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.

Consider Interim Relief if the prejudice is serious: David Garofalo vs David Crisp and others [2024] EWHC 1737 (Case)

This recent case demonstrates the lengths to which courts are willing to go to protect minority shareholders and punish violations of trade sanctions, as well as the breadth of remedies permitted to them when considering a s.994 petition.

Mr Garofalo was a minor shareholder in Valorem Holdings Limited and its subsidiaries (‘The Companies’). However, Mr. Garofalo discovered that, without his knowledge, the director of the companies (Mr Crisp) had been exporting perfumes to Russia in a breach of sanctions regulations. This was an alleged breach of the relationship agreement between the two as well as Mr. Crisp’s statutory and fiduciary duties as director. Mr Garofalo bought forward a s.994 petition. As an interim application, Mr. Garofalo applied for an ex parte injunction to remove Mr. Crisp as director.

The High Court ruled that the order to change management was appropriate and should remain in force until trial or a final relief. This was an exceptional situation and outcome at an interim stage, which required the Claimant to satisfy the ‘high degree of assurance’ test – namely, that Mr. Garofalo’s petition was likely to succeed, and that Mr. Crisp knew that the despatch of products to Russia was in violation of trade sanctions.

The following lessons can be drawn from the judgement:

  1. The court is willing to take exceptional measures to protect the interests of a minority shareholder through a petition under s.994, although with a high degree of caution.
  1. Providing interim relief in the context of a s.994 has been recognised as a possibility before (Re Premiere Care Holdings Ltd [2021]), but never achieved, often considered too intrusive to the status quo and with a high potential for injustice. Bearing in mind the unique and exceptional nature of the case in the violation of sanctions, it nevertheless demonstrates the strict nature with which sanctions violations are treated by the Court and the lengths to which they are willing to go to protect the interests and value of a company in this situation.
  1. Although a sanctions case is a very specific context, directors, shareholders and their advisors should be alive to situations where the unfair prejudice is of a level that interim relief would be warranted.
  1. This case emphasises the range of remedies available to the court when it comes to settling a s.994 petition