Shareholders’ rights and Remedies under the Companies Act 2006

Wed, 15 Feb 2023

This paper provides an analysis of the rights of shareholders including the right to petition for relief against unfair prejudice under section 994 and the remedies available under section 996 addressing who may be bring a petition, companies to which sections 994 and 995 apply including quasi partnerships, what constitutes offending conduct and unfair prejudice before considering the remedies available.

Shareholder

A shareholder can be a person, company or organisation that holds stock(s) in a given company. A shareholder must own a minimum of one share in a company’s stock or mutual fund to make them a partial owner. Shareholders typically declare dividends if the company does well and succeeds. They have the right to vote on certain matters with regard to the company and to be elected to a seat on the board of directors.

Shareholders have a vested interest in the success of the company. Their shares will either increase or decrease in value depending on how the business is doing. Since shareholders own a piece of the business, they usually require a say in running the company. How much of a say they have will depend on how many shares they own.

Some will see this as an opportunity to make money. By taking a stake in a growing company they may hope to see the value of their shares rise and sell them for a profit. Alternatively, they may receive annual dividends based on the company’s performance.

Others, though, want a stake in a company and the direction it is taking. They will be able to vote on certain decisions such as:

• The appointment of directors
• Deciding how much power to grant directors
• Setting director salaries
• Authorising an allotment or portion of shares to be given out.

They may also have to contribute to a company’s debts up to the limit of their own liability.

They do not take an active role in the running of the company – that falls within the remit of directors – but a shareholder can also be a director.

UNFAIR PREJUDICE PETITIONS

In accordance with s994 Companies Act 2006 [CA 2006], a member of a company may petition for relief where:

• The affairs of the company are being, or have been, conducted in a manner that is unfairly prejudicial to the interests of members generally, or some part of its members, in their capacity as such (including at least himself);
• An actual or proposed act or omission of the company is or would be so prejudicial

Upon satisfying itself that a s994 petition is substantiated and well founded the court may make an appropriate order. The most common is for the sale of the shares of the petitioning member, either to other members of the company or, in rare cases, by the company itself.

Members may also seek to:

• Bring actions in the name of the company, derivative actions
• Petition for the winding up of a company on the grounds that it would be just and equitable to do so, pursuant to section 122(1)(g ) Insolvency Act 1986 [IA 1986].
• Exercise various other rights under the CA 2006 and the IA 1986.

I           THE PETITIONER

Unfair prejudice petitions may be presented by:

• Members of a company, section 994 (1) CA 2006
• Non-members to whom shares in a company have been transferred by the execution and delivery of a proper instrument of transfer, section 994(2)
• Non members to whom shares if a company have been transmitted by operation of law, for example a trustee in bankruptcy for a bankrupt member or the personal representative of a deceased member, section 994(2).

A transferee of shares still has standing to bring a petition even where the company in question refuses to register the transferee as a shareholder and he has no grounds to challenges such refusal. This standing is concurrent with that of the transferor if they remain the registered shareholder, albeit that it would be difficult for him to establish prejudice if he has agreed a price and sought to transfer his shareholding with the transferee, Re McCarthy Surfacing Ltd [2006] EWHC 832(Ch) para 23-24; Re Satinet Ltd [2011 EWHC 1518 (Ch) para 148-149.

An individual who holds shares as a bare nominee or trustee may also present a petition, the relevant interests for the purpose of appraising unfair prejudice being those of the beneficial owner, Atlasview v Brightview [2004] EWHC 1056 (Ch) para 35-38. The beneficial owner behind the nominee or trustee cannot however being a direct claim as they are neither a member nor a person to whom shares have been transferred or transmitted by operation of law. Notwithstanding that primary position however, in an appropriate case however it may be possible for a beneficial owner to bring a derivative trust claim joining the trustee as a defendant if the trustee refuses to take steps in relation to unfairly prejudicial conduct, Lewin on Trusts 18^th edition 43-001 – 43-016.

Under s995 CA 2006, the Secretary of State for Business, Enterprise and Industrial Strategy is permitted to bring a petition where investigations or reports reveal that the company’s affairs are being, or have been, conducted in an unfairly prejudicial manner or an actual or proposed act or omission of the company would be so prejudicial. Such petitions are, unsurprisingly, rare.

Majority shareholders are not prevented from petitioning under s994 but prejudice will not be unfair when the petitioner can readily rectify the prejudicial state of affairs himself, Baltic Real Estate Ltd (No2) [1992] BCC 629. In such circumstances, a petition is likely to be struck out, Re Legal Costs Negotiators [1999] BCC 547. 

II         APPLICABLE COMPANIES

Petitions under s994 or s995 may be presented in relation to any company falling within the definition of the 2006 Act.

Section 1 of the Act states a company is one that was formed and registered under the CA 2006 or which immediately before the commencement of Part 1 CA 2006 was formed and registered under the Companies Act 1985 [CA 1985] [which companies will be treated as having been formed and registered under the 2006 Act). Accordingly, and in contrast with the winding up powers of the court, an unfair prejudice petition may not be presented in respect of the affairs of an overseas company.

The insolvency, entry into administration or liquidation of a company is not an automatic bar to the presentation of an unfair prejudice petition. In relation to an insolvent company however there will be no prejudice unless the petitioner can show:

• But for the wrongdoing forming the substance of his complaint, his shares would have had a value (for example where there has been excessive remuneration or a sale of assets an undervalue renders the company insolvent)
• He has suffered prejudice in some capacity connected with his shareholding.

The latter will be widely construed and can include prejudice suffered by a member for non-repayment of a loan made to the company as part of the transaction by which he acquired his shares, even if the shares now have no value, Re Tobian Properties Ltd [2012] EWCA Civ 998 at para 11-13.

