Video Transcript of Shareholder protection from unfair prejudice – Parts (1) Jurisdiction; and (2) Practice and Procedure

Parts (1) Jurisdiction; and (2) Practice and Procedure

Note: It is recommended that you watch the videos of the seminars delivered by Andrew Marsden rather than relying on this transcript. The videos of this seminar series can be seen at: https://commercialchambers.org/videos/

Good afternoon to you all,

My name is Andrew Marsden, and I wish you a warm welcome to this, the first in a series of short seminars on the subject of the protection of shareholders from unfairly prejudicial conduct.

I’m a company and commercial barrister, and my specialist area of expertise include matters relating to the protection of shareholders from unfairly prejudicial conduct. Indeed, that’s an area of the law in which I have practiced now for over 25 years.

This is my first attempt to run a seminar over the Zoom platform. Forgive my errors. There will undoubtedly be many. I’m sure I’ll get better as this series progresses.

In order to preserve bandwidth so as to give each of you the best audio and visual experience of these seminars, I have muted all participants and I have turned off all participants’ cameras. I shall be using the screen share function that the Zoom platform offers. I hope you are familiar with it. I will attempt to share my screen now. You should have in front of you now the title page to these seminars.

A word about the nature of these seminars; I sent out an email seeking an indication as to whether people would be interested in me running a series of these seminars, and the message came back that people were interested. But it also came back, loud and clear, that what was wanted was something of an introduction to the subject of shareholder protection from unfairly prejudicial conduct and that is the nature of this series of seminars.

When delivering them, I shall assume no prior knowledge of the subject. I will start from first principles. Over the course of these seminars I hope to cover all of the most important principles of law and points of practice in this area.

Before I delve into the subject, let me first refer you all to a document that I publish. I refer to it as a case and statute citator. This is in relation to the protection of shareholders from unfairly prejudicial conduct. I’ve invited everyone to download a copy of that in advance of this seminar. I hope you’ve had a chance to do so. If you haven’t a copy is available from the Commercial Chamber’s website. This series of seminars will generally follow the contents of that case and statute citator. It will, in other words, form the note to this series of seminars. However, because of the nature of these seminars being an introduction to the subject, I will not attempt to deal with all the issues that are covered in that statute and case citator. Rather, I’ll confine myself to the most important areas of and aspects of this jurisdiction. The case and statute citator goes much further. It provides, I hope, a comprehensive reference to the law in this area. I will certainly be referring to the principal statutory provisions and to the leading cases but I won’t attempt to cite authority for every proposition that I’m going to be referring to. Rather, for those who want to take their understanding and knowledge of this matter further I would refer them to that case and statute citator which, as I say I hope, covers all the authorities in this area. I provide regular updates. You’ll find those updated versions on the Commercial Chamber’s website in due course as and when they’re published.

Let me start, if I may, with an overview of what I’m hoping to achieve during the course of these seminars. First of all, I want to give you an overview of the jurisdiction. The main statutory provisions and an introduction to the jurisdiction. I then hopefully, later on in the course of today’s seminar, want to examine some of the practice and procedure in relation to applications for relief from unfairly prejudicial conduct. And then, probably in the next seminar, I will be turning to a detailed examination of the nature of unfairly prejudicial conduct itself and also looking at examples of unfairly prejudicial conduct as they’re commonly found in the course of practice. Towards the end of the seminars, I’ll be looking at the all important question of relief from unfairly prejudicial conduct. And finally, I’ll be looking at the somewhat discrete subject of offers to purchase and applications to strike out petitions in the light of those offers to purchase.

This seminar series is deliberately being designed as a series of short seminars, each is only going to be about 30 minutes long. I anticipated when I first was considering running this series of seminars that it would take me about six sessions to be able to cover those subjects that I have just outlined. I think having begun and got quite a way through preparing those topics, that it’s likely I’ll probably deal with it in less than six sessions. It may seem more like four sessions, but we’ll just see how we get on. I have deliberately attempted to keep each seminar to about 30 minutes. I’m very happy, of course, to answer any questions that any of you might have as regards issues that I raise during the course of these seminars or indeed other matters relating to this jurisdiction. But I don’t think it’s going to be practicable for me to do so during the course of the seminars. Rather, what I would prefer to do, and I hope you’re happy with it as well, is that I will seek to answer any questions you might have at the end of this series of seminars. And if I could ask you, please, to drop me a very brief note of any question that you want to raise to my email address there. Andrew Marsden of Commercial Chambers As I say, I will try and address all questions raised at the end of the final seminar. So let me then begin the substance of these seminars.

