Shareholder Disputes Circular

The petitioner’s own

The petitioner’s own conductAs seen above, unfair prejudice claims will sometimes engage the equitable concept oflegitimate expectations to address wrongdoing by a Respondent. But what if the Petitioner hasalso acted in some way contrary to the agreements in place? Respondents do frequently pointto wrong doing by the Petitioner in their defence as demonstrated by the cases of Badyal andSprint Electric.BadyalIn Badyal, the Petitioner, a shareholder director, alleged unfair prejudice on a number ofgrounds including his removal from the Board. Both the Petitioner and the Respondents agreedthat the company was a quasi-partnership. The Petitioner expected to be involved in therunning of the business and remain a director. The Respondents argued that the Petitioner’sremoval was justified: the Petitioner had assisted his son to set up a rival business, had providedthe rival business with funding, and had solicited company employees. The Court agreed thatthe Petitioner’s removal was justified in the circumstances. His conduct was such that it was notunfair for him to be removed as a director and his claim for unfair prejudice failed.Sprint ElectricThe Court reached a different conclusion in Sprint Electric (considered above in relation tolegitimate expectations). The Petitioner had brought a claim on the basis that the companywas a quasi-partnership and that his exclusion from management and removal as a directorwas unfairly prejudicial. The Respondent argued that the Petitioner’s own misconduct shouldbe taken into account, in particular the fact that he had refused to provide access to certaincomputer source code which he had developed but which the company claimed an entitlementto. The Respondent said that this misconduct meant either that the Petitioner should be deniedrelief entirely, or alternatively that any the relief granted to him should be limited, for exampleby discounting the buyout order to reflect the Petitioner’s “contributory fault”. The Court heldthat, while the company was correct about its right to the source code, the Petitioner’s conductwas not sufficiently serious to affect his Petition or the relief he was seeking. Whilst there wasblame on both sides for the relationship breakdown, the Respondent had gone too far byremoving the Petitioner as a director and as a result the Petitioner had indeed suffered unfairprejudice which needed to be remedied by means of a buy-out order. The terms of that buy-outorder would not be impacted by the Petitioner’s own conduct 2 .2There was an ancillary (and in the circumstances unresolved) dispute about whether the Respondent had in fact made anadequate offer to buy out the Petitioner’s minority shareholding before the conclusion of the claim so as to negate any unfairprejudice caused by his exclusion from the company.12

CommentIt is common in unfair prejudice cases for both sides to breach the agreement betweenthem or indeed other duties/obligations relevant to the company’s management. However,Sprint Electric shows that Petitioners will not automatically lose the ability to rely on theirrights (including equitable legitimate expectations) and seek relief simply because theyhave done something wrong. It is ultimately a question of degree: the more serious thewrongdoing (for example the establishment of a direct rival company in Badyal), and themore closely connected it is to the right(s) the Petitioner is relying on, the more it is likely toimpact a Court’s thinking 3 .3See also Re Last Lion Holdings (considered immediately below) on the issue of forms of relief available to Petitioners.13