Although unfair prejudice petitions may be presented regarding all companies unincorporated under either the 1985 or 2006 Acts, the scope for establishing unfair prejudice varies from company to company. Those who become shareholders in public companies on an arms length basis are unlikely to establish that they had any interest other that to have the company’s affairs conducted in accordance with the articles of association and/or any other written agreement governing the terms of membership.

Quasi partnerships

Quasi partnerships are at the opposite end of the spectrum. In Re Westbourne Galleries Ltd [1973] AC 360 Lord Wilberforce described that species of private company as involving one or more of the following aspects:

• A relationship of mutual confidence between shareholders
• An understanding that all or some of the shareholders will participate in the conduct of the business
• Restrictions on the transfer of shares.

He explained that the term “quasi partnership” is no more than a convenient term to describe a relationship akin to a partnership into which it is appropriate to import equitable considerations. He cautioned against using the expression if used “to obscure or deny the fact that the parties (possibly former partners) are now co-members in a company who have accepted in law, new obligations.”

Cases subsequently provided further clarification:

• It is not fatal to a finding of a quasi partnership that the parties are not of equal status, Fisher v Cadman [2005] EWHC 377 (Ch)
• Within a quasi partnership a court may give effect to informal arrangements and understandings which have been relied upon even if they would not otherwise have binding legal effect, Re Guidezone Ltd [2001] BCC 692
• The fact however that one party has a legitimate expectation that the company’s affairs will be conducted in a certain way does not entitle him to bring a petition based on conduct inconsistent with that legitimate expectation if it would not have been given effect by established equitable principles;
• A purely commercial relationship can evolve to have quasi-partnership features, or to become subject to some other understanding by words or conduct which it would be unfair to allow members to act inconsistently with, or the failure of which may render it unfair for the association to continue. Likewise a quasi partnership may evolve into a purely commercial arrangement, O’Neill and another v Phillips and others [1999] WLR 1092, para 1101E-1102A.
• Where features of a quasi-partnership are found to exist, acts or omissions that are inconsistent with the parties’ relationship, understandings and agreements may constitute unfairly prejudicial conduct even though such actions or omissions are expressly permitted by the company’s constitution
• A relationship of trust and confidence may be found despite the existence of formal agreements governing the relationship between the parties. In Re Hart Investment Holdings Ltd [2013] EWHC 2067 a personal relationship and understanding of trust and confidence that existed between two brothers was held to override:
  • The company’s articles of association
  • Various express and implied agreements entered into between the brothers; and
  • A formal business agreement.

III        CONDUCT

The unfairly prejudicial conduct must relate to the company’s affairs. These words are construed liberally by reference to commercial reality, in contrast with legal nicety.

Such conduct includes management decisions even where they do not involve the board of directors, as well as attempts by shareholders to exert greater control where this results om the disruption of management and a detriment to the proper running of the company, Re Oak Investment Partners XII Ltd [2009] EWHC 176 (Ch) para 13-14, affirmed in [2010] EWHC Civ 23 at para 120.

The affairs of the company do not however extend to actions of other shareholders in their capacity as such. Therefore, while the actions of a shareholder who uses his shareholding to block his removal from management may constitute unfairly prejudicial conduct regarding the affairs of the company, in circumstances where a director has already been properly and lawfully removed from management his refusal to dispose of shares cannot, Re Legal Costs Negotiators [1999] BCC 547 and Re Abbington Hotel Ltd [2-11] EWHC 635 (Ch). Neither will a shareholder voting nor selling his shares constitute the affairs of the company, no matter how harmful to other shareholders the outcome of such actions may be.

Parent and subsidiary relationships

The affairs of a parent company may also include the action or inaction of a subsidiary company which is controlled by the parent company. A shareholder of a parent company may therefore be able to establish unfair prejudice as a result of breaches of fiduciary duty owed to the subsidiary company, Re Grandactual Ltd [2005] EWHC 1415 (Ch). This is especially so where the directors of the parent and the subsidiary are one and the same Gross v Rackind [2004] EWCA Civ 815; Hawkes v Cuddy [2009] EWCA Civ 291.

Likewise, it has been successfully established that the failure of a parent company to pay a debt due to a subsidiary in which the petitioner was a 12.5% shareholder and the parent a 75% shareholder constituted the affairs of the subsidiary company. Such conduct would therefore have justified an unfair prejudice petition brought by the petitioner had it not been found that the withholding of payment was necessary to keep the group (and the subsidiary) afloat, Re Soundcraft Magnetics [1993] BCLC 360 CA. In taking this broad view of the affairs of the subsidiary, the Court of Appeal was influenced by the fact that its financial affairs were looked after by the parent company which received a management fee.

Conduct must be prejudicial to members’ interests as members. This requirement will not be narrowly or technically construed, especially where quasi-partnerships features are present. Consequently, prejudice to a member’s interest as a member has been found where:

• A person became a member of a company on the basis that he would be involved in its management and was subsequently excluded from management, O’Neill and another v Philips and others [1999] 1 WLR 1092
• A member lent money to the company in his capacity as a creditor, and the loan was made as part of the basis on which he became a member of the company, Gamlestaden Fastigheter AB v Baltic Partners Ltd and others [2007] UKPC 26.

However, where the interests of a member other than his interest as a shareholder are prejudiced, and those interests are not connected to the basis on which he became a member of the company, this cannot found a petition under section 994. 

In Re JE Cade & Son Ltd [1991] BCC 360 a shareholder failed in his attempt to advance a petition based on prejudice to his interests as the freeholder of land which the company in question had been granted a licence to farm.

The reference to conduct that is "unfairly prejudicial to the interests of the members generally or of some part of its members" in section 994(1)(a) makes it clear that conduct affecting all members of a company equally may be unfairly prejudicial. There is no need for a petitioner to establish that he has been treated differently to other shareholders (albeit that this is a factor likely to strengthen his claim of unfair prejudice).