And, as I say, I want to start with an overview of the jurisdiction and its statutory basis, and there is really nowhere else to start than the section itself. It’s found in Part 30 of the Companies Act 2006, and it deals with, as I say, applications for relief from unfairly prejudicial conduct. I’ve created my own extract on the screen in front of you now, and I want to start by taking you through that statutory provision and the points that are noteworthy from it.

It says as you can see, a member of a company may apply to the court by petition for an order under this part on the ground (a) that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members or (b) that an actual proposed act or omission of the company is or would be so prejudicial.

As I say, there are a number of things that immediately ought to be noted from that statutory provision.

First, the jurisdiction is one that is open to members of a company that’s generally, not exclusively, but generally, persons who are registered as shareholders in the register of members of the company.

Secondly, the jurisdiction applies in respect of companies, that is, the jurisdiction applies to companies formed and registered under the Companies Act. It therefore applies to companies incorporated and registered in England and Wales. The jurisdiction has been extended beyond companies to apply to limited liability partnerships. I’m going to specifically focus these talks on the jurisdiction insofar as it applies to companies rather than limited liability partnerships.

The third thing to note from the terms of section 994 is that an application for relief pursuant to this section is made by petition rather than a Claim Form or indeed any other form of originating process. Next note with me, if you will, that it is a complaint that the company’s affairs are being or have been conducted in a manner that’s unfairly prejudicial, the jurisdiction is one that seeks to provide relief from a wrongful conduct of a company’s affairs or unfairly prejudicial conduct of a company’s affairs, rather than conduct external to the company concerned. We’ll come back to look at that in more detail in due course.

You see, on the face of the section, that the jurisdiction is one that applies where the conduct of the company’s affairs is both unfair and prejudicial.

It must be both unfair and prejudicial to the interests of members that include the petitioner himself rather than to interests that those persons might have outside of their membership of the company.

The jurisdiction applies to conduct of the affairs of a company. That comprises actual conduct, in other words, historic conduct or current conduct, as well as proposed conduct of the company’s affairs. In other words, the jurisdiction applies both to historic and current unfairly prejudicial conduct but also to threats to conduct the affairs of a company in a manner unfairly prejudicial in the future.

Finally, from the terms of section 994 note please that the jurisdiction applies to conduct that comprises either an act or an omission.

That is then, on its face, the relatively simple overall, overarching and governing legislative provision that governs this particular jurisdiction. I’m always delighted by the fact that there is not significantly more legislation that’s needed to be considered in the context of my practice generally.

I say that’s the overarching provision but there is, at least for the purposes of this discussion, one other statutory provision that I’m going to ask you to consider. And that’s section 996(1) one of the Companies Act. That is the subsection which deals with the reliefs available to a petitioning member of a company. And you’ll see that the opening words of section 996(1) provides that if the court is satisfied that a petition is well-founded, then it may make such order as it thinks fit for the giving of relief in respect of the matters complained of. There are two matters to pick out from that legislative provision. The first is that once the court is satisfied that the petition is successful, that unfairly prejudicial conduct has been established, then it has a complete discretion to make such order as it thinks fit. In other words, it has an unfettered range of options available to it. But in selecting the appropriate option for any particular case, it has to select such option as it considers suitable for the giving of relief in respect of the matters complained of. In other words, it’s an unfettered discretion as to the form of relief that may be ordered but that form of relief has to be appropriate to the matters complained of in the petition. It’s the first, perhaps, of a number of aspects of this jurisdiction that identifies the importance the courts have repeatedly drawn attention to of properly framing the complaints within the body of the statement of case itself. In other words, of drafting the petition carefully and comprehensively.

