Re a Company (No 002612 of 1984) (1986) 2 BCC 99,453; [1985] BCLC 80

· Self-dealing by directors and majority shareholders: Re a Company, ex p Burr [1992] BCLC 724

· Misappropriation of corporate assets: Re London School of Electronics Ltd [1986] Ch 211; Clark v Cutland [2003] EWCA 810

· Non-payment of dividends or the payment of very low dividends: Re Sam Weller & Sons Ltd [1990] Ch 682, Routledge v Skerritt [2019] EWHC 573; Lucy McCallum-Toppin v McCallum-Toppin and AMT Coffee [2019] EWHC 46 (Ch)

· Serious mismanagement: Re Elgindata Ltd [1991] BCLC 959 Sealy 569,; See also Re Macro (Ipswich) Ltd [1994] 2 BCLC 354

But see McKillen v Misland Investments Ltd [2012] EWHC Ch for what is NOT unfairly prejudicial conduct.

Section 996 Remedial Orders
The buyout of the petitioner’s shares is usually ordered.

Dalby v Bodilly [2004] EWHC 3078. Note there are several issues wrt such an order, such as how the buy-out is valued and when it is dated. If a minority’s stake in a private company is offered on the market, it would be usually subject to a market discount to reflect the relatively weak character of a minority stake. But a s996 buy-out order can be valued at the court’s discretion to do fairness to the situation at hand. Further, the date of the valuation can be adjusted in order to achieve fairness too.

Valuation of Shares
With or without Discount

Re Bird Precision Bellows [1984] Ch 419, upheld in [1986] Ch 658; Sealy

Re Apollo Cleaning Services Ltd [1999] BCC 786

Re Planet Organic Ltd [2000] 1 BCLC 366

Also see Moxon v Litchfield, above

Date of Order

Re OC (Transport) Services Ltd [1984] BCLC 251; also Croly v Good, Shepherd v Williams, above

Other considerations

North Holdings Ltd v. Southern Tropics Ltd [1999] BCC 746

Re Benfield Greig Group plc [2002] BCC 256

Doughty Hanson & Co Ltd v Roe [2007] EWHC 2212 (Ch) (04 October 2007)

Hemmati, P.; Mitchell, C., “Section 461 Share Buy-outs: Principles of Valuation” (2003) 14 KCLJ 199

Other Orders
-An order regulating the conduct of the company’s affairs in the future: see Re HR Harmer Ltd [1958] 3 All ER 689; Sealy (this case is on s 996 & CA 1985, s. 459’s predecessor (s 210, CA 1985).

- An order analogous to a prohibitory or mandatory injunction on the company: Re Whyte, Petitioner (1984) 1 BCC 99, 044; Re a Company (No 002612 of 1984) [1985] BCLC 80

-An order authorising a derivative suit: see s. 996(2)(c) and Lowe v Fahey [1996] 1 BCLC 262; noted Gray (1997) 18 Co. Lawyer 121, Clark v Cutland [2004] 1 WLR 783

Just and Equitable Winding Up
This remedy pre-dates the s994 remedy and was resorted to by individuals who sought to wind up the company when personal relations have fallen apart in the business.

S122(1)(g), Insolvency Act: ‘the court is of the opinion that it is just and equitable that the company should be wound up’

When has s122(1)(g) been applied?
Re Westbourne Gallaries [1973] AC 360; Sealy

Re Yenidje Tobacco Co. [1916] 2 Ch 426, CA; Sealy

Harding & Walton v Edwards et al [2014] EWHC 247 (Ch)

Relationship with s994
Note s 125(2) & Fuller v Cyracuse Ltd [2001] B.C.C. 806 [2001] 1 B.C.L.C.

In Re a Company No.003843 of 1986 (1987) 3 BCC 624, Millett J said at pp. 631-632:

'it is now manifestly unreasonable for the petitioners to continue to press for a winding-up order. That would give them a financial remedy only, but it would be a financial remedy which would inevitably result in a later payment of a lesser sum than could be obtained from the offer that has been made. For authority that the court will intervene in a situation like the present to stay the proceedings once an offer to buyout has been made, see Re a Company (No. 002567 of 1982) [1983] 1 WLR 927, a decision of Vinelott J.'

Also see recent affirmations of the above reluctance to apply s122(1)(g) in

Fulham Football Club v Richards [2011] EWCA 855;

Badyal v Badyal [2018] EWHC 68

Further Reading

· Reece-Thomas and Ryan, “Section 459, Public Policy and Freedom of Contract: Parts I and II” (2001) 22(6) Company Lawyer 177 and 22(7) Company Lawyer 198

· Hirt, “In what circumstances should breaches of directors’ duties give rise to a remedy under ss. 459 – 461 of the Companies Act 1985” (2003) 24(4) Company Lawyer 100

· Chiu, Iris H-Y, “Contextualising Shareholders’ Disputes: A Way to Reconceptualise Minority Shareholders’ Remedies” (2006) Journal of Business Law 312