Unfair prejudice petitions: can a director’s breach of duty bar their claim?

30 September 2019

Treating a director who is a minority shareholder fairly in both their involvement in the management of a company and in any offers to acquire their shares is of paramount importance to defeating an unfair prejudice petition.

You are acting for a minority shareholder who wishes to bring an unfair prejudice claim pursuant to s 944 of the Companies Act 2006 but who is, at the same time, in breach of their fiduciary duties as a director of the company. Will the breach of their duties be a bar to seeking redress under an unfair prejudice petition?

There have been a number of cases where the court has held that the exclusion of a participant from management has been justified on the grounds of breach of duty. Those cases are very fact-specific, but tend to involve breaches of duty involving secretive and/or dishonest conduct. What if, however, the breach of duty is not as serious and is not secretive and/or does not involve dishonesty?

The Facts

The case of Sprintroom Ltd dealt with exactly this issue, among others. This dispute involved two actions. The first, referred to as ‘the source code claim’, being brought by Sprintroom (‘the company’) against the defendant director/minority shareholder (Dr P); the second was Dr P’s unfair prejudice claim.

In a somewhat surprising decision, the court at first instance held that while Dr P had failed to comply with his duties to the company by being ‘evasive’, ‘misleading’ and ‘dissembling’ and that his actions were ‘…contrary to the duties that he owed [the company] and was detrimental to [the company]…’, nevertheless his unfair prejudice claim succeeded.

The court found that the company was a quasi-partnership in which both the majority shareholder and Dr P were entitled to participate in management, with the corollary that equitable considerations rendered it unfair for the majority shareholder to use his voting power to exclude Dr P from management, relying on Company, a (No 00709 of 1992), Re, O'Neill v Phillips [1999] 2 All ER 961, [1999 ] 1 WLR 1092. The court also found that Dr P had been unfairly removed as a director and ordered that his 40% shareholding should be bought out at a price to be determined by the court. This was subject to determination as to whether offers which had been made meant that there had, in fact, been no unfairly prejudicial conduct, and the petition should be dismissed accordingly. The judge also found that any purchase of Dr P’s shares should be at full pro rata value, without discount to reflect the fact he was a minority shareholder. Both the company and Dr P appealed the decision.

On 6 June 2019, the Court of Appeal handed down its judgment in the case of Re Sprintroom Ltd Prescott v Potamianos and another; Potamianos v Prescott and another [2019] EWCA Civ 932, [2019] All ER (D) 41 (Jun), rejecting the company’s appeals and partially upholding Dr P’s.

The judgment

The company argued that having found, as he did, that Dr P was in breach of his fiduciary duties to the company in his attitude to the source code (which he claimed he, rather than the company, owned) and his conduct in the face of the source code claim, the judge ought to have found that Dr P was not entitled to relief on his unfair prejudice petition. Furthermore, his behaviour brought to an end the relationship of trust and confidence underlying the quasi-partnership, which no longer subsisted at the stage when Dr P was excluded. Dr P argued that the Court of Appeal should only interfere with the judge’s conclusions on whether there had been unfair prejudice if it found that the judge, quoting Lord Fraser of Tullybelton in G v G [1985] 2 All ER 225, [1985 ] 1 WLR 647 at p229, ‘…ha[d] not merely preferred an imperfect solution which is different from an alternative imperfect solution which the Court of Appeal might or would have adopted, but has exceeded the generous ambit within which reasonable disagreement is possible…’.

The Court of Appeal decided it could not interfere with the decision, stating at [72]: ‘The question of the room for appellate challenge of such an “evaluative” decision is an area of our procedural law which has attracted much attention from appellate courts in recent years, possibly fuelled by the ever-increasing complexity and detail of some litigation. In such litigation it is very difficult for appellate courts to put themselves in the same position as trial judges in making those decisions, based (as they are) on voluminous documentary and/or oral evidence, which can only be summarised even in an extensive judgment at first instance. In our judgment this is just such a case.’

Breach of duty

The Court of Appeal held at [81] that: ‘The judge applied the correct legal principles in making an evaluation which, on the basis of his total familiarity with the evidence and ability to view the conduct of Dr [P] in the context of the parties’ whole relationship, he was peculiarly well placed to make. We do not think it possible to identify any flaw in the judge’s reasoning which would justify this court in interfering with his conclusions.’

Although the company had referred to a number of cases which, on their facts, held that exclusion of a party from management is justified on the grounds of breach of duty by the excluded party, the Court of Appeal distinguished these from the present case on the basis that they all included secretive and/or dishonest conduct. Despite Dr P’s breach of duty, he had engaged in an open and bona fide dispute (that he owned the source code). Although he was found to be in breach of his fiduciary duties and, ultimately, found to be wrong in his claim that he owned the source code, this did not automatically render his removal as a director fair. In the words of the Court of Appeal at [83]: ‘The position that he took was ultimately held to have been wrong and he was found to have acted at one stage in the development of the dispute in a way that was unhelpful, evasive and in breach of his fiduciary duty to [the company]...there is no rule of law that every breach of fiduciary duty will necessarily render exclusion from management fair: it is always a question of fact and degree.’