Section 996(2) begins with the words without prejudice to the generality of subsection one. It does no more than provide a non-exhaustive list of examples of the kinds of relief that the court might consider giving in any particular case. Those forms of relief include (and you’ll see that I’ve drawn attention to three of those forms of relief that are referred to in section 996(2)) orders regulating the conduct of the company’s affairs in the future or requiring the company to refrain from or to do an act complained of those types of relief you might consider as being forms of relief in the nature of prohibitive or mandatory injunctive final injunctive relief. And then the third form of relief that I’ve highlighted as it’s listed within section 996(2) is by far the most common form of relief that is made in the context of this jurisdiction. That is what is known as a purchase order. It is an order providing for the purchase of the shares by members or by the company itself. I will come back, towards the end of these talks, to examine in some detail the nature of reliefs generally and, in particular, the form of purchase order that’s commonly encountered in this jurisdiction.

The jurisdiction itself is notable in that, on its face, it is a jurisdiction that is open to any shareholder. You’ll see that there is no restriction of the ability to use this jurisdiction to minority shareholders. You will have frequently heard this jurisdiction, I suspect, being described as one of protection afforded to minority shareholders. But actually that restriction doesn’t appear within the terms of section 994 itself. In practice, almost all applications for relief under section 994 are brought by minority shareholders. Majority shareholders tend for a number of reasons (not least cost) to rely upon the fact that they have control of the company, whether at a directorial or shareholder level or both, and they use that control to prevent the affairs of the company being conducted in a manner unfairly prejudicial to their interest. But on its face, again, I just ask you to note that section 994 is not restricted to minority shareholders petitioning for relief from unfairly prejudicial conduct.

That, as I say, is the extent of the statutory provisions that I wanted to draw to your attention at the outset of these talks. I am now going to go on and discuss some of the practice and procedure that relates to these applications before coming back in due course to discuss the principles applicable to applications for relief from unfairly prejudicial conduct.

So let me turn then, if I may, to practice and procedure. Petitions for relief from unfairly prejudicial conduct are properly issued in the Business and Property Courts of England and Wales. Generally, they are properly issued in London in the Company’s Court. They are commenced, as we’ve already seen, by petition rather than Claim Form. That’s what the terms of section 994 requires.

For my part, I find the use of a position in this context somewhat archaic. I don’t frankly understand why there has been the retention of the originating process in the form of petition for seeking relief under these provisions. In my view, it would have been much better, when the opportunity presented itself, to do away with the need for proceedings to be issued by a petition and to move towards a consistency of litigation process by the requirement of commencement through the ordinary issue of a Claim Form. But, nevertheless, that is where it is. A petition is required.

It used to also be the case that a petition, a separate petition, was required in respect of each company in respect of which relief from unfairly prejudicial conduct was sought.

Consequently, if you had participants, in a string of companies, there would need to be a different petition for each company where the allegations are unfairly prejudicial conduct related to more than one of the companies. However, in a case that I was recently involved in in the Cardiff District registry, I am pleased to say that the court took what I consider to be a pretty sensible procedural decision in recognising that no longer should it insist upon a separate petition being issued in respect of each company in respect of which relief from unfairly prejudicial conduct is sought. In other words, the courts took what I think is a sensible course of avoiding a multiplicity of proceedings and permitting allegations of unfairly prejudicial conduct to be made in respect of a number of companies of which the petitioner and respondents were participants.

Proceedings under section 994 are subject to a piece of subordinate legislation, the company’s Unfair Prejudice Applications Proceedings Rules 2009. I just want to draw your attention to some of the important aspects of what is a relatively short statutory instrument.

The first thing that I want to draw your attention to is that the civil procedure rules generally apply to proceedings under section 994 of the Companies Act.

The second is rather helpful in some ways. The Company’s Unfair Prejudice Applications Rules 2009 provide in a schedule to those rules, a pro forma of a petition and paragraph three of the rules, requires the petition to be in the form set out in that schedule, obviously subject to amendments to reflect the particular facts and circumstances of the case itself.