IV        PRESENTATION OF PETITION

A petition may be presented on the basis of a single act or omission and in respect of potential conduct

Single acts or omissions

A single unfairly prejudicial act or omission may amount to unfair prejudice if sufficiently serious. However, if the unfairly prejudicial conduct has been cured and cannot recur (for example, an improper refusal to disclose information, which information has been provided by the date of the petition) there is unlikely to be any scope for the court to grant relief and a petition will in these circumstances be dismissed, Re Legal Costs Negotiators Ltd [1999] BCC 547. Further a petitioner cannot complain of a past action taken before he became a shareholder to which all shareholders at the time had consented, Re Batesons Hotels (1958) [2013] EWHC 2530.

Potential Conduct

S994(1)(b) CA 2006 expressly contemplates that a petition may be brought in respect of proposed acts or omissions. However, the court is unlikely to conclude that such acts or omissions are sufficiently imminent simply because a body of shareholders (when in the minority) had attempted to act in a prejudicial manner and, for this reason alone should be regarded as likely to act in a manner prejudicial to minority shareholders on obtaining a majority, Re Astec (BSR) Plc [1998] BC 59. It is incumbent upon the petitioner to adduce evidence that an act or omission is imminent. It is not sufficient to simply rely upon the petitioner’s fear that a future act or omission may occur.

The court is unlikely to be satisfied that an act is sufficiently imminent in circumstances where:

• A majority shareholder indicates a desire to carry out an act that may be unfairly prejudicial but where the board has not yet decided to follow such a course, Re A Company (No 4475 of 1982) [1983] Ch 178
• Steps are taken that may facilitate later prejudicial acts. In Re Ringtower Holdings Plc [1989] 5 BCC 82 a public company was re-registered as a private company. The petitioning minority shareholder argued that the circumstances invited the inference that this was done to facilitate the giving of financial assistance for the purchase of the company's shares. It was held that the petition was premature given that any such financial assistance would need to be the subject of a later special resolution which, if proposed, could be the subject of a petition in due course.

Prejudice must be suffered and must be unfair

Both prejudice and unfairness must be shown for relief to be granted (although there is no need to show discrimination as well as unfair prejudice). A member can clearly show prejudice if the economic value of his shares has significantly decreased or is put in jeopardy by the conduct of which the complaint is made, Re Brenfield Squash Racquets Club Limited [1996] 2 BCLC 184. Prejudice justifying a petition however is not confined to such economic detriment, especially where it is established that one or more features of a quasi partnership exist.

Examples of prejudice are dealt with below. Despite its breadth, it will nevertheless prove fatal to a petition if the conduct complained of by a petitioner results in them being no worse off. In Rock (Nominees) Ltd v RCO (Holdings|) Plc [2004] EWCA Civ 118 which concerned a sale of a company’s wholly owned subsidiary to its majority shareholder in breach of fiduciary duty. No prejudice was proved because the sale took place at the best reasonably available price.

As for unfairness, the court is not constrained by technical considerations of legal right. That said, courts are understandably reluctant to introduce vague and subjective notions of fairness and morality into commercial relationships. It is therefore well established that in appraising unfairness and prejudice a court must:

• Take an objective approach applying established equitable principles, Re Saul D Harrison [1994] BCC 475;
• Adopt as a starting point the basis on which the petitioner agreed to become a member of the company, for example the articles of association of the company, any agreements between the shareholders and any subsequent amendments), O’Neill and another v Philips and others [1999] 1 WLR 1092.

While the prejudice must be unfair, bad faith is not required and the petitioner need not establish the existence of a conscious intention to cause prejudice to the petitioner, Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch)

V         EXAMPLES OF UNFAIRLY PREJUDICIAL CONDUCT

 A         Breaches of Duty and Failures to Give Effect to Legal Rights

Breaches of Fiduciary Duty

Breach of fiduciary duty by a director is not of itself unfair prejudice. Real prejudice must have been suffered as a result of the breach, Rock (Nominees Ltd v RCO (Holdings) plc [2004] EWCA Civ 1998. However, if prejudice is occasioned, breaches of fiduciary duty have been said to be paradigmatic of conduct that is unfairly prejudicial to the interests of the members generally, Atlasview v Brightview [2004] EWHC 1056 (Ch). Relevant prejudice caused by breaches of fiduciary duty may include damage to the parties' relationship of trust and confidence especially in the context of a quasi-partnership type company, Re Edwardian Group Ltd [2018] EWHC 1715 (Ch); Re Baumler (UK) Ltd [2004] EWHC 1763 (Ch).

More obviously, breaches of duty entailing the misuse or misappropriation of company assets or the procurement of an allotment of shares to dilute a minority's interests will be unfairly prejudicial. In Re Woven Rugs Ltd [2010] EWHC 230 (Ch) a company’s director and majority shareholder caused the company to borrow money from a third party to finance the repayment of the loans he had made to the company in preference to the repayment of loans that had been made to the company on the same terms by the petitioning minority shareholders.

The bringing of an unfair prejudice petition will usually be precluded if the articles of association release the directors from the breach of fiduciary duty relied on by the petitioner (this being part of the basis on which the member subscribed for shares in the company). However, the fact that a breach of fiduciary duty has been ratified under section 239 of the CA 2006 will not always provide a complete answer to a petition: a ratifying resolution will itself be an act of the company which may amount to unfair prejudice, Re Saul D Harrison & Sons.

