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Posted: September 12th, 2022
Company Law: Discussion Posts
Company Law: Discussion Posts
allegation of unfairly prejudicial conduct takes place within a commercial environment. Does this reality – that is to say, the marketplace conditions within which firms operate – in any way inform courts in how they construe ‘unfair prejudice’ and the grounds upon which a petition may be made?
In addition to my last posting, it is inevitable that some of you may get carried away with the possibilities that s 994 appears to present in the protection of minorities, and it is also likely that others will take the (disheartened) view that courts will usually be reluctant to intervene in the day-to-day business of firms. It is important to note that the reality is probably somewhere in between these two poles.
On the one hand, there are some fundamental rules and principles of company law that have special impact here – (i) majority rule; (ii) the reluctance of the courts to intervene in a firm’s internal affairs unless there is clear evidence of wrongdoing; (iii) the company as a proper plaintiff; (iv) directors as the day-to-day decision makers and shareholders as passive investors; and (v) the essentially commercial relationship that governs the interactions of a firm’s participants. On the other hand, though, other aspects of company law oblige courts to sometimes intervene, including (i) s 21 and the freedom of individuals to amend a firm’s articles and insert personal ‘rights’/‘expectations’; (ii) restrictions placed on s 33 by the Hickman principle; (iii) the severe limitations faced by shareholders within private limited companies to sell their shares (that is, no access to a secondary market for the trading of shares); and (iv) the dark side of majority rule whereby a minority shareholder may have no decision-making power if removed from their management role as director.
As you discuss with your colleagues, bear in mind that it could be suggested that courts have sought to chart a course that seeks to balance these positions and, along the way, have explored concepts such as legitimate expectations and quasi-partnerships in order to clarify judicial thinking.
Response to Muhannad Karrar’s Post
Your focus on Unfair prejudice tests being objective and its inclusion of conduct of the involved parties are very well done. The objective entails determining whether the majority exercises their strict legal rights in an objectively unfair way regardless of subjectively acting in good faith. It is important to note that the conduct may be legal, but it was inequitable [1]. The majority are unfair when they use rules in a way in which equity does contrast to good faith. In this way, the concept of unfairness becomes difficult to apply, exposing much tension between contract law and equity. Considering the case of Braganza v BP Shipping Ltd, [2], the court demonstrated that a party that has been awarded a measure of discretion in an agreement is required to exercise it in a manner that is not unreasonable or capricious. Equity has currently taken a distinct route by imposing further duties or restrictions on the individuals considered fiduciaries. The company shareholders within a quasi-partnership are in a paradigm fiduciary relationship that places a duty to exhibit utmost good faith in their conduct.
The Court of Appeal indicated that courts need to act on a principled basis even if a flexible approach to the situation is allowed. For instance, situations such as failing to permit a petitioner to be involved in management or consultations for decisions is prima facie an unfair prejudice as demonstrated in Moxon v Litchfield and Others, Re LCM Wealth Management (2013) [3]. Other situations include excessive remuneration or bonuses not directly amounting to unfair prejudice except against the Articles of Association or an understanding by the members as illustrated in Re Cumana Ltd: CA (1986) [4]. Mismanagement of the company;s resources by the board is not sufficient to be considered unfair prejudice, but cases such as Estera Trust (Jersey) Limited v. Edwardian Group Limited and others (2019) [5] indicated that when the mismanagement is a case of breaching directors’ duties, then it becomes unfair prejudice. Many courts prior to and after the O’Neall case have adopted the incremental approach in looking into a particular situation by determining whether it is sufficiently close to a past case and considering the facts to achieve the objectiveness factor of their unfair prejudice test.
References
[1] Halpern D, and Bowmer M, ‘Unfair Prejudice Petitions: What Makes Prejudice “Unfair”? – 4 New Square’ (4 New Square, 2019)
[2] Braganza v BP Shipping Limited [2015] UKSC 17, SC
[3] Moxon v Litchfield and Others, Re LCM Wealth Management Ltd: [2013] EWHC 3957 (Ch)
[4] In Re Cumana Ltd: (1986) BCC 99, [1986] BCLC 430
[5] Estera Trust Limited and Herinder Singh v Jasminder Singh, Verite Trust Company Limited, Jemma Trust Company Limited and Edwardian Group Limited: [2019] 1 BCLC 171, Fancourt J.