Paragraph 3.2 requires the petition itself to specify both the grounds relied on and the form of the relief that is actually sought

Paragraph 3.3 requires the court, once a petition has been presented, to fix a return date for directions to be given for the progress of the petition. In practice, it used to be universally the case that the presentation of a position would lead the court to fix a return date and require the parties to attend before it for directors to be given for the progress of the petition through to trial. In practice, now, certainly in London, it’s universally practice, but other courts have also followed this practice, that automatic directions are issued on the presentation of the petition. Those automatic directions providing that the petition should stand as points of claim and for the filing of points of defence and indeed for the filing of any reply. And that practice, of course, is an entirely sensible one. It prevents the matter being brought before the courts until the claim is properly formulated in the statements of case and it allows the court to understand the position of both sides and the matters in issue so that it can then frame the remainder of directions in a way appropriate to the matter as it has been framed by those statements of case.

It’s also worth noting that petitions, once sealed, generally need to be served by the petitioner on each respondent and on the company itself and, generally, need to be served within 14 days of any return date that is set.

On the return date, the court is directed by the terms of the rules to consider a number of things. Firstly, it has to give consideration as to whether the petition ought to be served on any other interested persons. If there are other interested shareholders or indeed persons external to the company who may be interested in the matters that are the subject of the litigation, it will give directions for the service of the petition on other interested persons. They’re joined into the proceedings as necessary. The court is also required to have regard to the need for publicity of the petition. The default position is that a petition issued under section 994 is not the subject of advertising unless the court considers that there is a need for it to be advertised in order to ensure that other potentially interested people might be permitted to come forward and partake in the litigation itself. As I say, generally, petitions are not advertised, but the court is required to consider whether a petition ought to be advertised at the first return date.

Directions are then, of course, given as you would expect in any piece of commercial litigation as to the disclosure of documentary evidence (that is both hard copy and electronic evidence). The provisions of the disclosure pilot that is provided for by Practice Direction 51U apply to proceedings under section 994. My experience is that, in practice, disclosure is often ordered in section 994 cases in accordance with Model D; what we might historically have understood as standard disclosure or that most closely akin to standard disclosure. On the other hand, it’s fair to say that in the cases that I’ve been involved in recently, I have noticed a trend towards parties agreeing lesser levels of disclosure between themselves as being applicable to the proceedings between them. Agreeing to those sorts of limited orders for disclosure is obviously driven by concerns as to costs incurred in dealing with disclosure. Costs incurred in relation to dealing with disclosure in these types of proceedings can be and is notoriously high given that the nature of the proceedings often requires an examination of a period of relationship between the protagonists. Indeed, in order to minimise the costs involved in disclosure, I was recently involved in a case where the parties actually agreed to limit disclosure to Model B under the disclosure pilot. Some of what out of the ordinary I have to say; but it was done for the pragmatic reason of limiting the costs of the disclosure exercise.

Of course, there will be directions given regarding an exchange of witnesses evidence and there will be directions given regarding expert evidence. Let me mention a couple of things about expert evidence in passing; almost always these cases will involve an element of expert evidence as to valuation. As I’ve already mentioned, overwhelmingly the appropriate form of relief in circumstances where unfairly prejudicial conduct is established is the making of a purchase order at a fair price and evidence of valuation of both the company as a whole and, more particularly, of the shareholding of the petitioner and in particular, its fair value is central to a determination of what that fair price is to be ascertained as. But these cases don’t just throw up a need for expert evidence of valuation, they tend also, particularly in cases where there are allegations of misappropriation, whether they are of misappropriation of funds from the company, that is when that unfairly prejudicial conduct takes the form of allegations of misappropriation of funds, or, indeed, misappropriation of other business property or of business opportunities. Then there is not only a need often for expert evidence that relates to value but also a need for expert forensic accounting evidence to identify the extent of misappropriation of funds, property or business opportunities in order that appropriate adjustment can be made for those misappropriations when determining a fair price to be ordered as payable pursuant to a buy out order.

Finally, at that directions hearing, as you would expect if directions are given all the way through to a trial, you will be given directions for both pre-trial review and for the trial itself.