That the proper claimant for a breach of fiduciary duty is the company is not of itself a bar to an unfair prejudice petition, Re Saul D Harrison & Sons plc [1994] BCC 475. Permitting a petitioner to maintain an action in the name of the company is one of the specific remedies provided for by section 996 of the CA 2006. The court can also award the petitioner compensation. However, where such relief is sought in an unfair prejudice petition, the court will pay close attention to the principles restricting the bringing of derivative actions and preventing the recovery of reflective loss and seek to tailor any relief in a way which does minimum violence to their operation, Sikorski v Sikorski [2012] EWHC 1613; Re Fi Call Ltd [2014] BCC 286

It should also be noted that the directors must exercise their fiduciary duties and powers of management in the interests of the company as a whole. Sometimes doing so will require the taking of steps that are prejudicial to some of the members to secure the future of the company. Those steps will not be regarded as unfair.

Mismanagement

A court will not interfere in questions of commercial judgment. However, where mismanagement is established, rather than a mere difference of opinion on the desirability of different commercial decisions, this may constitute unfair prejudice. Per Re Macro (Ipswich) Ltd [1994] 2 BCLC 354 whether or not such mismanagement is sufficiently serious falls to be appraised by reference to the following criteria:

• The scale of financial loss arising
• Frequency and duration of acts or omissions constituting mismanagement.

Failure to pay dividends

Setting the level of dividends payable to shareholders is a commercial decision with which courts are normally reluctant to interfere. The absence of dividends cannot, of itself, constitute unfair prejudice: the decision to pay dividends should always to be driven by commercial objectives that may mean that the company cannot afford to pay them.

However, in Re Sam Weller & Sons Ltd [1990] Ch 682, unfair prejudice was established where:

• The payment of a certain level of dividend (if justified by the company’s financial position) was part of the basis on which the petitioner became a member of the company and payments below this level are received without justification, Re Gate of India (Tynemouth) Ltd [2008] EWHC 959 (Ch)
• The directors
  • Have abdicated their responsibility to consider paying or increasing dividends; or
  • Have refused to pay dividends for improper purposes such as enhancing the capital value of their own shareholdings while deriving an income from directors’ fees

Payment of excessive remuneration

The level of remuneration is also a commercial decision which the court is normally unlikely to second guess.

However, the following are exceptions to this:

• Where remuneration is not calculated by reference to the value of the services provided by directors who are in control of the company, and is instead a disguised payment of dividend or dressed-up return of capital, this will be unfairly prejudicial conduct even where approved by the shareholders in a general meeting, Re Halt Garage [1982] 2 ALL ER 1016.
• Where remuneration is a genuine reward for service but can be objectively shown to be excessive in the light of expert evidence on comparable remuneration or the trading condition of the company, a decision of the board of directors to approve that remuneration may be found to have been taken in breach of fiduciary duty for the improper purpose of self-enrichment. However, if such remuneration is approved by shareholders in a general meeting there will have been no breach of duty and no petition may be brough unless it is shown to be a dressed up return of capital, Re Company ex p Burr [1992] BCLC 724.
• Where remuneration has not been approved by the board of directors, shareholders or otherwise in accordance with the articles of association, a greater degree of judicial scrutiny is permitted. Whether or not such remuneration is unfairly prejudicial is a question of fact, appraised by reference to whether or not the remuneration is within the bracket that executives carrying the sort of responsibility and discharging the sort of duties that the director in question was carrying and discharging, would expect to receive Irvine v Irvine (no1) [2006] EWHC 406 (Ch). While a court will usually require expert evidence to reach a decision in this regard, in Re AMT Coffee Ltd [2019] EWHC 46 (Ch) HHJ Matthews concluded that the levels of remuneration paid to the directors were in certain years outside what he determined to be an acceptable bracket on the strength of the factual evidence as to the directors’ roles and the manner in which the remuneration was calculated. This conclusion was reached in circumstances where all the expert evidence called by the petitioner and the respondents as to appropriate benchmarks and the remuneration that would have to be paid to replacement directors was rejected
• It may be that a director is so critical to the survival of a company and its business that paying remuneration in excess of what is considered within the normal range is justifiable.
• the drawing of any remuneration will constitute unfair prejudice if done contrary to an understanding that directors will not be remunerated, or as to the permissible levels of remuneration, Fisher v Cadman [2005] EWHC 377 Ch.

 Diluting the minority’s shareholding

Allotting further shares in the company for the improper purpose of diluting a minority shareholder's shareholding is an obvious example of unfair prejudice, Re Coloursource Ltd [2004] EWHC 3078 (Ch)

Unfair prejudice may also be established in the context of a rights issue (an offer of new shares or other securities made to existing shareholders in proportion to their shareholdings) which a petitioning minority shareholder is, in principle, free to take up, if: 

• it is known that the petitioning minority shareholder cannot take advantage of the issue
• in breach of fiduciary duty, the directors fail to properly consider the price that could and should be extracted from those willing and able to subscribe for shares.

This is especially so where the board are also shareholders in a position to benefit from a rights issue, Re Sunrise Radio Ltd [2009] EWHC 2838 (Ch).

Failure to abide by the articles of association or agreements between shareholders and non-compliance with the Companies Act 2006

Failures to abide by the articles of association or agreements between shareholders and non-trivial failures to comply with the CA 2006 constitute a breach of the basis on which a member subscribes for shares in a company and may justify the bringing of an unfair prejudice petition.

