Court considers order for unfair prejudice against majority shareholder

12 July 2021

The High Court considered the appropriate remedy for an unfair prejudice petition based on breaches of directors’ duties and failures to observe the terms of a shareholders’ agreement.

What happened?

Macom GmbH v Bozeat and others [2021] EWHC 1661 (Ch) concerned a company owned by a married couple and a German company. The corporate member was the majority shareholder and the married couple were minority shareholders.

The corporate member appointed a director to the company’s board. The company’s only other director was the husband. Under the terms of the company’s articles of association, any decision of the directors was to be made by a majority decision at a meeting of the board. However, the husband had a casting vote under a shareholders’ agreement, giving him control of the company’s board.

Relations between the two directors deteriorated following the late payment of a dividend. When the corporate member’s CEO intervened to resolve matters, relations broke down and the corporate member ceased supporting the company financially and operationally. In response, the husband restricted the corporate member’s access to information and refused to meet or correspond with the director appointed by the corporate member.

The corporate member claimed that this behaviour (among other things) amounted to unfair prejudice. Under English law, a member of a company can petition the court for relief if (among other things) the company’s affairs have been or are being conducted in a manner that is unfairly prejudicial to the interest of members generally or of some part of the members that includes that member.

Normally, if a court concludes that there has been unfair prejudice, it will order a buy-out of the aggrieved member’s shares. However, the court has wide discretionary powers to decide what relief to provide.

What did the court say?

The court agreed that the corporate member had been unfairly prejudiced.

The judge said that, even though the corporate member may not have suffered any financial loss, it had a right to be consulted and involved in the company’s management under the company’s articles and the shareholders’ agreement, which was part and parcel of its investment in the company. By excluding the corporate member, the company had unfairly prejudiced it.

The corporate member had argued that “it would be wrong in principle for the court to perpetuate a dysfunctional relationship” and requested an order that its shares be purchased. As noted above, this kind of buy-out is probably the most common type of relief granted to remedy unfair prejudice.

The judge acknowledged that, in deciding what relief to grant, the type of relief an aggrieved member is seeking is a major factor which the court should take into account. However, he felt it would be “wholly disproportionate” to order the husband to buy the corporate member’s shares when the corporate member had not shown that it had suffered any financial loss.

Rather, the judge noted that the unfair prejudice had related to the governance and management of the company. He therefore concluded that an order regulating the future conduct of the company’s affairs was a more appropriate remedy. Specifically, he made an order requiring the company’s members to comply with the relevant provisions of its articles and the shareholders’ agreement, and supplementing those provisions with some additional governance terms, such as a requirement to hold board meetings on a frequent basis.

How does this affect me?

This is a rare example of a majority shareholder suffering unfair prejudice, rather than (as is more common) a minority shareholder. It is also unusual because the relief granted was not a buy-out of shares, but rather an order as to the corporate governance of the company.

The case is a reminder that the court has a wide discretion when deciding what relief to grant in the face of unfair prejudice. It will consider the wishes of the member who is alleging prejudice but, as a general rule, will grant the relief that is most appropriate in the circumstances.

For a member alleging unfair prejudice, the decision highlights certain things to consider:

  • What order should I seek? It is typical to ask the court for a buy-out order, but this may not always be the most appropriate remedy. The order a court will make depends to some extent on the nature of the behaviour that has allegedly given rise to unfair prejudice.
  • What loss have I suffered? If the aggrieved member has not suffered any financial loss, it is less likely that the court will make an order that compensates the member economically.
  • Am I in the minority? Normally, a member holding a majority of voting rights in a company will have the power to effect significant change, including by changing the company’s board, in order to address any issues. In that case, the court may be less willing to intervene. However, as this case shows, in some circumstances a majority member may have a good case.
  • Is there any value in seeking an order? Ultimately, unfair prejudice proceedings are very evidence- and fact-driven. They can be long, drawn-out and costly. If the likelihood at the end of the matter is that the court will not make an order for a buy-out, an aggrieved member should weigh up carefully the merits and drawbacks of bringing a petition in the first place.

For company directors and shareholders, it is a reminder to consider carefully how the way in which a company’s business is run may impact its members. The fact that a member may have control of a company does not mean it can ignore another member’s rights.