Let me make one or two observations as regards a thorny issue, which arises in many of these cases and that’s the issue of preliminary issues. It is very often suggested, ordinarily by the respondents to proceedings under section 994 before they are put to the costs of obtaining inevitably expensive expert evidence as to value, that it is sensible that there first be determined preliminary issues as to (1) whether or not a purchase order is justified. In other words, whether or not the petitioner has made out its case as to the conduct of the affairs of the company in a manner unfairly prejudicial to it; and (2) whether a purchase order is the appropriate form of relief for that established, unfairly prejudicial conduct. The arguments for providing directions for the determination of such preliminary issues are, on the one hand, of course, the potential for the saving of costs of disclosure in relation to valuation issues and the cost of expert evidence itself. Should the court conclude on the determination of that preliminary issue that, in fact, no unfair prejudice has been established or even, if there has been an element of unfair prejudice, that it is not appropriate to make a purchase order for the relief of that unfair prejudice, then potentially those arguments are good arguments. Often strong arguments against it, however, are considerations that the introduction of directions for a preliminary issue would involve substantial delay in determination of the issues globally and the additional costs that the determination of any preliminary issue often involves. The practice of courts varies greatly. I was involved in a case very recently where we did persuade the courts to set down a preliminary issue. It does vary, I think, on balance, ordinarily the courts are pretty reluctant to accede to requests for preliminary issues to be stated and the driving rationale behind that reluctance appears to me to be the fact that obtaining expert valuation is generally considered conducive to the prospects of achieving settlement. Without expert valuation available at an early stage, it is difficult for the parties to identify the parameters within which they can sensibly look to negotiate settlement of the particular dispute that they’re involved in.

Other procedural points to note: I think I’ve said already that the Civil Procedure Rules apply, generally they do. It’s probably worth just mentioning that there is no procedure for default judgment in these proceedings under Part 12 of the Civil Procedure Rules. Default judgments are not available because they are not proceedings that are commenced by the Claim Form procedure and Part 12 doesn’t apply to proceedings begun by petition. On the other hand, summary judgment is available in these proceedings under CPR Part 24 and indeed strike out applications, as I’ve already indicated, are commonplace within the context of these form of proceedings. Interim injunctive relief is also generally available in these proceedings.

Prohibitory and mandatory injunctions and freezing injunctions are all available. Whether they’ll be granted in any particular case is, of course, dependent on the application of American Cyanamid principles, but, as a matter of a general observation, injunctive relief is available in an appropriate case.

Likewise, security for costs; if the tests for the making of an order for security for costs are satisfied the ability of the court to so order exists within this jurisdiction as well.

Cost management almost universally applies to these proceedings. And, whilst on the question of costs, I’ll just conclude this particular seminar by making a few observations on what is frequently encountered in practice, and that is a desire on the part of litigants to use the funds of the company itself to fund their defence. In other words, a respondent presented with a petition under section 994 is very frequently tempted to use the funds of the company the subject matter of that section 994 petition to try to defend the claim which is being brought against him. This, he simply must not do. In substance, this is a dispute between the participants in the company. The company itself is only made a party in order that it might be required to give disclosure of relevant documentary evidence within its control or possession and to ensure that it is itself bound by any order made by the court, including a purchase order if that is made against the company rather than the shareholder respondents. If a respondent does use the funds of the company to meet his costs of defending these proceedings injunctive relief is clearly available to prevent him doing so. The petitioner frequently applies for injunctive relief in those circumstances. The use of company funds itself may involve unfairly prejudicial conduct. And finally, a serious warning as far as legal advice given in connection with these proceedings is concerned is that if unwisely, the respondents do use the funds of the company, you may well find yourself facing an application for disclosure of the advice that has been provided by the lawyers invoiced to the company on the basis that the petitioner himself, as well as other shareholder directors, are entitled to see the advice that has been given to the company. That can place the respondents in some difficulty and tends to pull the rug as far as negotiations of advantageous settlement terms are concerned on behalf of the respondents.

I think that is an appropriate place to end the first of these seminars. Thank you all for joining me today. I hope you found it interesting. I hope you found it useful. Remember, if you have any questions, then please put them on an email to me and I shall address them, as I say, at the end of this seminar series. In the meantime, in these times, stay safe and well and I hope to see you again this time next week. Many thanks.