Trends in minority shareholder complaints

Although unfair prejudice is a shareholder right under the Companies Act 2006, it is now well established that petitions can in principle be subject to arbitration agreements[1]. Arbitration is an alternative to court proceedings which may be agreed between parties and results in a final and binding decision. Arbitration is generally confidential and provides greater flexibility for commercial parties to choose how they will resolve a dispute. Arbitration can also reduce costs for parties compared with court proceedings in several respects. For example, the rules governing the disclosure of documents in arbitrations are much narrower than those prescribed for in court proceedings, reducing time costs. Further, generally speaking, arbitration proceedings can be completed quicker than court proceedings. The market is showing a trend (though not necessarily a preference) for more arbitration agreements within typical M&A transactions and corporate governance documents. This does increase the likelihood that an arbitral tribunal will have jurisdiction over an unfair prejudice claim arising out of a dispute connected with such arrangements.

For instance, unfair prejudice petitions may be subject to arbitration where:

• an existing shareholders’ agreement or other relational contract contains a term that disputes will be resolved by arbitration. Such terms are becoming increasingly common among investors who are familiar with arbitration or have opted for arbitration to avoid cross-jurisdictional risks associated with Brexit. Crucially, arbitration agreements are generally interpreted widely on the presumption that the parties intended to resolve all claims together rather than splitting claims between Court and arbitration[2]. Where a petitioner complains of some conduct subject to an arbitration agreement, this presumption can extend to a much larger class of complaints than might otherwise be expected to fall within the scope of arbitration[3]; or
• alternatively, the parties agree at the outset of a dispute that arbitration would be the preferable form of dispute resolution (a so-called “ad-hoc” arbitration agreement). This may be the case where a more limited arbitration agreement is already in place and the parties wish to avoid jurisdictional disputes or claims being split between Court and arbitration.

Arbitration has a number of important implications for unfair prejudice petitions:

• one possible remedy resulting from an unfair prejudice petition is a winding-up order, which places the company into compulsory liquidation and requires the sale of its assets to third parties. An arbitral tribunal cannot grant a winding-up order because of its effect on third parties who are not bound by a final decision of the tribunal (or “award”). If seeking this outcome, a petitioner would need to conduct a two-stage process of obtaining an award through arbitration and then, separately, seeking to enforce that decision at Court. This can cause additional cost and delay, so the parties might prefer to agree to Court proceedings where a winding-up order is the likely outcome;
• where some shareholders are parties to an arbitration agreement and others are not, there is a significant risk of both arbitration and Court proceedings running in parallel unless the parties can agree a single method of dispute resolution. If the shareholders have all fallen out, it can be difficult to reach such an agreement. To avoid this risk, it is important to ensure that all shareholders are bound by any applicable shareholders’ agreement and to obtain signed deeds of adherence from new shareholders as a condition to them acquiring shares. Alternatively, a petitioner may choose to pursue only those shareholders who are subject to the shareholders’ agreement;
• the flexibility of arbitration may allow a more commercial approach to resolving shareholder disputes. For example, the tribunal might canvass the opinion of independent shareholders or look into ways to restore confidence at an earlier stage. In the right circumstances, this flexibility may help to preserve company operations and value to the benefit of all shareholders;
• unfair prejudice petitions have a reputation for being lengthy and expensive (in part due to the fact that they are often highly factual disputes requiring a significant volume of disclosure and extensive witness evidence) and shining unwanted publicity on the detailed workings of companies. The developments referred to below have the potential to further exacerbate this position. Arbitration agreements are a compelling option to address these issues: as noted above, arbitration is generally confidential, and arbitral tribunals will generally make less extensive orders for evidence, which can keep costs and delay to a minimum; or
• conversely, a petitioner seeking a comprehensive inquiry into company affairs or to cause embarrassment and disruption to obtain a buy-out on favourable terms will generally prefer public Court proceedings.

Given the significant consequences of a decision to arbitrate an unfair petition, it is important for all parties to consider the advantages and disadvantages when entering into any shareholders’ agreement or equivalent arrangement while relations are amicable.

[1] Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 855; [2012] Ch. 333.

[2]  Fiona Trust & Holding Corporation & Ors v Privalov & Ors [2007] EWCA Civ 20

[3] See, for example, Ref Tomolugen Holdings Ltd v Silica Investors Ltd [2015] SGCA 57

In all disputes, it is important to consider settlement opportunities from an early stage. We have previously commented on the stringent cost consequences a party may face if they unreasonably refuse to engage in alternative dispute resolution. Any dispute can lead to costs, disruption, and the tainting of relationships, which are best avoided where practical.

In unfair prejudice petitions, there is an added incentive: a fair and reasonable offer to buy a petitioner’s shares (also referred to as an “O’Neil and Phillips offer”) can be a complete answer to the petition[4]. Making a compliant offer will be grounds to dismiss the petition entirely, on the basis that there is no unfairness where a suitable offer has been made.

This is often, at least superficially, attractive to majority shareholders facing an unfair prejudice petition. Following the break-down of relations, it may be in the interests of all parties for the petitioner to leave the business on sensible commercial terms, in order to minimise disruption and allow the business to move on. The key area of disagreement will be the exit price.

Unfortunately for respondent shareholders facing a petition, making a fair offer may in practice be difficult or impossible in all but the most straightforward cases. Some of the most challenging features of making an offer are that:

1. a fixed price offer will rarely be sufficient.[5] An expert valuation process (with provisions for information access) will usually be required, with costs split between the parties. Possible exceptions to this would be where value can clearly be benchmarked against recent offers to acquire the company, or where the company’s articles of association contain a clear valuation process;
2. seeking to agree on a valuation date can often be very difficult;
3. the offer must account for the impact on value from all allegations of unfair prejudice, such as the misapplication of funds or diversion of opportunities. In practice this can often be extremely difficult to apply to a valuation exercise;
4. the petitioner must be able to satisfy themselves that the offer is reasonable at the time. This will require equal access to information;
5. in all but the most exceptional circumstances, there can be no minority discount in the buy-out price. In other words, the price must be a proportion of the overall market value of the company (even where a small interest in a private company would usually trade hands far below that price); or
6. there must be equal access to information and the offer must include payment of the costs to date of any unfair prejudice petition already commenced.