The offers

The majority shareholder had made four offers to Dr P to buy out his shares. The judge at first instance decided that he could not consider whether these offers were reasonable, in which case the unfair prejudice claim would fail, without expert valuation and, therefore, postponed this issue. Dr P appealed this decision and the Court of Appeal upheld that aspect of the appeal. The Court of Appeal held that, evaluating the circumstances surrounding the offers, none of them rendered Dr P’s exclusion from the company fair. They could not be relied on to defeat Dr P’s petition and, importantly, the court stated at [144] that ‘…it would make no difference to that conclusion that the expert might now value the shares as at the time the offers were made at less than the £1.34 million or £1 million offered'.

 

Conclusion

So why a surprising decision? It is impossible to be certain, but it would seem logical to assume that the ownership of the source code would be of fundamental importance to the company and it is unsurprising that a dispute about the same would cause a breakdown in the quasi-partnership and relationship between the majority shareholder and Dr P. It would also be logical to assume that Dr P’s actions, which were found to amount to a breach of his fiduciary duties, would have influenced any advice given to the majority shareholder about removing Dr P as a director, excluding him from the management of the company and what offer to make for his shares. Yet still Dr P’s unfair prejudice petition succeeded, and would have done so even if the offers made for his shares were for more than any subsequent valuation.

So, what to advise your client? It will, of course, be fact-sensitive, but practitioners will have to consider any advice very carefully in the light of this decision. Treating the director who is a minority shareholder fairly in both their involvement in the management of a company and in any offers to acquire their shares will be of paramount importance to defeating an unfair prejudice petition. Absent any secretive or dishonest conduct, there can be no certainty that a director’s actions, even if in breach of their fiduciary duties, will justify their removal as a director, or make an offer to buy their shares based, in whole or in part, on their conduct, fair.

This article first appeared on New Law Journal's website on 29 July 2019.

About the author

Richard Foss is a Partner in our Dispute Resolution team. Richard acts for organisations in a variety of commercial disputes and also advises private individuals and entrepreneurs.  Richard has particular expertise acting for and advising directors and management teams in relation to civil litigation. Richard is also a London Solicitors Litigation Associate (LSLA) committee member.

 

Latest blogs & news

BEIS White Paper on Audit Reform: Will Kwarteng's reforms really unchain entrepreneurs?

In 2012, as a recently elected MP, Kwasi Kwarteng co-authored “Britannia Unchained: Global Lessons for Growth and Properity”, a political pamphlet which championed risk-taking and innovation in the UK economy, and which ever since has led some to label him a fervent Brexiteer. Appointed as the Business Secretary in January 2021, only a few months later his department (BEIS) published one of the longest and most ambitious government White Papers in recent years.

“Lights. Camera. Action!” – Re Motion Picture Capital and standing for minority shareholders to bring unfair prejudice petitions

In the recent case of Re Motion Picture Capital Limited [2021] EWHC 2504 (Ch), the Court greenlit an unfair prejudice petition presented by a minority shareholder who no longer held shares in the relevant company at the time his petition was heard. The petitioner’s position was "Show me the money!", requesting an order that the company purchase his shares at a price reflecting the company’s value, even though his shares had already been transferred into the names of the company’s nominees.

Is a personality clash in the Boardroom a fair reason for dismissal?

A recent case has highlighted a trend that that we have seen over recent years, with Employment Tribunals finding that the dismissal of a senior executive can be fair where there has been a breakdown in relations amongst a management team and one director / executive is considered to be more at fault (Moore v Phoenix Product Development Ltd EAT/0070/20).  Also, the procedural requirements for such dismissals may be more limited, in this case, the fact that no right of appeal was offered did not render the dismissal unfair.

The Court confirms the Legal Costs Principle in Shareholder Disputes

In the case of KOZA LTD and HAMDI IPEK –v- KOZA ALTIN IŞLETMELERI AS [2021] EWHC 786 (Ch), Mr Justice Trower awarded an injunction restraining Mr Ipek, Koza Ltd (“KL”)’s sole director, from causing KL to use its funds to pay legal costs in the litigation, which was in reality a shareholder dispute between Mr Ipek and Koza Altin Işletmeleri AS (“KAI”).  The decision upholds the ‘legal costs principle’ in company disputes, which provides that a company’s money should not be spent on disputes between shareholders.

Ignorance is bliss? Not for directors!

In the recent case of TMG Brokers Ltd (In Liquidation) (also known as: Baker v Staines) the High Court held a director of a company to be jointly and severally liable for payments made by his co-director out of the company’s bank account which were made without proper authority and amounted to  disguised distributions of capital. The fact that he had placed trust in the other director for the company's financial affairs did not excuse him from performing his duties.

FCA Moves to Deregulate SPACs

Following the release of the Hill Report at the start of last month, the FCA has announced that it is going to open a consultation into changing the Listing Rules and connected guidance with a view to encouraging the listing of Special Purpose Acquisition Vehicles (SPACs).

