Issues in Unfair Prejudice Petitions 4: Relief

The court has an exceptionally wide jurisdiction to order relief pursuant to s.996 Companies Act 2006 (CA 2006) where it has found that an unfair prejudice petition presented pursuant to s.994 is well founded. Pursuant to s.996(1) the court “may make such order as it thinks fit for giving relief in respect of the matters complained of”[1]. The orders the court may make include[2]:

• regulating the conduct of the company's affairs in the future;
• requiring the company to refrain from doing or continuing an act complained of, or to do an act that the petitioner has complained it has omitted to do;
• authorising civil proceedings to be brought in the name and on behalf of the company;
• requiring the company not to make alterations in its articles without the leave of the court; or
• providing for the purchase of the shares of any members of the company by other members or by the company itself.

The purpose of the relief granted under s.996 is to remedy the unfair prejudice suffered by the petitioner[3]. For that reason, the remedy should be proportionate to the unfair prejudice and should not be punitive in nature[4].

Share purchase orders

The most common relief sought in an unfair prejudice petition is an order that the respondent purchases the petitioner’s shares at a price to be determined. The basis upon which the court orders that the petitioner’s shares should be valued will frequently be a key battle ground, because the terms of the buyout order may radically affect the sum that the respondent is eventually ordered to pay. It is worth bearing in mind the following general principles that emerge from the case law:

• The court will usually order a valuation of the petitioner’s shares at a fair market value, but on the assumption that the company was in the position it would have been in but for the unfairly prejudicial conduct[5]. So, for example, where a respondent director appropriates part of the company’s business for himself at an undervalue, the court may order that the petitioner’s shares be valued on the basis that either the director had paid full value to the company, or on the basis that the company had not disposed of that part of its business.
• The court is not limited to ordering the relief sought by the petitioner[6] and it can be creative in determining the basis of valuation. For example, in The Stratos Club Limited[7], it was ordered that the petitioner’s shares be valued on the basis that they were held in a fictitious parent company that owned various assets that had been acquired by the Respondent in a manner that had been adjudged unfairly prejudicial.
• The date for valuation is a matter for the discretion of the court in the circumstances of the particular case. The starting point will be that shares should be valued at the date of the order for purchase. However, in Profinance Trust v Gladstone[8] the court identified some examples of where fairness may require another date of valuation be chosen, including: (i) where a company has been deprived of its business, in which case an early valuation date may be required in fairness to the petitioner[9]. Similarly, if the majority shareholder has deliberately depreciated the value of shares in anticipation of a petition being presented, it would be permissible to value the shares at a date before such action was taken[10]; and (ii) where a minority shareholder has a petition on foot and there is a general fall in the market. In such a case, the court may order that the shares be valued at an earlier date, especially if it strongly disapproves of the respondent’s prejudicial conduct. It will be interesting to see if this reasoning is applied in any cases in which a company’s business has been disrupted by the Covid-19 pandemic.
• In general, a “minority discount” (to reflect the fact that the petitioner does not have a controlling proportion of the shares in the company) will be appropriate only in special circumstances.[11]

Relevance of the petitioner’s conduct

Wrongdoing and/or misconduct on the part of the petitioner can affect the court’s decision whether to grant relief where unfair prejudice is found[12]. However, in general there needs to be either a strong connection between the conduct in question and the matters that the petitioner is complaining of, or for the conduct to be so egregious that it needs to be weighed against the unfairly prejudicial conduct complained of[13].

Similarly, where a petitioner has unreasonably refused to negotiate a compromise[14] or has refused a respondent’s offer to purchase their shares at a fair price, this may constitute grounds for the refusal of relief notwithstanding a finding of unfair prejudice. There is an established mechanism by which a respondent to an unfair prejudice petition can offer to purchase the petitioner’s shares at an independently determined fair value and pay the petitioner’s costs (commonly referred to as an “O’Neill v Phillips offer”, since the requirements were established by the House of Lords in O’Neill v Phillips[15]).

Interim payments

Where the court has ordered a respondent to purchase the petitioner’s shares at a price to be determined, it has jurisdiction under both s.996 and CPR r.25.6-7 to order an interim payment on account of the purchase price.[16]

Other remedies

Other remedies that the Court has ordered pursuant to s.996 CA include:

• An order that the majority sell their shares to the petitioner at a price to be determined, although such an order is only granted in exceptional circumstances given that it involves the compulsory expropriation of the majority’s interests[17].
• Any order that it could have made if the proceedings had instead been brought as a derivative action, including an order for the payment in favour of the company by way of compensation for any loss suffered or by way of an account of profits.[18] In Bhullar v Bhullar[19] the court ordered an inquiry for the benefit of the company as to loss and an account of profits made as a result of the respondent’s breaches of fiduciary duty.
• An order that the respondent assumes some other liability to remedy unfairness caused to the petitioner. For example, in The Stratos Club Ltd the respondent was ordered to assume liability for the petitioner’s shareholder’s loan account in circumstances where the court had found that the manner in which the respondent allowed the shareholder’s loan to accrue was unfair to the petitioner.
• An order regulating the management and affairs of the company. For example, in Hawkes v Cuddy[20] the relief ordered included provisions regulating the constitution of the boards of directors and what would happen in the event of a deadlock at a general meeting. In the recent case of Macom GmBH (UK) Ltd[21], the Judge 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.

[1] S.996(1) CA 2006

[2] S.996(2) CA 2006

[3] Re. Bird Precision Bellows Ltd [1986] Ch 658 CA (Civ Div) at 669

[4] Re. Phoenix Office Supplies Ltd [2003] BCC 11 at [51]

[5] Scottish Cooperative Wholesale Society v Meyer [1959] AC 324 at 364

[6] Hawkes v Cuddy [2008] BCC 390, upheld on appeal [2010] BCC 597

[7] [2020] EWHC 3485 (Ch)

[8] [2002] 1 BCLC 141 at [61]

[9] Scottish Cooperative Wholesale Society v Meyer at 368

[10] Re. Cumana Ltd [1986] BCLC 430 at 436c

[11] Re. Blue Index, Murrell v Swallow [2014] EWHC 2680 (Ch).

[12] Interactive Technology Corp v Ferster [2016] EWHC 2896 (Ch)

[13] Re. The Stratos Club Ltd at [345]

[14] Re. Metropolis Motorcycles Ltd [2007] 1 BCLC 520

[15] [1999] 1 WLR 1092 at 1106-1108

[16] see e.g Re. Annacott Holdings Ltd [2011] EWHC 3180 (Ch); Re. The Stratos Club Limited [2021] EWHC 1008 (Ch)

[17] Re. Baltic Real Estate (No. 1) [1993] BCLC 498; Re. Company (No.00836 of 1995) [1996] BCC 432 ChD

[18] Sikorski v Sikorski [2012] EWHC 1613 (Ch) at [71]

[19] Unreported, 10 May 2002

[20] [2008] BCC 390

[21] [2021] EWHC 1661 (CH)