Whose affair is it anyway?
The Court of Appeal provided important guidance on the types of complaint that are within the scope of claims brought pursuant to section 994 of the Companies Act 2006.
Although the judgment focused on the technical question of the extent to which the personal conduct of shareholders can be pleaded in statements of case, the Court of Appeal also conveyed the more general message that unfair prejudice claims should be kept within manageable bounds and should not be used to trawl through the "myriad" complaints and recriminations that often arise when relations between shareholders break down.
The petitioners alleged that the majority shareholders in Kings Solution Group Limited (the Company) had mounted a concerted campaign to exclude the minority from participation in the management of the Company and to acquire the shares of the minority at an undervalue. The petitioners' points of claim were a lengthy document running to 69 pages. Snowden LJ described the points of claim as "extensive" and "repetitive" and said that they were drafted in a "narrative (and at times hyperbolic) style more reminiscent of an advocacy piece for the opening of a trial."
The respondents applied to strike out certain paragraphs of the petitioners’ points of claim on the basis that the relevant paragraphs related to the personal conduct of the respondents and not the conduct of the affairs of the company. The respondents' (the appellants') application on this point was unsuccessful at first instance ( EWHC 2861 (Ch)).
However, before the Court of Appeal Snowden LJ accepted the appellants' submissions that the personal conduct of shareholders can only be pleaded if that personal conduct has enabled or given rise to unfairly prejudicial conduct of the affairs of the company. In other words, there needs to be a causal connection between the personal conduct complained of and the conduct of the affairs of the company, which is said to be unfairly prejudicial.
The relevant paragraphs did not comply with this requirement and were struck out. By way of example, one of the petitioners’ allegations was that there had been an attempt to frustrate the operation of a put option granted to one of the petitioners in respect of his shares in the Company. The Court of Appeal said that this was a purely personal matter between the parties to the put option (which did not include the Company) and this "could not conceivably amount to conduct of the affairs of the Company."
The correct approach to unfair prejudice claims
Snowden LJ’s judgment contains the following observations, which are of relevance more generally to a party involved in an unfair prejudice claims pursuant to section 994 of the Companies Act 2006:
- there is "a clear tendency" for petitions and pleadings in unfair prejudice claims to seek to raise "myriad grievances and complaints of diverse forms of misconduct against the respondents to the petition";
- if this is allowed to happen, it can have knock-on consequences in the form of very extensive disclosure and lengthy trials, which can have a disproportionate effect on the resources of the court and the parties;
- it is not sufficient for petitioners to allege that a course of conduct "in relation" to a company has unfairly prejudiced their interests;
- section 994 of the Companies Act 2006 requires that acts complained of in an unfair prejudice petition must either be (i) an act or omission of the company or (ii) conduct of the affairs of the company. This is designed to keep unfair prejudice petitions within limited and manageable bounds; and
- petitions and statements of case in unfair prejudice cases should make it clear which limb of section 994 is being relied upon and should contain a concise statement of the facts upon which the petitioner relies to make out that requirement.
This case is an important reminder that petitioners in unfair prejudice claims must be able to identify either (i) an act or omission of the company or (ii) conduct of the affairs of the company, which has caused unfair prejudice.
An act done in the conduct of a shareholder’s personal affairs is not sufficient to found a claim for unfair prejudice pursuant to section 994 of the Companies Act 2006, however unfair or prejudicial the petitioners consider that conduct to be.
Allegations about the conduct of shareholders should not be included in statements of case unless there is a causal connection between that conduct and an act or omission of the company or the conduct of the affairs of the company.
As Snowden LJ said in his judgment, "[s]atisfaction of these requirements should not be overlooked or minimised" and, as this case shows, parties who fail to heed this guidance may find that their statements of case are susceptible to an application for strike-out.
James Popperwell, Ed Llewelyn-Evans and Alex Douty instructing Catherine Addy QC of Maitland Chambers, and Joe Sullivan of Quadrant Chambers represented the successful appellants.