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

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.