ICSA’s Report on Board Evaluations – A Brief Summary

Following a request by the Department of Business, Energy and Industrial Strategy (“BEIS”) ICSA has prepared a report assessing the effectiveness of the independent board evaluation process introduced in the 2018 update of the UK Corporate Governance Code (the “UK Code”).  

One hand in the cookie jar: Fraud and directors’ duties in insolvency

What happens when a director commits fraud by misappropriating company assets?  Or what of the director who continues trading knowing that the company has no realistic prospect of paying its debts as and when they fall due? To whom does a director owe duties at that point and what recourse is there against that director? This article explores these questions.

Money, money, money: what are directors’ duties in respect of the company’s bank account?

Disputes between directors often arise because of, and/or result in, disputes about company money. Directors need to be alert to how they are required to act, particularly in times of conflict.

Can a De Facto Director be disqualified as a Director?

It is well known that directors owe duties to the company of which they are a director and, in certain circumstances, its shareholders, creditors and employees. Many people believe that if you have not been formally appointed as a director, i.e. you do not appear on Companies House records as a director, you will not owe the usual directors’ duties and, therefore, cannot be in breach of such duties or subject to sanctions for breach.

Fit and proper person requirements for directors in the health and care sector – what does this mean and what are service providers required to do?

All providers registered with the Care Quality Commission (“CQC) must assure themselves that all directors who are responsible for delivering care to service users are fit and proper – in other words, they must be able to diligently carry out their responsibility to ensure the quality and safety of care. This forms part of the providers’ duty to ensure the service is well-led, which is one of the focus points during an inspection. Not only does the CQC monitor compliance at the point of registration, but it is an on-going duty and can lead to enforcement action where it is not met.

Directors’ communications with their solicitors: perhaps not as privileged as you think (Part 2)

In the recent case of Barrowfen Properties Ltd v (1) Girish Dahyabhai Patel (2) Stevens & Bolton LLP (3) Barrowfen Properties II [2020] EWHC 2536 (Ch), the High Court extended the iniquity exception to breaches of a director’s statutory duties.

Insolvency Practitioners: the regulator’s reach is wide when it comes to integrity

It goes without saying that Insolvency Practitioners must behave honestly and with integrity in all their professional dealings.  IPs must handle money and assets in a way which justifies the trust placed in them, but some professionals don’t realise that the way they behave on a Saturday night may be just as relevant to their ability to continue in their chosen profession as the way they behave on a Monday morning.   

Coronavirus business loan scheme fraud

In response to the coronavirus (“COVID-19”) pandemic, the government introduced a number of loan schemes in order to assist businesses struggling financially.  Recent reports suggest that these schemes, as outlined below, have become a target for fraudulent loan applications, by both genuine businesses and also organised criminal enterprises.  This blog briefly examines the various loan schemes in place and the criminal offences which are likely to be the focus of investigating authorities in the coming months.

The driving force fallacy

Court of Appeal overturns injunction in favour of son who sought to restrain his family from participating in the management of their caravan park business - Loveridge –v- Loveridge [2020] EWCA Civ 1104.

Directors disqualified following history of health and safety and waste law breaches

Brother and sister Mark and Rachel Penfold were directors of a waste management company. In February 2016 an employee of the business suffered a serious injury when his arm was caught in a conveyer he was operating whilst at work. The Health and Safety Executive prosecuted the company and both individuals under the Provision and Use of Work Equipment Regulations 1998 (PUWER). 

Director of an insolvent company? Know your exposure…

We live in uncertain and financially very troubling times.  The coronavirus pandemic and the unprecedented measures put in place to tackle it have caused severe disruption to businesses.  Big names such as Harveys, TM Lewin, Intu and the owners of Café Rouge and Bella Italia all went into administration at the beginning of the month.  They will not be the last.

Simply Alarming: when might an unfair prejudice petition fail?

In the recent case of Simply Alarming Security Ltd [2020] 7 WLUK 330 the Court refused to order that the Respondent director/shareholder had to purchase the shares of a shareholder/former director (the Petitioner) who alleged that she had been the subject of unfairly prejudicial conduct by the Respondent. 

Stretching the limits of Directors’ personal liability for torts?

It is a sad reality that the Covid-19 Pandemic is likely to lead to a spike in the number of companies being put into insolvency.  This has the potential to leave parties with claims against those companies with a reduced prospect of full recovery, even if their claims are strong.  As a result, claimants may look for alternative targets, including ways in which they could sue directors personally. 

Company Succession Planning: Death of a sole director – now what?

Company succession planning is critical to ensure that a company can continue to run in the unfortunate event that a director (or shareholder) dies. If there are other surviving directors, they are able to step in and run the company, but what happens when a sole company director dies?

Share insightLinkedIn Twitter Facebook Email to a friend Print

Email this page to a friend

We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.

Leave a comment

You may also be interested in:

Skip to content Home About Us Insights Services Contact Accessibility