Unfair Prejudice and Subsidiary Companies
Unfair prejudice on the part of a subsidiary company will not of itself excuse the holding company from liability, as an important ruling demonstrates.
What is unfair prejudice?
Unfair prejudice arises out of acts which have led to a reduction in the value of an individual’s shares, for example, failing to consult shareholders or paying directors excessive salaries but awarding no dividends.
However, an unfair prejudice legal claim can only be brought where a company's affairs have been conducted in an unfairly prejudicial manner. So where does this leave a subsidiary of the company?
What was the case about?
Three individuals went into business together. They set up a limited company, APML, in 2007 and each were appointed directors and allotted equal shares in the new company.
In 2010, they signed a shareholders’ agreement and articles of association which required that certain “reserved matters” required the consent of all three directors, including payment of bonuses. They were also prevented from disclosing any confidential company information; and if any director materially breached the agreement, the others could acquire his shares for £1 each.
More unusually, the parties were also required to act in good faith and “give effect to the spirit and intention” of their agreement.
Two years later, the company acquired another company (Sigma) through a separate company (AGL) set up specifically for the acquisition. All three directors were appointed directors of AGL. One of the three directors (the petitioner in this case) was a minority shareholder in AGL.
There was a breakdown in relationship between the directors and the petitioner was eventually dismissed from his job with APML (but he remained on the board as a full director). The bank was told not to deal with him – but this was done without first obtaining a resolution of the board of directors.
One of the other directors emailed the group’s management accounts to the petitioner which revealed a significant reduction in profits and net assets. The petitioner expressed serious concerns both to the bank and the other directors. As a result, the company banking facilities were suspended and the other directors formally removed the petitioner from the bank mandate.
The petitioner brought a claim for unfair prejudice arguing that the other two directors had breached their obligations of good faith and carried out reserved matters without his consent. He claimed the other directors had caused him unfair prejudice by excluding him from management in APML’s affairs, dismissing him from his employment to advance their own interests; and directing APML to carry out reserved matters without his consent.
The court agreed with the petitioner on all counts.
Further, as the petition was a shareholder of the holding company (AGL) but not the subsidiary (APML), he had to show AGL’s affairs had been conducted in a prejudicial way. As APML was controlled by AGL the court attributed APML’s conduct to the holding company.
What does this mean?
Unfair prejudice on the part of a holding or parent company in relation a subsidiary’s affairs could be treated as unfairly prejudicial conduct of the holding/parent company’s affairs such that a subsidiary shareholder could win a claim against it.
Care must be taken to ensure any action relating to the company’s affairs or those of a subsidiary company could not be viewed as unfairly prejudicial to minimise the risk of a dispute. Expert advice from company law specialists is vital.
1Brown v Bray & Anor [2019] EWHC 2304
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