Shareholder Remedies, Unfair Prejudice, and Section 994 Petitions: A review of recent authority
Introduction
Disputes between directors and shareholders disrupt the running of otherwise successful businesses. New businesses and start-ups naturally involve the directors and shareholders shared enthusiasm for the project and willingness to take a risk. It is later, when disagreements occur about the direction that a company should follow, that problems arise.
A powerful remedy for shareholders is a section 994 petition. This allows a minority shareholder to petition the court if the affairs of the company are being run in a way which is ‘unfairly prejudicial’ to their interests. The court has a wide range of remedies, but the normal order is for a sale or purchase of shares at a fixed price.
Five recent cases have provided important lessons and guidance for shareholders and directors about what to do when a company is being run against your interests. In this series, Alex Pritchard-Jones and Harrison Burroughs explain the key points of each case.
Context is everything: Dean Banfield vs Paul Edwards and others [2024] EWHC 2104 (Case)
Dean Banfield was one of five part-owners of a small graphics company. He filed a s.994 petition pleading that, after resigning as director of the company due to a fallout with one of the other owners, he negotiated his exit from the company, including selling his shares to the other shareholders, which he claimed was a contractual obligation through a binding exit agreement. However, they did not buy them. He also claimed that he was excluded from management of the company whilst still a shareholder, was excluded from shareholder meetings and that the other owners gave themselves an increase in salary as a tool to exclude him.
In judgement, the high court dismissed Dean Banfield’s claims. The lack of binding exit agreement, combined with contradictions in his plea and witness statement and his resignation from directorship meant that the above claims could be dismissed. Furthermore, his claim of excessive remuneration can be ignored as the total dividends did not increase, they were simply split among less people following his, and another member’s, resignations.
These points can be taken from this case:
- The importance of contextualisation is demonstrated by the accusation of excessive remuneration. It appears justifiable at first, considering the amounts by which the dividend payments increased were large. However, it is important to contextualise figures; as mentioned above, the total amount of dividends remained roughly the same, decreasing by 3% per annum. Furthermore, evidence shows an increased workload for the remaining owners, as well as conversations with their accountant demonstrating that, despite the increase, it was cheaper than employing someone else to fulfil the vacated roles.
- The difference between resignation from directorship and as an employee is very different, as noted in a comparison with Phoenix office supplies Ltd. Vs Larvin (2003). In that case, Larvin resigned as an employee, but remained as a director, allowing him fuller rights. The fact that Dean Banfield explicitly resigned as director meant he was not entitled to participate in the management of the company, despite still holding shares – a crucial difference in this case.