Word Count: 458
Response to Alison Moore
Considering your input on the ruling made in the Foss v Harbottle [1] case being harsh for failing to put much consideration on the minorities’ views to a particular issue, I intend to disagree with the claim. I indicate that it does have its underlying importance. The ruling made in Foss v Harbottle establishes an important principle in company law where the proper plaintiff to a wrong done to a company is the company itself. Using this principle, in conjunction with the Salomon principle of companies with distinct legal personalities, does bring invaluable significance to commerce and the modern economy [2].
Furthermore, the Company Act 2006 does provide several remedies to minority shareholders, which they could gain through derivative claims and unfair prejudice claims. The ruling does have its exception where for a minority shareholder to place a derivative action on behalf of the company, it needs to demonstrate that the company is eligible for the claimed relief and actions to fall within the proper boundaries of exception to the rule made in Foss v Harbottle. The Foss ruling only applies when the corporate rights have been infringed and not when individual rights to a member have been denied.
References
[1] Foss v Harbottle (1843) 2 Hare 461, 67 ER 18
[2] Spotorno A, ‘Why Is The Rule In Foss V. Harbottle Such An Important One’ (2018) 39 Business Law review
Word Count: 244
Response to Sophie Blackmore
Notably, the courts must consider the circumstantial facts within a situation before deciding how to apply Section 994 of the Company Act 2006. The courts will utilize the available broad discretion in determining the right remedies for the involved shareholders. To this effect, I believe that the courts will accept the Section 994 depending on the circumstantial facts and use their discretion to either favor the minority shareholders, the quasi-partnership or determine whether the conduct was unfair prejudice and its right remedy. Their main objective is to ensure that the circumstances are dealt with fairly, and petitioners will have no control over the kind of relief they get from the courts. There are no limitations to the court in applying Section 994 and ensuring that the minority shareholders have been protected.
In the VB Football Assets v Blackpool Football Club [1], the High Court indicated that they have a wider breadth of remedies when it comes to unfair prejudice claims. The court is not limited by the relief being sought by the petitioner when they are seeking to avail of the proper remedy [2]. The decision made in this case demonstrated the significance of ensuring that all agreements and understandings are adequately elaborated in the documentation. Involved parties should be mindful of what exists beyond the available documents.
References
[1] VB Football Assets v Blackpool Football Club [2017] EWHC 2767 (Ch)
[2] Horne L, ‘Unfair Prejudice Petitions: The Court Flexing Its Discretion On Remedy’ (Macfarlanes.com, 2020)
Word Count: 258
First Post:
Fulham’s decision to consider party autonomy in deciding on the unfair prejudice autonomy does illustrate the court’s willingness to consider the marketplace conditions to determine the claim and the grounds on which the petition was based. The Court of Appeal indicated in the case of Fulham Football Club Ltd v Richards & Anor (Fulham (1987) [2]. This claim was based on an unfair prejudice petition under Section 994 of the Companies Act 2006 that would also be considered an arbitration. This decision was dealing with whether a party is allowed to contract out of their statutory rights in petitioning the court for relief under section 994. This case provided a significant lens through which various important aspects of the UK’s Company law can be viewed. The Court of Appeal did raise various issues that went beyond the rights and liabilities of involved parties as they adopted the explicit, contractual, pro-arbitration approach.
The Fulham decisions would have significant implications concerning the future development of Section 994 as a remedy to the minority shareholder. They embraced the idea of the parties’ ability to contract out of their statutory rights as they petition for relief under Section 994, which is also known as the unfair prejudice remedy. The decision demonstrated the court’s willingness to acknowledge the contract as the animating element within company law and offering their support towards enforcing the agreements made freely by parties [3]. It illustrates that through this firm decision on “party autonomy,” the courts did not only contrive to stunt the development of Section 994 being a remedy to the minority shareholder but also firmly reasserts and extends the contractual analogy inherent in the Company law implemented in the modern UK.
