Unfair prejudice petitions: a case update

Charlie Newington-Bridges and Jack Pankhurst of our Commercial team provide a case update on unfair prejudice petitions, in light of four interesting judgments from the first half of 2024.

Thg Plc v Zedra Trust Company (Jersey) Limited [2024] EWCA Civ 158

1. In Zedra, the narrow issue on appeal was whether a limitation period applied to a petition under section 994 of the Companies Act 2006.
2. As Lewison LJ made clear [2], the alleged facts were not of any real significance because the appeal was one of principle. The Court of Appeal was being asked whether the received wisdom that no bright line limitation period applied to unfair prejudice petitions was correct.
3. In a landmark judgment, the Court of Appeal overturned 40 years’ of received wisdom and found that unfair prejudice petitions were indeed subject to statutory limitation periods under the Limitation Act 1980.
4. The judgment explored why it might make practical sense for no limitation period to apply. The Court considered that one reason was that many petitions rely on a course of conduct as amounting cumulatively to unfair prejudice. Another was that the petitioner might not appreciate that there was wrongdoing, which could be concealed either deliberately or in bad faith. However, Lewison LJ found there was an answer to both points. As to the first, the Court drew on a Law Commission report, which considered, among other things, that: ‘Where it is only the cumulative effect of a whole series of incidents which gives rise to the claim for unfair prejudice, the primary limitation period will only start on the date on which the claimant knows (or should know) of the event which gives him or her grounds to bring a claim under section [994]. This may be the last event in series…” [36]. As to the second, the Court found that the postponement provisions of Section 32 of the 1980 Act could provide the necessary assistance [38].
5. Having considered that the Court of Appeal was not bound by earlier judgments which had assumed (without hearing argument) there to be no limitation period, Lewison LJ ultimately considered that different limitation periods ought to apply depending on the relief sought. Ultimately, the Court found that:
6. Generally, an unfair prejudice petition is subject to the limitation period laid down in section 8, which is a twelve-year period from the date on which the cause of action arose [72].
7. However, if the only relief sought is an order for the payment of money (whether liquidated or unliquidated), the claim will be subject to a 6-year limitation period pursuant to section 9 of the 1980 Act [129].
8. Helpfully, the Court of Appeal suggested that petitions which sought a buy-out of the majority’s shareholding were unlikely to be considered claims for the recovery of money. The 12-year period was likely to apply instead.
9. Snowden LJ provided an interesting, concurring judgment in which he sounded a note of caution about stale claims which are nonetheless brought within an applicable limitation period. He said that:
10. ‘…the policy of the courts since the relatively early days of the unfair prejudice jurisdiction has been to discourage litigants from dredging up old grievances and to encourage them to focus on a limited number of specific, current complaints. That approach was reflected in the Law Commission’s suggestion that a relatively short limitation period of three years should be introduced in relation to section 994 petitions’ [161].
11. ‘Judges should not be discouraged, in appropriate cases, from striking out or summarily dismissing allegations of historical misconduct if it can clearly be seen, at an interim stage, that even though the petition was presented within the applicable limitation period, no reasonable judge could consider that such matters would justify the exercise of discretion to grant the relief sought at trial. However, as Lewison LJ has indicated, the precise implications of our decision in this respect will need to be worked out in a future case in which it matters’ [162].
12. It remains to be seen how strike out/summary judgment applications relating to specific allegations of historical conduct will be considered going forwards. Even where claims are within a statutory limitation period, Snowden LJ provides a reminder that it remains possible to defend petitions on that basis they there has been delay and/or apparent acquiescence.

Wells v Hornshaw and others [2024] EWHC 330 (Ch)