Examples of such conduct include:

• failure to hold annual general meetings, to provide accounts and to disclose interests in a transaction with the company contrary to the CA 2006, Re Woven Rugs [2010] EWHC 230 (Ch)
• making loans to directors without complying with the requirements of s197 of the CA 2006 or otherwise ratifying the same, Re AMT Coffee Limited [2019] EWHC 46 (Ch)
• registering new members in breach of restrictions on transfers to non-members contained in the articles of association

B         Inequitable conduct

Examples of inequitable conduct include:

• Causing an irrevocable breakdown of trust and confidence in a quasi-partnership, entered into on the basis of mutual duties of good faith, trust, disclosure and co-operation in the strategic operations of a group of companies, by seeking to take control of the company, Boughtwood v Oak Investments Partners [2009] EWHC 176 (Ch) affirmed on appeal at [2010] EWCA Civ 23
• Exclusion from management where participation was part of the bargain between shareholders and such exclusion is not justified by the petitioner's misconduct or otherwise, O’Neill and another v Phillips and others [1999] 1 WLR 1092. Re I Fit Global Ltd [2013] EWHC 2090 (Ch)
• Failure to consult with, or provide information to, a petitioner where it was agreed that the petitioner would be consulted or provided with such information, Hawkes v Cuddy [2007] EWHC 2999 (Ch) 

C         Deadlock

A breakdown in trust and confidence leading to deadlock which cannot be attributed to any unfairly prejudicial conduct will not justify relief under section 994 of the CA 2006. These circumstances may, however, make it just and equitable for the company to be wound up, O’Neill v Phillips [1999] 1 WLR 1092

However, a petition presented on this ground will fail if:

• The deadlock is attributable to the petitioner’s fault 
• The deadlock occurs as a result of the proper operation of provisions in the company’s articles or other shareholder agreement designed to prevent a decision being taken against the wishes of one or more shareholders.

Notwithstanding this, the deadlock may lead to further unfairly prejudicial conduct such as a majority shareholder insisting that the arrangement should continue without taking any account of the changed circumstances, Hawkes v Cuddy [2007] EWHC 2999 (Ch) 

The court may also wind up a company on the just and equitable ground where accusations and counter-accusations have been made by different sets of shareholders that the court is not in a position to finally resolve, but which nevertheless demonstrate common ground that the relationship of trust and confidence has irretrievably broken down, Apex Global Management Limited v Fi Call Ltd [2015] EWHC 3269 (Ch)

D         Removal of Auditors

To give effect to article 38 (restricting the basis on which statutory auditors may be dismissed) of  EU Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts, section 994 (1A) CA 2006 deems the removal of a company’s auditor to constitute unfair prejudice if done on the grounds of divergence of opinion on accounting treatments or audit procedures, or on any other improper grounds.

 E         Altering articles of association: insertion of compulsory transfer mechanisms

In Allen v Gold Reefs of West Africa Limited [1900] 1 Ch 656 it was held that an amendment to the articles capable of leading to the expropriation of a shareholder's interest such as the incorporation of a provision equating to a compulsory transfer imposed obligations on shareholders to exercise their voting power in good faith and in the best interests of the company, rather than merely in their own best interests.

On the strength of this authority, an interim injunction was obtained in Constable v Executive Connections Limited [2005] EWHC 2 (Ch) preventing the implementation of an amendment to a company's articles of association obliging a member to sell his shares should an offer be received for the purchase of all of the company’s shares which 75% of its shareholders approved. It was argued that the amendment to the articles was a commercial judgment made by the majority shareholder (for which the court was not in position to substitute its own judgment). Reliance was also placed on the fact that the shareholder was to receive in excess of market value for his shares under the drag along mechanism with the result that the amendment could not be regarded as unfairly prejudicial. Notwithstanding these considerations, the court considered it arguable that the amendment was an impermissible use of majority shareholder power and that the balance of convenience favoured an injunction. Regrettably the case did not proceed beyond this interlocutory stage and there was therefore no opportunity for a more definitive answer to this question to be given.

That a petitioner is likely to face an uphill struggle in relation to any such challenge is indicated by the decision of the Court of Appeal in Arbuthnott v Bonnyman & Ors [2015] EWCA Civ 536 (20 May 2015). In that case, it was held that amendments to a company's articles of association, including to drag along provisions, were not invalid and did not involve unfairly prejudicial conduct under section 994 of the CA 2006. The judge had found that there was no evidence of bad faith or improper motive. Instead, the amendment of the articles was said to have been no more than a tidying-up exercise, and had not introduced any major change from the shareholders' agreement or the unamended, original articles. Indeed, on the face of it the changes (making the articles clearer and more consistent and facilitating the transfer and registration of shares compulsorily acquired) were for the benefit of the company even if they also benefited the majority shareholders as such. The Court of Appeal upheld this decision on the grounds that the respondent majority shareholders had considered they were acting in the best interests of the company as a whole. 

The judgment contains a list of principles, extracted from the case law, regarding the circumstances in which alterations to the articles of association would be held to be invalid:

• The limitations on the exercise of the power to amend a company’s articles arise because, as in the case of all powers, the manner of their exercise is constrained by the purpose of the power and because the framers of the power of a majority to bind a minority will not, in the absence of clear words, have intended the power to be completely without limitation. These principles may be characterised as principles of law and equity or as implied terms, Assenagon Assset Management SA v Irish Bank Resolution Corpn Ltd [2012] EWHC 2090 (Ch)
• A power to amend will be validly exercised if it is exercised in good faith in the interests of the company, Sidebottom v Kershaw Leese and Co Ltd [1920] 1 Ch 154
• It is for the shareholders, and not the court, to say whether an alteration of the articles is for the benefit of the company. But it will not be for the benefit of the company if no reasonable person would consider it to be such, Shuttleworth v Cox [1927] 2 KB 9
• The view of shareholders acting in good faith that a proposed alteration of the articles is for the benefit of the company, which cannot be said to be a view which no reasonable person could hold, is not impugned by the fact that one or more of the shareholders were actually acting under some mistake of fact or lack of knowledge or understanding (Peters' American Delicacy Co v Heath (1939) 61 CLR 457 at 491). In other words, the court will not investigate the quality of the subjective views of such shareholders.
• he mere fact that the amendment adversely affects one or more minority shareholders and benefit others does not, of itself, invalidate the amendment if the amendment is made in good faith in the interests of the company (Sidebottom v Kershaw Leese and Co Ltd [1920] 1 Ch 154; Shuttleworth v Cox [1927] 2 KB 9; Citco Banking Corp NV v Pusser’s Ltd [2007] UKPC 13
• A power to amend may also be validly exercised even though the amendment is not for the benefit of the company because it relates to a matter in which the company as an entity has no interest but rather is only for the benefit of shareholders as such or some of them. This will not, however, be the case if the amendment involves oppression of the minority, is otherwise unjust or is outside the scope of the power (Peters' American Delicacy Co v Heath (1939) 61 CLR 457; Assenagon Asset Management SA v Irish Bank Resolution Corpn Ltd [2012] EWHC 2090 (Ch)).
• The burden is on the person impugning the validity of the amendment of the articles to satisfy the court that there are grounds for doing so (Citco Banking Corp NV v Pusser's Ltd [2007] UKPC 13;Peters' American Delicacy Co v Heath (1939) 61 CLR 457).

