Shareholder Disputes Circular

The Court’s discretion

The Court’s discretion on form of reliefIf a Petitioner is able to establish unfair prejudice, the next step is for the Court to considerthe appropriate relief. As noted above in the introduction to this circular, the most commonremedy is a share buy-out order, where the majority shareholder is forced to buy the Petitioner’sshares at a fair value. This is an attractive option for Petitioners because they can exit thecompany, realise their investment, and often avoid the need to give a discount for the factthat they hold a minority of shares, which would usually happen in a commercial share saletransaction. Notwithstanding this, the Court has a wide discretion as to what relief to grant asdemonstrated in Last Lion Holdings and Rembert.Last Lion HoldingsIn Last Lion Holdings, the Petitioner brought an unfair prejudice petition against the majorityshareholder for blocking the sale of its shares to a third party. Unbeknownst to the Petitioner,the Respondent had previously tried to sell the Petitioner’s shares to the same third party inthe hope of securing for itself a significant uplift profit. When negotiations fell through, thePetitioner was approached directly by the third party to sell the minority shareholding and theRespondent blocked this at Board level.The Respondent argued that this blocking was reasonable because due diligence investigationsrevealed an insider trading conviction against the third party purchaser’s controller, making himunsuitable to be a shareholder in the business. The Petitioner acknowledged the conviction butpointed to, amongst other things, the fact that the Respondent had been content previously tosell to the third party without conducting such in-depth due diligence.The Court agreed with the Petitioner. The Respondent had unreasonably blocked the sharesale including by means of its purported reliance on the insider trading conviction. The Board’sactions constituted a breach of the articles of association and of relevant director duties whichwas unfairly prejudicial. Consequently, the Court granted an injunction compelling the Boardto approve the sale of the Petitioner’s shares direct to the proposed third party purchaser, abuy-out order not being needed in circumstances where there was a ready-made purchaser at apreviously agreed price 4 .RembertIn Rembert the Petitioner was a 5% shareholder. The 95% shareholder ran the day-todaybusiness. The Petitioner’s shareholding was due to increase in line with his investmentpursuant to an investment agreement. However, relatively early in the venture, the Respondentannounced that the company’s assets had been sold and it would be dissolved.4A buy out order or other relief would need to be granted if the proposed sale subsequently fell through.14

The Petitioner alleged unfair prejudice on a number of grounds, including the Respondent’sfailure to: (i) provide him with accounting information; (ii) consult him on the company’sdissolution; and (iii) use monies invested in the business for their intended purposes. The Courtheld that the Respondent’s actions were unfairly prejudicial to the Petitioner, the Petitionerhaving placed his trust and confidence in the Respondent to run the company properly. TheCourt therefore considered making a buy-out order but concluded that valuing the shareswould need additional evidence that was unavailable. Instead, and despite not receivingdetailed analysis on the point at trial, the Court awarded the Petitioner, as “investmentreparation”, equitable compensation equal to 75% of the money he had invested (plus certainancillary costs) on the basis that: (i) the Respondent held a proportion of the Petitioner’s rightfulminority shareholding on trust; (ii) her actions were contrary to her trustee obligations; and(iii) the award of equitable compensation is permissible under the Court’s broad discretion asto relief in unfair prejudice proceedings. This figure was reached by weighing up the risks ininvesting in a start-up business against the nature of the Respondent’s misconduct.CommentThese two cases demonstrate the Court’s wide discretion to grant relief to alleviate theeffect of unfair prejudice. While a buy-out order is usually the default position, in somesituations, such as in Last Lion Holdings, there may be a simpler way of alleviating theunfair prejudice (in that case, there was a willing third party purchaser). The Court’sawarding of equitable compensation in Rembert might be said by some to have been astep too far in terms of exercising its discretion, but again shows the willingness of theCourt to be flexible to achieve what it considers to be a just outcome.A final word on share buy-out orders. As noted in the introduction, the usual position, atleast in so far as quasi-partnerships are concerned, is that a minority discount will not beapplied to a buy-out order. But not all unfair prejudice claims involve quasi partnershipsand where that is the case different considerations may arise. For example, in CF Booth thecompany was a family business but not a quasi-partnership and the Court considered it fairin the circumstances to make a buy-out order applying a minority discount of one third,the unfair prejudice in question being remedied by a separate balance sheet adjustment.15