Issues in Unfair Prejudice Petitions 2
Unfairness
In this series of posts, Anna Lintner analyses key aspects of unfair prejudice petitions:
Section 994 Companies Act 2006 (“CA 2006”) permits a shareholder to petition the Court for relief on the basis that the affairs of the company are being conducted in a manner that unfairly prejudices their interests as a shareholder.
Unfairness in this context is not to be judged by reference to subjective notions of fairness; in order to establish unfairness, the petitioner will generally be required to show that the respondent has acted in breach of a recognised legal or equitable obligation. The nature and extent of those obligations will depend on: (i) the legal terms on which the parties agreed that the company would do business; and (ii) context, including the nature of the relationship between the parties, which may give rise to further obligations in equity: see the much-cited judgment of Lord Hoffman in O’Neill & Anor v Phillips & Ors[1] at 1098–1102.
Legal Obligations
The terms on which the parties agreed that the company would do business will include:
- The company’s articles of association;
- Any collateral agreements and understandings between the shareholders, such as any shareholders’ agreement; and
- The applicable rights/duties conferred by statute: Re Tobian Properties Ltd[2] at [22]. The most commonly invoked of such statutory obligations are the duties of directors set out in ss. 171–177 CA 2006. For example, a director may act unfairly where she fails to act in a manner that she considers in good faith would be most likely to promote the success of the company or prefers her interests to that of the company (as occurred in Re The Stratos Club Ltd[3]). Generally however, mismanagement by directors that fall short of a breach of the statutory duties will not amount to unfairness.
Not every breach of a duty or obligation will amount to unfair conduct – the breach must be more than trivial or technical and must be sufficiently serious (though often such cases will also fail on the issue of prejudice, which will be considered in the next blog post in this series). As noted in Re Sunrise Radio Limited[4] at [7]:
“isolated trivial complaints, even when in breach of some legal requirement, having no impact on the value of the petitioner's shares, or upon any realistic objective assessment of the integrity and competence of the board, will not be visited by the threat of an unfair prejudice petition, but should be left to be dealt with by the regime of sanctions and other remedies the law provides.”
Quasi-Partnership Cases
In addition, where it can be shown that there is “something more” to the relationship between shareholders than a purely commercial association, the Court may find that equitable obligations arise in addition to strict legal rights and obligations. This means that conduct that would be considered fair in the context of a purely commercial relationship might nevertheless be considered unfair in the context of a special relationship between shareholders that is familial or “quasi-partnership” in nature. In particular, where the company is run as a quasi-partnership, the Court may be willing to import equitable obligations from the law of partnership into the relationship between the parties.
The concept of quasi-partnership in this context is not binary; a quasi-partnership will not be treated as having all of the features of a partnership, but rather the specific relationship between the parties will determine which aspects of the law of partnership are imported. However, unlike partners, shareholders will not usually be held to be in a fiduciary relationship: Re Coroin Ltd[5].
The factors (the “something more”) that will suggest the existence of equitable obligations are not fixed, but may typically include some or all of the following (per Re Westbourne Galleries Ltd[6]):
- An association formed or continued on the basis of a personal relationship, involving mutual confidence (although note that a breakdown in the relationship of mutual trust and confidence will usually not in itself be sufficient to amount to unfairness for the purposes of s. 994);
- An agreement or understanding that some or all of the shareholders will participate in the management of the business or be consulted in relation to certain decisions; and
- Restriction upon the transfer of the members’ interest in the company – so that an aggrieved member cannot take out her stake and go elsewhere.
Conversely, the existence of an entire agreement or no partnership clause in a shareholders’ agreement will usually preclude the existence of a quasi-partnership: see e.g. George v McCarthy[7] at [23]–[24].
Where the Court finds that the company has been run as a quasi-partnership, the equitable rights and obligations that may, depending on the circumstances, flow from that include:
- An equitable obligation of good faith, including an obligation to exercise legal rights in good faith. It is however worth noting that, even in a case which is not a quasi-partnership, an obligation of good faith may arise by reason of an express contractual good faith term in an agreement governing the relationship between the parties, such as a shareholders’ agreement;
- A right not to be excluded from the management of the company and to be consulted about decisions (see Re Gallium Fund Solutions Group Ltd[8] for a recent example). However, there will be no unfairness where: (i) the petitioner has been excluded following a breakdown in trust and confidence between the parties and the majority has offered to purchase the petitioner’s shares at a fair price (an “O’Neill v Philipps” offer); (ii) if the petitioner has been guilty of gross misconduct or is a bad leaver (Re LCM Wealth Management Ltd[9]); or (iii) the petitioner has excluded himself from the company by leaving his position as director of his own volition (Larvin v Phoenix Office Supplies[10]); and
- An obligation not to act contrary to an understanding or promise that is unenforceable at law: O’Neill v Phillips at 1101–1102.
In the next of this series of posts, Anna Lintner will look at the issue of prejudice in unfair prejudice petitions.
[1] [1999] 1 WLR 1092.
[2] [2012] EWCA Civ 998; [2013] Bus LR 753.
[3] [2020] EWHC 3485 (Ch).
[4] [2009] EWHC 2893 (Ch).
[5] [2012] EWHC 521 (Ch).
[6] [1973] AC 360.
[7] [2019] EWHC 2939 (Ch).
[8] [2021] EWHC 765 (Ch).
[9] [2013] EWHC 3957 (Ch).
[10] [2002] EWCA Civ 1740; [2003] BCC 11.