While this guidance indicates that successful challenges will be rare, the Arbuthnott decision was predicated on a finding that the alteration to the articles had not introduced any major change from the compulsory transfer provisions that existed in the articles before the alteration. It therefore remains undecided whether an amendment of articles to insert drag along rights for the first time will be invalid or involve unfairly prejudicial conduct under section 994.

 VI        REMEDIES

Under section 996(1) the court has a wide discretion to make such order as it thinks fit to remedy any unfair prejudice that the petitioner is able to establish. Without limit to the court's broad discretion, section 996(2) specifically permits the court to make orders that:

• Regulate the conduct of the company's affairs in the future. This could be simply ordering a single meeting to be held or going so far as setting out a code of conduct for future company business
• Require the company to refrain from an act or to carry out an act that it has omitted to do (including ordering the company to amend its constitutional documents and resolutions, section 999(2) CA 2006
• Authorise civil proceedings to be brought in the name of the company even where the strict preconditions of the statutory derivative action cannot be established, albeit that the principles applicable to derivative actions and prohibiting the recovery of reflective loss will be borne firmly in mind. A potential use of this remedy would be where the company refuses to bring claims against third parties arising other than from breaches of duty by directors which would justify the use of the statutory derivative action procedure.
• Prohibit changes to the company's articles of association.
• Provide for the purchase of the shares of a member of the company by other members or (less commonly) by the company itself on such terms as the court thinks fit. Any order for the purchase of shares by the company will have to pay careful regard to the interests of creditors and the implications of diminishing the company’s assets or increasing its indebtedness to fund the share purchase.
• Make orders against directors and third parties (if made respondents to the petition) where it is just to grant a remedy against them (including imposing an obligation to purchase the petitioner’s shares) having regard to their involvement in the conduct complained of.

In exercising its powers under section 996, the court is not constrained by the type of order sought by the petitioner (albeit the acceptability of the order to the petitioner will carry great weight) and will be guided not only by the need to provide redress to the petitioner, but also to regulate the affairs of the company in the future.

In Ferdinand v Patel [2016] EWHC 1524(Ch), the court went so far as to order the winding up of the company (despite neither party having requested this) on the basis that this was the fairest way of doing justice between the two solicitor shareholders who could each pursue their respective practices through newly incorporated companies.

In appraising what is necessary in this regard, the court will take into account the interests of creditors and other relevant third parties. 

Further, and as was recognised by Patten J giving the judgment of the Court of Appeal in Grace v Biagioli [2005] EWCA Civ 1222, the court will have regard to conduct which has occurred since the petition was presented, and make such order as is necessary to ensure that the unfairly prejudicial conduct does not continue into the future:

The prospective nature of the jurisdiction is reflected in the fact that the court must assess the appropriateness of any particular remedy as at the date of the hearing and not at the date of presentation of the petition; and may even take into account conduct which has occurred between those two days. The court is entitled to look at the reality and practicalities of the overall situation, past, present and future.

The breadth of the remedy was highlighted in Apex Global Management Ltd v Fl Call Ltd [2015] EWHC 3269 (Ch), a case in which a petition and counter-petitions were lodged alleging unfair prejudice and seeking winding up on the just and equitable ground. Hildyard J held that the court had power under section 996 to order a liquidator to be appointed in connection with the winding up of the company to investigate a specific misapplication of company property that was alleged to have occurred.

Notwithstanding this flexibility, the unfairly prejudicial conduct (not to mention the ensuing litigation) will in the vast majority of cases have led to a breakdown in the relationship between the parties. Effective relief will therefore normally entail the making of an order providing for a clean break between the parties. The usual method of achieving this is to make a purchase order.

Purchase Order

A purchase order normally requires the wrongdoing member(s) to purchase the minority shareholding of the petitioner. However, in exceptional circumstances an order may be made requiring the majority members of a company to sell their shares to the minority petitioner. Such circumstances may be found to exist where the conduct of the majority demonstrates that they are unfit to be involved in the affairs of the company, Re Company (No 00789 of 1987) ex p Shooter [1991] BCLC 267.

Where the petitioner and the respondent have shareholdings of the same, or similar, size and cannot agree who should buy the other out, the court decides who should sell and who should buy having regard to the:

• Best interests of the company
• Extent of the wrongdoing
• Views of other stakeholders

Valuation is normally determined on the basis of expert evidence adduced by petitioner and respondent. It is rare that a joint expert will be appointed. The court has a broad discretion to do what is fair in determining the appropriate valuation methodology. The array of valuation bases by which an expert may be ordered to determine fair market value are beyond the scope of this note. Specialist works on share valuation should be consulted for explanations of methodologies such as discounted cash flow, capitalized dividends, capitalized maintainable earnings and adjusted net assets, and when it will be appropriate to value a company on a going concern or break up basis. It was recently emphasised in Re Edwardian Group Limited [2019] EWHC 873 (Ch) that the valuer should pay careful regard to industry specific considerations. In that case, the valuation of a hotel group was to be conducted taking into account issues such as occupancy rates, average daily room rates, maintenance costs and whether a premium should attach to the purchase of all of the hotels in the group at once.

