Minority Shareholders: The Range of Relief In Unfair Prejudice Claims
The rights of minority shareholders are relatively limited, but they do have the right not to be unfairly prejudiced by the actions of other shareholders and directors. In those instances, the courts have significant flexibility to grant relief against a defendant.
Unfair prejudice arises where a company’s directors (or majority shareholders) abuse their powers to further their own interests - to the detriment of minority shareholders (often devaluing their shares). In those circumstances, an unfair prejudice petition can be presented to the court under section 994 Companies Act 2006.
On a successful petition, typically the respondent will be ordered to buy out the petitioner's shares at fair price. However, the courts have a wide discretion to order appropriate relief beyond this.
Demonstrating this, the High Court has considered1 the extent and the types of relief available to protect minority shareholders in unfair prejudice petitions. In Re Valorem, the court granted exceptional interim relief in the form of the removal of the company’s CEO.
What’s the background?
Two shareholders (P and R) each owned around 41.35% of the company shareholding. R was also a director of the company. P brought an unfair petition accusing R of criminal conduct by knowingly violating UK sanctions regulations by causing the company to sell perfume products to Russia.
The alleged conduct threatened the company’s reputation and future viability of the company. It also breached R’s fiduciary duty; as well as his obligations under a relationship agreement with P. That agreement required both parties to exercise reasonable endeavours to promote the success of the business; and that P would have free rein without undue interference
At the first hearing, held ex parte, the judge found that there was a serious issue to be tried; a ‘very high degree of assurance’ that P would succeed at trial; and an “exceptionally strong prima facie case that there had been unfair conduct”. R was therefore removed from the board and P’s management team was appointed as directors.
One of the reasons for removing (rather than suspending) R was the danger of the prosecution not only of the director, but also of the company itself (R is currently under criminal investigation). The judge said there was a “highly persuasive case that such distance from the director and cooperation and full disclosure with the authorities is the most effective way of seeking to persuade the authorities that the Company is not associated with such trading”.
Further orders were also made, including an imaging order in respect of R’s electronic documents and his wife (the second respondent); an order for the delivery up of company books and records and for R to deliver up his passport ("the Ancillary Orders").
At this subsequent hearing, the court was satisfied that replacement of R under the change of management order was appropriate and should remain in force until trial or earlier order.
The judge had made clear that P had to show “a high degree of assurance that [his case] will be proven at trial or a strong or very strong prima facie case.
This is a strict test and one which P was able to satisfy. The court found there was an “existential danger to the companies” if R was to remain in or to be reinstated. There was a strong prima facie case that he was deliberately trading or causing the companies to trade in breach of sanctions.
Key takeaway
The ruling illustrates the flexibility afforded to the courts in granting relief to a party bringing an unfair prejudice petition. The appropriate relief will depend on the circumstances of the case – including the potential risks to the company itself if relief is not granted.
1 Valorem [2024] EWHC 1737
If you would like us to cover an issue in the next NGM Tax Law Newsletter, we would be delighted to hear from you