9. In Wells, the petitioner, Stuart Wells, was the registered holder of 14.3% of the issued share capital in a company called Transwaste Recycling and Aggregate Limited. Paul and Mark Hornshaw each held half of the remaining issued share capital.
10. On 23 September 2015, the company’s premises were raided by HMRC and the police due to a suspected fraud. The Hornshaws were arrested. Following an investigation, no charges were brought. However, it took until 2019 for the matter to be fully investigated.
11. Following the raid, on 26 September 2015, Mr Wells gave notice that he wanted to leave the Company.
12. In order that Mr Wells could sell his shareholding, the parties were to resort to a share valuation clause within a shareholders’ agreement. That clause provided for the appointment of the company auditor to provide a valuation. The parties appointed the company auditor to provide a valuation of the shares as at 30 September 2015.
13. The auditor completed his valuation based on financial information up to December 2014. Mr Wells did not agree with the figure for various reasons, which included the auditor’s use of a discount of 75%. In the end, Mr Wells’ exit did not take place as envisaged and matters were allowed to drift. In July 2019, Mr Wells pursued an unfair prejudice petition.
14. The Court explained that the case was unusual [19 – 22]. This was principally because an unfair prejudice jurisdiction is often concerned with a situation where a minority shareholder has no other means of leaving the company without the assistance of the Court. Here there was a contractual means. The issue lied in the petitioner’s dissatisfaction with the manner in which the valuation was calculated.
15. As such, the Court had to determine how the exit mechanism, as set out in the Shareholders’ Agreement, interacted with the statutory relief which Mr Wells sought. In particular, the Court had to consider whether the availability of the contractual exit route (and, as the Court decided, Mr Wells’ obligation to take such a route [119]) precluded relief pursuant to s.994 of the Companies Act 2006.
16. The Court was presented with a lengthy picture of alleged wrongdoing over a number of years, which included allegations of share dilution, conflicts of interest, and uncommercial loans. The Court had to consider whether any such conduct, if made out, was unfair and prejudicial.
17. The Court found that certain courses of conduct relating to the management of the Company (prior to Mr Wells’ exit request in September 2015) was prejudicial to the value of Mr Wells’ shareholding, but that it was not unfair.
18. The Court did, however, take issue with the valuation of Mr Wells’ shares. Following September 2015, the Company’s auditor had, in Adam Johnson J’s judgment, valued the shares using outdated financial information. Further, it was considered that the auditor’s valuation was not binding on Mr Wells, because Mr Clark, the auditor, had departed from his instructions. He was instructed, specifically, to estimate “the fair market value of the business enterprise of [the company] as at 30 September 2015“. However, as he relied on outdated figures from December 2014, he did not do this. The Court found that there was, therefore, a departure from his instructions [126].
19. Ultimately, in light of the use of out-of-date information, the unfair prejudice test was made out [240]. The Court therefore ordered that Mr Wells was entitled to relief.
20. The judgment is interesting in highlighting a broad interpretation of “company’s affairs” for the purposes of s.994 Companies Act 2006. It also confirmed that there is still the potential for successful unfair prejudice petitions where there is a contractual exit mechanism, but that process is not properly followed.
21. The key takeaway, it seems to us, is that shareholder agreements should be clearly drafted in order to reduce the scope for potential disputes surrounding an exit. Those drafting agreements may wish to consider setting a relevant date for the purposes of valuing an exiting shareholder’s shares. The case also highlights the fact that quite often litigation is longwinded, expensive, and petitioners take a shot-gun approach in order to establish unfairness and prejudice.

Re HLHP Oriental Food Ltd [2024] EWHC 497 (Ch)

22. This was a case concerning an unfair prejudice petition brought by 4 minority shareholders in two companies: HLHP Oriental Food Limited (‘Oriental’) and HLHP Bayswater Limited (‘Bayswater’) .
23. In essence, the Petitioners said that they have been unfairly prejudiced because their shares in the companies have been expropriated and that the expropriations were made other than in return for fair value. They also said that they have been excluded from the business and operations of Oriental and Bayswater, denied access to books, records and information relating to the two companies and forced from their positions within the companies and as directors.
24. However, the issue at the outset of the trial following a late application by the Respondents was a challenge to three of the Petitioners’ standing. The challenge was made on the basis that the Petitioners’ names did not appear on the register of members and, further, that they were unable to establish that they had received shares by way of valid transfers pursuant to duly executed instruments of transfer. A complicating factor was that prior to the challenge being made, the Defence had admitted that the Petitioners were members for the purposes of s994 (and therefore entitled to bring a petition).
25. There were therefore two applications before the court, the first was an application to amend the defence denying that the Petitioners had standing. The second was an application by the Petitioners to rectify the register under s125 of the Companies Act 2006 so that the Petitioners were registered as members of the company.
26. In his judgment, Zacaroli J granted the Respondents permission to amend. He reasoned that they should be permitted to withdraw the admissions that had been made in the Defence in respect of the Petitioners’ shareholdings in part because it had become clear that there had been no transfer of shares to the petitioners and at least some of their names did not appear on the register of members. He held, in particular, that it is for the Petitioners to establish standing and that the Court would have to be satisfied that there is standing irrespective of what was said in the Defence, since this is a ‘gateway’ requirement for the purposes of the statutory jurisdiction under section 994 of the Companies Act 2006.
27. What this meant was that the fact that the Defence had admitted the Petitioners’ shareholdings right up to the commencement of the trial was not a reason to prevent the Respondents being permitted to amend so as to plead the position as they now understood it to be.
28. The Petitioners’ application to amend the register under s125 was refused by Zacaroli J. The Petitioners would not be permitted to claim rectification of the register within the existing unfair prejudice proceedings because the Petitioners’ case needed to be further particularised and the evidence and disclosure in the unfair prejudice proceedings had not been directed to that issue. There was the further problem that the Petitioners had not sought to join the persons whose names they were seeking to remove from the register, one of which was a dissolved company.
29. The decision was a lesson for all practitioners to check the register of members and the transfer formalities/share certificates of potential petitioners. In this case, the companies house records and confirmation statements showed or appeared to show that the petitioners were members, but the register did not. One can therefore see how the situation came about that both parties had accepted that the Petitioners were members for the purposes of s994.