Once a market value is arrived at, it may fall to be further adjusted by reference to the following principles:

• Any reduction in the value of the shareholding caused by the unfairly prejudicial conduct will be ignored in ascertaining the value of the shares, Birdi v Specsavers Optical Group Ltd [2015] EWHC 2870 (Ch)
• Likewise the price required to be paid for the shares may be increased to take account of the unfairly prejudicial conduct
• Common adjustments include adding back in excessive remuneration, accounting for unpaid dividends, restoring misappropriated assets, treating directors’ loans as having been repaid with interest, and adding back in losses occasioned by breaches of fiduciary duty. Where a shareholder has wrongfully been excluded from management in an unfairly prejudicial manner the court may also add back the salary that he should have received for providing managerial services and, if possible on the evidence, to take account of how the company would have performed had the excluded shareholder been allowed to participate, Re Annacott Holdings Ltd [2011] EWHC 3180
• The date of valuation will normally be the date of the purchase order, this being the point at which the unfairly prejudicial conduct comes to an end and the normal date at which a going concern valuation should be conducted, Profinance Trust SA v Gladstone [2002] EWCA Civ 1133
• However, fairness may require an earlier date such as the date when the petition was presented or the date when the petitioner was excluded from management. This will often be the case where the conduct of the wrongdoing majority has rendered the company insolvent or made arriving at a valuation ignoring the effect of such wrongdoing overly difficult, especially if such conduct occurred at a time when the petitioner was incapable of preventing it, Croly v Good [2010] EWHC 1 (Ch)
• In Re Edwardian Group it was held that an earlier date might also be appropriate where the evidence showed the petitioner had deliberately held off issuing his petition for tactical reasons (in that case, to allow extra-judicial proceedings based on the Hindu "Mitakshara" principles of joint family property to run their course in the hope that the petitioner would gain a greater share as a coparcener male member of the family). Similar tactical considerations justifying an earlier valuation date might include a petitioner deliberately holding off from issuing a petition to allow an upturn in trading to occur.
• Where an earlier valuation date is selected, subsequent events should in general be ignored to avoid the valuation being distorted by hindsight, Shah v Shah [2011] EWHC 1902. However, some limited regard may be had to what has happened in the interim where this informs what forecasts could reasonably have been made at the valuation date to enable the court to see whether future intentions were acted on and contingencies came to pass, Re Abbington Hotel [2012] 1 BCLC 410

Interest will not generally be awarded in connection with a purchase order. The shares are owned by the petitioner and nothing is owing until a buy-out order is made. However, interest may be awarded if there is a delay between the transfer of the shareholding and payment for the same occasioned by a dispute about the appropriate purchase price, Re Southern Counties Fresh Foods Ltd [2010] EWHC 3334 (Ch). It has also been held that interest may be payable for a period of "delay" occasioned when an earlier valuation date is selected. This will not always be the case and was not ordered despite the early valuation date in Re Edwardian Group. Fancourt J did not consider that interest would be justified in circumstances where the “delay” arose as a result of a conscious decision by the petitioner.

The court also has jurisdiction to give the purchasing party time to pay if genuinely required to raise the necessary funds, Re a company (No 002612 of 1984) [1986] BCC 99453

Minority Discount

A further adjustment which may be extremely significant in terms of the purchase price is whether a discount should be made to reflect a petitioner’s minority interest. 

Until recently the circumstances in which a minority discount would be applied were relatively settled. In a company with quasi-partnership features the court normally required the petitioner to be paid such proportion of the company's value as a going concern as his shares represented without any discount to reflect the fact that he was a minority shareholder, Re Bird Precision Bellows Ltd [1984] Ch 419. Conversely in a normal trading company a discount was usually included absent exceptional circumstances, Irvine v Irvine No2 [2007] 1 BCLC 445.

This orthodoxy was doubted in Re Blue Index Limited [2014] EWHC 2680 (Ch) Robin Hollington QC (sitting as a deputy High Court judge) held that the default position should be no minority discount for all companies. To order otherwise would be to reward the oppressing majority and improperly treat the petitioner as if he was a willing seller. An exception to this would be if the shares were originally acquired at a discount.

This approach was considered in Re Autobody Ringway Limited [2018] EWHC 2336 (Ch). The petitioner had been excluded from management in breach of an agreement that he would be involved. While HHJ Hodge held that his removal was justified, it was nevertheless unfairly prejudicial for the respondent to continue to run the company without offering to buy out the petitioner. On the facts of the case HHJ Hodge considered that a minority discount was appropriate because his removal had been justified, the petitioner had only paid a nominal amount for his shares while the respondent had provided the business connections, experience and opportunities that allowed the formation of the company. However, had the circumstances been difficult, and in particular had the removal not been justified, HHJ Hodge stated that he would have disallowed a minority discount despite the fact that the company was not a quasi-partnership. That the justifiability of the petitioner’s removal from management may serve as a litmus test for the existence of a minority discount or not in cases of this nature was further endorsed in Re Westshield Ltd [2019] EWHC 115 (Ch) at paragraph 138. 

The absence of a presumption that there should be a minority discount for companies which are not quasi-partnerships was further confirmed by Fancourt J in Re Edwardian Group. However, Fancourt J did not consider that the court only had a binary choice between discount and no discount. Instead he emphasised that the task of the court is to find a fair outcome which may involve a more nuanced approach. On the facts of Re Edwardian, this consisted in recognising the very considerable marriage value of the petitioner’s shares for the respondent, and requiring 50% of such marriage value to be paid in excess of the share’s market value.

VII      BARS TO RELIEF

Given the primacy of purchase orders in the hierarchy of relief ordered under section 996 CA 2006 a fair offer to purchase the petitioner's shares may be found to be equivalent to the relief that he would be entitled to on successful prosecution of his petition. If the offer made gives the petitioner all of the advantages he could reasonably expect from the petition, persisting with the unfair prejudice proceedings will be regarded as an abuse of process and the petition will be struck out, Road Nominees Ltd v Karvaski [2011] EWHC 2214.

