Shareholder Disputes Circular

IntroductionUnfair

IntroductionUnfair prejudice disputes are essentially commercial divorces: they result from the breakdownof an important relationship which is often founded upon mutual trust. These disputes aretherefore typically fractious and hard fought.They are also expensive. One cause of this expense is that there are often multiple overlappinglegal rules to consider including, most commonly, employment law, company law, contractlaw, and directors’ duties. Another cause is the Court’s ability, in certain circumstances, to lookbehind written agreements (shareholders’ agreements and articles of association) and enforceminority shareholder rights rooted in overarching 'legitimate expectations’. The unfair prejudiceregime is one of the very few areas of law where written commercial agreements enteredinto voluntarily can be overridden in this way and this can lead to considerable commercialuncertainty. However, the Court’s willingness to engage with legitimate expectations isunderstandable because shareholders do not always record in writing the entirety of theiragreement as to how a company will operate. This is particularly true of companies which firstdevelop out of close personal connections.The key purpose of the unfair prejudice regime is obviously to protect minority shareholderswhen their rights are being violated. This is a particularly important protection in companieswith a dominant shareholder who has Board representation or even full practical control of theBoard. In simple terms, a successful Petitioner must show: (i) some act has been done (or anomission made) that, in a meaningful way, is prejudicial to his or her interests as a member ofthe company; and (ii) that the prejudicial conduct is actually unfair. It does not follow that allprejudicial conduct will be found to be unfair. In particular, wrongdoing by the Petitioner canlead the Court to determine that, when considered in the round, any prejudicial conduct by theRespondent was not in fact unfair so as to merit a remedy.There is not an exhaustive list of what constitutes unfairly prejudicial conduct. However, certainexamples arise frequently. These include the exclusion of a minority shareholder from themanagement of the company, the failure to pay dividends, excessive director remuneration,and the payment of third parties (often family members) under fictitious employment contracts.Where unfair prejudice is established, there is a wide range of remedies the Court can grant.By far the most common remedy is a share buyout order. This is popular with Petitioners fora variety of reasons, one of which is that in certain situations the Court will not discount theordered sale price to reflect the fact that the Petitioner has only a minority shareholding whichis the usual position in a purely commercial sale. However, it is important for putative Petitionersto ascertain early on that the remedy they seek is actually worth something. Not all minority4

shareholdings will have sufficient value to justify the significant costs of unfair prejudiceproceedings and some in effect have no value.This circular examines a number of unfair prejudice petitions that came before the courtsrecently 1 . We discuss what these cases tell us about how the Courts are currently approachingthe above issues. Our analysis is grouped around five themes:Legitimate expectations – when these arise and how they can trump written agreements.Director remuneration – examples of unfairly prejudicial conduct where director remunerationbecomes excessive.Petitioner’s own conduct – how Petitioner conduct can affect the outcome of an unfairprejudice petition.The Court’s discretion on forms of relief – the wide range of remedies available for asuccessful unfair prejudice petition.Technical/procedural issues – examples of where these can have a meaningful impact on theoutcome of an unfair prejudice petition.In the final section, we offer some tips for those either bringing or defending unfair prejudiceclaims based on the 2018 cases we have considered. If you do not have enough time to readthe whole of this circular then we suggest you move straight to these tips.Michael WardPartner, Dispute ResolutionT: +44 (0) 117 307 6872M: +44 (0) 7805 855 132E: michael.ward@burges-salmon.comSian EdmundsPartner, Dispute ResolutionT: +44 (0) 117 902 7187M: +44 (0) 7973 122 691E: sian.edmunds@burges-salmon.comAndrew BurnettePartner, Dispute ResolutionT: +44 (0) 117 902 7734M: +44 (0) 7973 439 953E: andrew.burnette@burges-salmon.com1This circular was prepared based on unfair prejudice petitions reported up to the end of January 2019. A small number ofadditional cases, some of which touch on the issues discussed in this circular, have been released since. These will be covered in asubsequent circular.5