As a minority shareholder, where the actions by the board of directors are unfairly prejudicial towards you, you may be entitled to bring an action under s994 of the Companies Act 2006 (the Act).
In recent cases, the courts have adopted a narrow approach to the question of what constitutes unfair conduct, and whilst actions may be unfair, they may not be sufficient to warrant a claim under the Act.
In the case of Re Cardiff City Football Club (Holdings) Ltd [2022] EWHC 2023 (Ch), the court provided a useful guide as to circumstances where conduct which is unfair to a minority shareholder will not meet the test for unfairly prejudicial conduct under the Act.
Myerson's Dispute Resolution Team explore the test for unfair prejudice under s.994 of the Act and the unique case of Cardiff City Football Club (Holdings) Ltd.
To succeed under s.994 of the Act, a shareholder must show they have been subjected to unfairly prejudicial conduct by directors or shareholders of the company.
The test is objective, and the court will take into account whether a hypothetical reasonable bystander would consider the conduct unfair.
The court will consider various factors, including:
(1) Whether the unfairly prejudicial conduct is by the company in respect of the company's affairs, namely management decisions (whether they are carried out by directors or shareholders).
(2) The conduct relates to the interests of shareholders with respect to their shareholding.
(3) The petition can be based on a single act or omission or future conduct.
(4) The conduct must be both unfair and prejudicial. It is not enough to say that an action is unfair but that it has caused, or will cause, some tangible detriment to the petitioner.
Mr Tan was a majority shareholder of Cardiff City Football Club (Holdings) Ltd (the company), holding 94.22% of the total shares.
He was also a significant creditor of the company.
Mr Isaac was a minority shareholder of 3.97% who had fallen out with Mr Tan. Although Mr Isaac had tried to sell his shares to Mr Tan, Mr Tan had refused.
In 2018, two of the company's directors, one of whom was a nominee for Mr Tan, resolved to offer new shares, which Mr Tan accepted, in consideration for Mr Tan writing off £67 million of the debt owed to him by the company.
As a result, Mr Tan's shareholding rose to 98.3%, and Mr Isaac's shareholding was diluted to 1.18%.
Mr Isaac issued an unfair prejudice petition on the basis the offer of shares was orchestrated by Mr Tan to dilute his shares, citing Mr Tan's personal animosity towards him.
Further, he alleged the directors had breached their duties under the Act by rubber stamping Mr Tan's decision, namely to exercise independent judgement (s.173) and failure to use their powers to allot shares for a proper purpose (s.171).
Mr Tan and the Company, as respondents to the petition, claimed the shares were issued for the purpose of improving the club's financial position and that the underlying decision was motivated by sound commercial reasons.
Mr Tan had also previously made a pledge to reduce the company's debt.
Mr Isaacs sought an order for Mr Tan to buy his shareholding at their value immediately before the offer.
The judge found that Mr Tan's actions were partially motivated by personal animosity towards Mr Isaacs, but the offer also made commercial sense, and the pledge to reduce the company's debt was genuine.
The judge ruled that Mr Tan's actions did not amount to "conduct of the company's affairs" which must be evidenced to make out a successful case in unfair prejudice.
He ruled that Mr Tan's actions amounted to conduct in his private capacity as a shareholder. Accordingly, his conduct did not fall within the ambit of s.994.
Ultimately, the court found that Mr Tan's actions had not been unlawful or unconscionable, as they were still ultimately in the best interests of the company.
The directors were found to have acted with independent judgment and had used their powers to allot shares for a proper purpose.
They were also found to have made the decision for sound commercial reasons, which had been properly considered.
Although one of the directors, Mr Tan's nominee had considered the improper purpose of diluting Mr Isaac's shares, which was unfair, it was not prejudicial as the proper commercial purpose of the decision would have resulted in the same outcome.
The key takeaway from this case is that unfairness in the moral sense will not necessarily amount to a successful unfair prejudice action, particularly where the actions are supported by sound commercial reasons.
Although one might understand why Mr Isaac felt aggrieved by the actions of Mr Tan and the board of directors, the motivations for which appeared based on a personal vendetta against him, the claim failed since:
The case emphasises the importance of making decisions on the basis of sound commercial reasons for the benefit of the company and maintain a clear record of decisions reached and the reasons why.
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