In the light of this, it is important for potential respondents who are advised that the allegations of unfair prejudice made against them have substance to make a properly calculated offer to purchase. Petitioners should also consider carefully any such offer that is made.

Ideally, an offer will be made before the start of proceedings so that the position will not be complicated by costs. It is also best practice when issuing a petition where a purchase order is sought (or where it is contemplated that a purchase order is the best relief that the petitioner can expect to obtain), for a period of time to be given to the respondent within which to make an offer exclusive of costs. Any offer made after that period of time has elapsed is likely to be considered reasonable only if provision is made regarding the petitioner's costs.

In O’Neill v Philips [1999] 1 WLR 1092 Lord Hoffmann provided guidance about what must be included within a fair offer. He emphasized that, if the price for the shares has not been agreed between the parties, the offer must provide for a valuation to be conducted by a competent expert to whom both parties are to have the opportunity to make representations following full disclosure of information relevant to the value of the shares. Inequality of arms, information or access to the expert valuer may render an offer unfair and justify its rejection by the petitioner 

Any offer should also address the question of a minority discount, and its extent, by reference to the evolving case law in this area described above. Traditionally, an offer made in the context of a quasi-partnership would not include any discount, but an offer in respect of a normal trading company might permissibly do so. A more nuanced approach will now be called for.

Further, where the unfairly prejudicial conduct has diminished the value of the shares or assets/monies have been misappropriated from the company, the offer to purchase must take this into account, Re Woven Rugs [2010] EWHC 230 (Ch)

Exit route provided by the articles of association or a shareholders' agreement

A petition will also be amenable to strike out if the grounds relied on in the petition are catered for by the articles of association or a collateral shareholders' agreement, and the petitioner is by his petition seeking to circumvent those contractually prescribed remedies.

As a result, petitions have been dismissed based on alleged exclusion from management where provisions in the company's articles provided the other members with an option to buy the shares of the petitioning member at a value to be determined by the company's auditors on him ceasing to be a director or employee of the company, 

However, in situations of quasi-partnership the operation of equitable principles may mean that the conduct complained of is still unfairly prejudicial notwithstanding such contractual provisions. This will especially be the case where participation in management is found to have been part of the understanding pursuant to which the company was established, Re Company No 00330 of 1991, ex p Holdern [1991] BCC 241. 

Petitioner misconduct

Misconduct on the part of the petitioner may mean that prejudicial acts or omissions are not regarded as unfair. An obvious example is misconduct justifying the petitioner's dismissal as a director despite the existence of an understanding within a quasi-partnership that he would be involved in management. However, the breach in question must be sufficiently serious to justify the petitioner's dismissal. It may also be necessary for an offer to be made to purchase his shares at the same time, especially in the context of a quasi-partnership, Re BC&G Care Homes Ltd [2015] EWHC 1518 (Ch)

 Further, although an unfair prejudice petition is based on a statutory remedy, with the result that there is no strict requirement for the petitioner to come with clean hands, Re London School of Economics [1986] Ch 211 misconduct on the part of the petitioner will be a relevant factor for the court to take into account when determining what relief (if any) should be granted.

The misconduct must be relevant to the unfair prejudice and sufficiently serious to justify precluding relief. The bar seems to be set very high, it having been held in Richardson v Blackmore [2005] EWCA Civ 1356 that a petitioner's deployment of a forged letter in the course of a trial was not sufficiently serious to justify depriving him of any remedy for the unfair prejudice which he had suffered.

Delay and acquiescence

There is no limitation period for the bringing of an unfair prejudice petition. However, the longer a petitioner delays, the greater the risk he will be found to have acquiesced in any unfairly prejudicial acts or omissions of which he is aware. This is especially likely in relation to allegations of unfair prejudice in respect of shares acquired after the petitioner became aware of the relevant conduct. Further, relief cannot be obtained in respect of shares acquired by a petitioner after presenting an unfair prejudice petition as a means of making a post filing bet (as was the situation in the Bermudian case of Annuity & Life Reassurance Ltd v Kingboard Chemical Holding Ltd [2015] Bda LR 97). In addition, the court has a discretion to refuse to entertain a petition where it is brought after a period of inordinate and unexplained delay, Re Grandactual [2005] EWHC 1415

However, where unfairly prejudicial conduct has been ongoing for many years but is continuing at the date of the petition, and it is evident that the petitioner has not accepted it, a petition may still be presented regarding the historical acts and omissions, especially where the delay is attributable to frustrated attempts on the part of the petitioner to obtain information about what had been going on, Re Southern Counties Fresh Foods Ltd [2008] EWHC 2810.

VIII     May other claims be brought with unfair prejudice petitions?

In Wootliff v Rushton-turner and others [2016] EWHC 2802 (Ch) the High Court had to decide whether a claim for wrongful dismissal could be pursued within an unfair prejudice petition.

W was a member and chief executive officer of a company. The company dismissed him from his employment and removed him from office as director. W brought a claim in the Employment Tribunal for, among other things, wrongful dismissal. He later withdrew those claims, but reserved his right to pursue the wrongful dismissal claim in an alternative jurisdiction. He then presented an unfair prejudice petition in the Chancery Division, claiming that the company had no grounds to dismiss him and that his removal constituted unfairly prejudicial conduct, as did an issue of further shares after he had been dismissed which diluted his shareholding. The respondents sought to have the wrongful dismissal head of claim struck out.

The court held that it had a wide discretion in relation to the relief it may give to a successful petitioner and could make such order as it saw fit. As the language was so wide, it could not be said to shut out relief for compensation for breach of a service agreement. 

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