Corporate disputes – 2024 in review

Summary

• As business structures come under increasing stress in challenging economic times, shareholders and joint venture parties may be considering their role within a business and the contribution of fellow shareholders or joint venture partners.
• Minority shareholders are increasingly threatening and commencing unfair prejudice petitions (section 994 of the Companies Act 2006) to seek an exit that may not otherwise be available. Court data shows more than a three-fold increase in the number of petitions issued in 2024. 
• Ambiguities in share valuation provisions in Articles of Association and Shareholders’ Agreements have also given rise to interesting issues and provide a reminder to ensure that provisions are clearly drafted. 

The renaissance of unfair prejudice claims 

Under section 994 of the Companies Act 2006, any shareholder can seek relief from the court if they believe the company's affairs are being conducted in a manner that is unfairly prejudicial to their interests as shareholders. This jurisdiction is typically exercised by minority shareholders who consider that another shareholder or shareholders are causing the company to act in a manner that is unfairly prejudicial.

Whilst the court has broad powers to grant relief, the most common relief is an order that the petitioning shareholder’s shares be purchased at fair value, usually (though not always) by the respondent shareholder – or in other words, an exit from the venture.

Strategically, because of the nature of the relief sought by the petitioning shareholder, a respondent to a credible petition is likely to consider if there are ways to rectify any alleged prejudice at an early stage, including by making an early offer to purchase the petitioning shareholder’s shares (though there may well be a dispute as to value). Accordingly, even the threat of an unfair prejudice petition could conceivably provide a shareholder with a route towards securing an exit.

Court data shows that more unfair prejudice petitions have been issued in 2024 than any time in the last 10 years. Three times more petitions have been issued in 2024 than in 2023.  There have also been a large number of reported decisions:

In Garofalo v Crisp and others [2024] EWHC 1737 (Ch) the court considered an application for an interim injunction to remove a director (who was said to be causing unfair prejudice) and appoint two additional directors. It was said that the removal of the director was the only way to mitigate the threat to the reputational damage of the company in circumstances where it was said that the director was knowingly causing the company to breach sanctions regulations. 

This is a relatively novel and exceptional action where the court satisfied itself that there was a high degree of assurance that the petitioner would succeed in showing unfair prejudice at trial.  Nonetheless, it is an important option to have in mind in cases of egregious unfairly prejudicial conduct where there is urgency to the relief sought. 

Saxon Woods Investments Ltd v Costa and others [2023] EWHC 850 (Ch) - In an interim decision, a court found that a breach of an obligation in the shareholders’ agreement to “work together in good faith towards an exit” could provide the basis for a successful unfair prejudice petition (if prejudice can be shown). It is notable here that if the minority shareholder is ultimately successful in relying on a breach of the provision to evidence unfair prejudice, it will in practical terms transform a relatively light touch provision in the shareholders’ agreement, which does not include a right to exit, into a tangible exit.

Wells v Hornshaw and others [2024] EWHC 330 (Ch) - In this case the minority shareholder had a contractual exit right, which he exercised. The minority shareholder then challenged the basis of the valuation that was carried out by an accountant of his shareholding as being unfairly prejudicial. The challenge was successful, as the accountant had used outdated financial information from which to calculate the value. That was found to be conduct that was unfairly prejudicial and the court ordered that the valuation exercise be carried out again with an exit secured at the correct value.

In circumstances where the unfair prejudice petition might be used as a strategic tool to seek to engineer an exit, the courts have made clear that they will exercise discretion to strike out weak claims. In Brierley v Howe (Re 36 Bourne Street Ltd) [2024] EWHC 2789 (Ch), the minority shareholder claimed to be entitled to a transfer of shares from the majority shareholder. That raised argument about whether the matter constituted the conduct of “the company’s affairs” pursuant to section 994.

The court found that it did not; generally, a legal dispute about whether one party has a claim against the other to the transfer of goods (here, shares) is a private contractual dispute, it is not one involving the company. In these circumstances, the court was prepared to strike out the petition. There have been other reported decisions in 2024 where weak claims have been struck out. This encouragingly robust approach should give confidence to respondents to nuisance petitions.

Remedies

In a successful petition, the court has a very wide discretion to do what is considered fair in all the circumstances of the case, in order to put right the prejudice. The decision in Queensgate Place Ltd v Solid Star Ltd [2024] EWHC 1816 (Ch) concerned a joint venture to develop a Kensington hotel into flats.  The petition sought an order that its shares in the company (which was by this time insolvent) be purchased by the authors of the prejudice at a fair price had there been no unfair prejudice. 

The court had to determine the date of the valuation; it decided on the date on which the key prejudicial action was taken. It then had to consider the counterfactual situation in which the company could have conducted its affairs in a manner that was not prejudicial to the petitioner in order to arrive at a fair price. The case shows that a court is prepared to make a buyout order even if the company is insolvent

Limitation

Several decisions have challenged the “received wisdom” of the legal community and have held that an unfair prejudice petition is subject, depending upon the relief sought, to either a 12 year limitation period as an action on a specialty under section 8 of the Limitation Act 1980 or a six year period under section 9 of that act (as an action to recover money recoverable by virtue of an enactment).  It is always important for a potential petitioner to act without delay; the 2024 decisions appear to give teeth to that need.  

Shareholder disputes regarding share valuation provisions

Valuation in a deemed transfer notice

In Syspal Capital Limited v Mr Christopher John Truman and anor [2024] EWHC 1561 (ChD), the Court considered whether the automatic transfer of Mr Truman’s (the minority shareholder’s) shares under the Articles of Association (the Articles) was triggered by:

• his earlier dismissal as an employee, in which case he would be entitled to be paid the “Market Value” for his shares; or 
• his later resignation as a director on his 65th birthday (i.e. without cause), which would mean he was entitled to the “Fair Value”.