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“It’s not fair” – A close look at unfair prejudice actions

By Nicholas Ellor, Senior Underwriter.

When setting up any business, the principal founders will inevitably have to trust each other to devote their time, efforts and abilities in achieving an agreed commercial objective. They will also expect each to play a role in the business and to have the right to participate in its running, management and ultimately to participate in the fruits of success.

What they will not expect is to be plotted against, to be shut out or excluded, nor to have profits diverted or distributed in an unfair and inequitable way.

Of course, human beings being what they are, are not infallible. A business relationship, like any personal relationship, can turn sour and break down. This conduct can happen over an extended period of time or relatively quickly.

Prudent business partners will instruct solicitors to draw up detailed legally enforceable and binding agreements to legislate, among other things, on the relationship between them, their respective rights and obligations and what is to happen in the event one of them wishes to sell his or her stake in the business.

When an irretrievable breakdown does occur, the parties can try to resolve their differences by negotiation outside of court proceedings. If partners, then recourse can be had to the terms of the partnership agreement or in its absence the Partnership Act 1890. If shareholders, then recourse can be had to the terms of the shareholders agreement or in its absence the Companies Act 2006 – specifically s.994 “unfair prejudice” actions.

“Minority shareholders may feel aggrieved about their treatment by the controlling shareholders, witness Mike Ashley and his minority stake in Debenhams.”

Feeling aggrieved is of course, on its own, no basis to found a claim if the action complained of is in accordance with the strict legal rights of the directors and shareholders.

Unfair prejudice actions (brought by way of petition in the Companies Court) mainly emerge within the context of small private companies. This is a statutory cause of action and the court has a wide discretion to grant such equitable relief as it thinks fit to remedy the unfair prejudice suffered. The petitioner must be a shareholder.

So what conduct amounts to it being “unfair”?
Typical examples are breach of the articles of association, any shareholders’ agreement and the directors acting in bad faith. The conduct must cause “prejudice” to the petitioning shareholder (such as diminution in the value of the shares).

Other examples of “unfair” conduct relate to the exclusion of the petitioning shareholder from the company’s management in the context where the petitioner had a “legitimate expectation” to have the right to be a director of the company and participate in its management. This is in the context of one of the more exotic conceits in the legal lexicon of a “quasi-partnership”.

This is akin to an understanding or collateral agreement between the parties where they as shareholders agree between them what role each should have in the participation and management of the business whilst shareholders. Such an agreement is based on the personal relationship between them and is one of mutual trust and confidence. This equitable superimposition trumps any legal rights majority shareholders may have in exercise of their strict legal rights under the articles of association of the company and or any accompanying shareholders’ agreement.

A remedy often sought in the petition will be that the majority shareholder buys out the petitioner’s shares or indeed for the company do so. There is then the question of valuation and what discount if any should apply for the minority stake. If agreement cannot be reached on the valuation, then an expert will have to be brought in to determine “fair value”. There is usually no discount where the company is found to be a “quasi-partnership”.

In our view
Unfair prejudice actions are expensive and time consuming. The trial will involve detailed and lengthy oral testimony from the principal witnesses. Involvement of Counsel at an early stage is often required as is the need for an expert valuation. Significant disbursements such as the issue fee and the cost of obtaining an expert’s valuation report will need to be expended.

Temple’s disbursement funding facility, available to its clients that have taken out our after-the-event insurance with it, enables the client to pay for these significant disbursements. This loan, which is insured under Temple’s litigation/ATE insurance policy means that, in the unfortunate event the client loses, the insurer indemnifies the liability and the client has nothing to pay.

All litigation is stressful to lesser or greater degrees for the parties involved, especially so where unfair prejudice actions are concerned as there will inevitably be pent up feelings of anger and resentment relating to the conduct complained of and treatment by the respondent of the petitioner.

Having the security of after-the-event insurance and access to Temple’s related funding facility will lessen the burden the petitioner has to carry in embarking on what can be and often is an acrimonious fight to obtain the relief sought.

To find out more about shareholder dispute litigation backed by litigation/ATE insurance, please call our commercial team on 01483 577877 or send an email to nicholas.ellor@temple-legal. co.uk

Nicholas Ellor

Senior Underwriter
Read articles by Nicholas Ellor

Nicholas Ellor

Nicholas has recently joined Temple as a Senior Underwriter to provide support to the commercial underwriting team.

Nicholas brings with him twenty years’ worth of experience working as a solicitor in London on both contentious and non-contentious company commercial and corporate matters. Having been a practitioner, he is fully aware of the pressure and time constraints a commercial litigator has to operate under and will be able to bring his insights to the table and provide a fast and professional service.

His experience and knowledge will enhance the existing teams’ abilities to quickly and expertly assess claims and to provide intelligent and timely support throughout the legal process.

 

 

Read articles by Nicholas Ellor

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