Even where an offer can address all of these points (and the offer process is often very expensive and practically very difficult to undertake in parallel with the underlying legal proceedings), the Court may be unable to conclude that an offer was in fact fair until trial – depriving the respondent of the opportunity to avoid the costs and disruption of fighting a petition to its conclusion.

While respondents should always consider making a fair offer, our experience is that an offer will rarely be straightforward in all but low-value cases, or situations where a petition simply seeks a buy-out at the unadjusted market value. In our view, fair offers are rarely the clean solution that they may at first appear to be.

[4] O'Neill v Phillips [1999] 1 WLR 1092

[5] Re Sprintroom Ltd [2019] EWCA Civ

Unfair prejudice petitions can result in wide-ranging and costly investigations into company business over an extended time period as they often involve allegations of exclusion from management and breach of statutory and fiduciary duties by directors. An important restriction on the scope of unfair prejudice petitions is that they must relate to the “company’s affairs” or an “actual or proposed act or omission of the company”.

This requirement prevents shareholders from bringing a petition on the basis of actions which are not taken for or on behalf of the company.[6] For example, acts solely in the capacity of a shareholder (such as shareholder voting) or acts taken in non-company capacities cannot normally give rise to unfair prejudice. Acts outside the scope of the company’s affairs are liable to be struck out at an early stage, which can be a crucial stage in limiting the scope of unfair prejudice petitions given their tendency to extend into wide ranging personal disputes.

However, in the recent case King v Kings Solutions Group Ltd [2020] EWHC 2861 (Ch), the Court adopted a notably wider approach with potentially significant implications for parties.

In that case, the Petitioners made a number of allegations which they defined in their Points of Claim as amounting to a “Campaign” of unfair prejudice. These included several actions which amounted to personal acts and/or conduct which did not, of themselves, constitute acts and/or conduct of the affairs of the subject company, such as: (i) the rejection by a shareholder of the purported exercise by the petitioner of a contractual put option through which the petitioner attempted to sell shares; and (ii) various steps taken by a shareholder to recover legal costs it had been awarded against the petitioner in separate legal proceedings.

At first instance, the Judge accepted that these acts, when “viewed in isolation”[7], did not involve or form part of any conduct of the affairs of the company and were acts that would normally fall “well outside the normal boundaries of an unfair prejudice petition”[8]. However, the Judge went on to say that, if those personal acts had been carried out as part of the “Campaign”, that would demonstrate a “sufficient causal connection between the conduct of the Applicants in their personal capacity, their conduct of the affairs of the Company itself and the prejudice which the Petitioners claimed to have suffered” possibly justifying relief pursuant to sections 994 to 996 of the Companies Act 2006[9]. The Judge went on to make it clear that, “if it had not been for the “Campaign” allegation and the allegation of prejudice…I would have struck them out”.[10]

This approach has the potential to allow petitioners to challenge acts that have nothing to do with the company and which are purely personal acts simply by pleading the existence of an adverse “campaign” against them. While this will benefit petitioners looking to adopt a “kitchen sink” approach and air all grievances arising out of the breakdown of relations, it may be a cause of concern for respondents who wish to resolve claims at proportionate time and cost. Careful corporate management to ensure clear demarcation between company affairs and shareholder business in the run-up to a dispute is an important means of managing this risk.

[6] Re Unisoft Group Ltd (No 3) [1994] 1 BCLC 609

[7] Paragraphs 125 and 129 of the Judgment

[8] Paragraph 138(iv) of the Judgment

[9] Paragraph 127(iii) of the Judgment

[10] Paragraph 138(iv) of the Judgment

The natural, and often assumed, respondent to an unfair prejudice petition is the company’s majority shareholder, because they are able to exert control over the company and obtain a collateral benefit at the expense of the minority. This is, however, another area in which the provisions of the Companies Act 2006 are non-exhaustive and the Courts have shown considerable flexibility. Relief can be granted against former members of the company[11] or, indeed, people who have never been members - for example, a respondent who has since sold their shares, a non-shareholder-director or an alleged third-party beneficiary of the diverted opportunity[12]. The test applied by the Court is, simply, whether a respondent was sufficiently connected with the alleged conduct that it would be just to grant a remedy in all the circumstances[13].

In our experience, the breadth of the jurisdiction can be an important tool for aggrieved shareholders when faced with complex transactions or corporate structures, where economic interest and control are not necessarily straightforward. However, the Courts’ open-ended approach can (and does) facilitate frivolous claims against non-shareholders perceived as having “deep pockets”. Even where such allegations are ultimately bound to fail, it is not always possible to strike out a factually-contested claim before trial.

Where a non-shareholder faces allegations of unfair prejudice, it is crucial that they take advice at the outset and present a robust response throughout the dispute. Ensuring that investments are managed at arm’s length, adopting a clear and consistent stance from the beginning of a dispute, focusing on key “knock-out” legal points and taking steps (such as settlement offers) to exert costs pressure on the claimant are all important tools in deterring frivolous claims.

[11] Re a Company (No 005287 of 1985) [1986] B.C.L.C. 68

[12] Clark v Cutland [2003] 2 B.C.L.C. 393

[13] F&C Alternative Investments (Holdings) Ltd v Barthelemy (No 2) [2011] EWHC 1731 (Ch)