References
[1] Bartram E, ‘What Protection Do I Have As A Shareholder? | Bermans’ (Bermans.co.uk, 2020)
[2] Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 855
[3] McVea H, ‘Section 994 Of The Companies Act 2006 And The Primacy Of Contract’ (2012) 75 The Modern Law Review
Word Count: 342
Second post:
The unfair prejudice conduct must be in respect to the affairs of the company[1]. These terms are to be construed liberally in reference to the commercial reality compared to legal niceties. This conduct will include management decisions that fail to include the board of directors and any attempts by shareholders to exert higher control, leading to disruptions in management and disadvantage the proper running of the organization. This would be illustrated in the case of Oak Investment Partners Xii v. Boughtwood [2009][2] where the court indicated that in the event a significant shareholder is an appointed a management role on the company, then engaged in particular conduct that involves an improper assertion of rights to control over the practical management of company affairs. The conduct is able to be considered the conduct of the company’s affairs in an unfairly prejudicial way in relation to Section 994 of the Companies Act 2006.
These company affairs have a relation to the company’s commercial environment in which it is operating in. It is only prudent that a court considers the marketplace conditions in which firms operate especially if the conduct in consideration has a direct relation to the latter. For instance, the Court of Appeal in the case of Swann v Birkinshaw [2017] EWCA Civ 84 [3] indicated that its wide discretion allows it to decide the valuation methodology for the shares to be purchased. This method could choose to utilize the market value of share capital or they could consider other relevant factors [4].
References
[1] Brooks S, ‘What Is Unfair Prejudice, When Can You Claim For It And What Remedies Are Available?’ (Jonathanlea.net, 2020)
[2] Oak Investment Partners Xii v. Boughtwood [2009] EWHC 176 (CH), [2009] ALL ER (D) 67 (FEB)
[3] Swann v Birkinshaw [2017] EWCA Civ 84
[4] Corsi A, ‘Valuing A Company’S Shares Following Unfair Prejudice’ (Nortonrosefulbright.com, 2017)
Word Count: 337
Summary Post:
Notably, various principles and considerations in the unfair prejudice claim are placed under Section 1994 of the Companies Act 2006. The act that replaced Section 459 Companies Act 1985 provides that a company’s member could apply to the court by petition for an order on the ground where the company’s affairs were conducted in an unfairly prejudicial manner in relation to members’ interests and that the action or omission of the company was prejudicial. Some of the issues that arise include whether the courts are working to favour minority shareholders, quasi-partnership or establish whether unfair prejudice has actually occurred. However, the issues and in different cases can be complex and difficult for the courts. These different circumstantial facts then determine the path taken by the court in their decision. Their main role is to exercise wider discretion to determine whether unfair prejudice conduct has happened. This wider discretion allows them to balance their position in the petitions depending on the legitimate expectations and quasi-partnerships as they work to demonstrate judicial thinking on those matters.
Evidently, the minority shareholders placing an action on this claim, will need to demonstrate that company’s actions were unfair and prejudicial, the unfair objective test is conducted, and a major starting point would be whether a contractual agreement does exist between the company and shareholder such as the Articles of Association and Shareholder Agreement. In case the petitioner can establish an unfair prejudice then the courts could choose either to lace a regulation on the conduct of the company’s affairs in the future, requiring the company to refrain from actions or acting in a particular way, such as in Section 999(2) of the Companies Act, 2006, authorization of civil proceedings to be brought in the company’s name with strict preconditions of the statutory derivative actions, prohibiting changes to the organization’s articles of association among others. In general, the court will look into the circumstantial facts to determine the appropriate remedies for precedent cases. Also, Section 996(2) specifies the particular remedies that it could grant. The court has been empowered to authorize the petitioner who has successfully established the unfairly prejudicial conduct, such as when the director has breached a duty and ab action is brought in the company’s name.
Word Count: 375
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