Saxon Woods Investments Ltd v Costa [2024] EWHC 387 (Ch)

30. This was a judgment in an unfair prejudice petition of Mr Simon Gleeson sitting as a deputy High Court Judge. It involved at heart the question of whether a shareholders’ agreement had been breached.
31. The Shareholders Agreement (‘the SHA’) was entered into between the Eighth Respondent, Spring Media Investments Limited and its shareholders (including the Petitioner) to the effect that they would work together in good faith towards a sale of the Company and would give good faith consideration to any opportunities for a sale prior to a defined date. In the event that no sale was achieved by that date, the SHA provided that the board of the Company should instruct an investment bank to “cause” a sale. No sale was achieved, and, four years after that deadline, the Company was unsold.
32. The Petitioner’s case was that the Company did not in fact work in good faith towards a sale, and that when the deadline passed, they did not engage an investment bank to effect a sale.
33. The First Respondent’s case was that, on a true construction of the SHA, the Company’s actions did not breach it, and both he and the Company did in fact do everything that the clause required. In particular, he said that he caused an investment bank to be retained by the Company, and that everything that happened thereafter was done on the advice of that investment bank.
34. The First Respondent also said that even if this had not been the case, the board did not consider that a sale executed on the timetable specified in the SHA would maximise value for shareholders, and that a decision in these circumstances not to proceed with the sale did not constitute a breach of the agreement, and therefore did not constitute any sort of unfair prejudice to the Petitioner.
35. In reaching its judgment, the court noted that the SHA did not mandate a sale by a particular date. But it did require the company and its investors to work together towards achieving a sale or an exit by a specified date. This involved taking active steps before that date, but, due to the First Respondent’s control of the process, the company had not done this.
36. It was held that although the First Respondent had sincerely believed that no offer could be procured at an acceptable price before that date, that did not relieve the company of its duty to work towards an Exit and to seek and consider offers (even if thought they would be unattractive).
37. The company had failed to consider the opportunities presented by the two potential bidders. It did not matter that neither opportunity had matured into a full offer. They merited consideration, but the First Respondent had refused to entertain them.
38. The First Respondent argued that it had not been in the company’s best interests to conclude an Exit before the end of 2019, and his duty to the company to promote its success overrode any obligations in the SHA.
39. The judge agreed that fiduciary duties will normally override conflicting contractual duties, but there was no conflict here. If the First Respondent had been faced with two competing offers, he would have been duty-bound to recommend the higher offer. But his duties did not preclude him from pursuing a less profitable exit at an earlier point rather than a potentially more profitable exit later down the line.
40. The judge also rejected the First Respondent’s argument that a sale to a private equity investor would not have been a true sale or exit simply because certain management shareholders would have retained an indirect stake in the company by rolling their interests over into the new acquiring entity (effectively “exiting to themselves”).
41. The judge found that the conduct of the First Respondent constituted a breach of the shareholders’ agreement and that the actions of the First Respondent resulted in a failure to act in good faith towards achieving the desired “sale or exit and the neglect of other opportunities presented”. The court determined that because of this the Petitioner had suffered unfair prejudice as it had been unable to sell its shares as envisaged by the shareholders’ agreement, and that the proper remedy was for the court to make an order for its shares to be bought.
42. The case is a reminder that unfair prejudice will almost always involve the breach of an agreement or understanding reached between the parties. In this case, there was an agreement between the shareholders that certain actions would be taken within specified periods of time or, where not specified, within a reasonable period of time as implied in the normal way. This did not occur and therefore the agreement had been breached and the petitioner prejudiced unfairly.
43. The judgment in the case runs to over 112 pages and the judge noted at the outset that there was a great deal of evidence much of which was irrelevant or not germane to the issues. He also noted that much time at trial had been taken up with each side trying to show that the other was dishonest. The judge made no findings of dishonesty. The case may be a lesson that unfair prejudice petitions often become cumbersome, lengthy and therefore expensive because of the personal animosity and mistrust that is a feature of these types of cases.

This case summary is an overview of recent cases relating to unfair prejudice petitions and is provided for information purposes only. It is not legal advice and should not be relied upon as such. Businesses and individuals should seek bespoke legal advice in respect of their particular positions.