Dispute Resolution | Procurement | Fraud
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A recent case involving Cardiff City Football Club has considered the meaning of unfairly prejudicial conduct for the purposes of s994 of the Companies Act 2006 (the "Act").
An unfair prejudice petition under s994 of the Act is the primary procedure by which a minority shareholder who is the victim of unfairly prejudicial conduct can seek relief from the Court.
The decision highlights the factual complexities that can arise in situations where the Board resolves to act in a way which, whilst commercially justified and in accordance with the duties owed by the directors as a matter of law, also has the effect of benefiting a majority shareholder at the expense or cost of a minority shareholder.
It is also a reminder to petitioners of the need to be clear as to whose behaviour they are complaining about: ultimately, only conduct which amounts to conduct of the company’s affairs, i.e., actions taken by the Board, will fall within the scope of the Act.
Mr Isaac ("Mr I") and Mr Tan ("Mr T") were both shareholders in Cardiff City Holdings (the "Company"), the holding company of Cardiff City Football Club (the "Club"). Mr I had a minority shareholding in the Company; Mr T had a majority shareholding and was also a major creditor of the Company. There was some history or past animosity between the two as a result of the fact they had been involved in a previous dispute relating to a third-party claim against the Company.
In May 2018, the Board passed a resolution, which had been proposed by Mr T, and which enabled any existing shareholder of the Company to acquire 5 additional shares for every 2 shares that they owned. Mr T was the only shareholder to take up the offer (converting some of the debt owed to him by the Company into shares), as a result of which his shareholding increased from 94.22% to 98.3%, and Mr I's shareholding decreased from 3.97% to 1.18%.
Mr I alleged that the offer of shares by the Company and the consequential dilution of his shareholding was unfairly prejudicial and therefore contrary to the Act. Mr T denied these allegations. He argued that his purchase of additional shares in the Company enabled the Company to write off some of the debt it owed him, and that doing so would alleviate the Club's debt issues that had been preventing them from making player transfers in recent years.
There were various issues before the Court, including consideration of the appropriate date for the valuation of the shares in question where unfair prejudice had been made out. However, we think that of most interest is the Court's reasoning in finding that, in fact, Mr T's actions had not been unfairly prejudicial.
Mr I had argued that the directors' role in passing the May 2018 resolution had been to do no more than 'rubber stamp' Mr T's proposal and that they had not made any further enquiries or looked behind it. The Court, however, found that, in passing the resolution, the directors had had the Company's best interests in mind and that the resolution was commercially justified as it would reduce the Company's indebtedness and allow the transfer embargo to be lifted.
Although pre-prepared Board minutes could suggest that the resolution was a 'done deal' before it was even put to the vote, the Court held that this was in fact routine practice and there was nothing wrong with preparing such documentation as long as the Board remained open and alert to further investigation, discussion and potentially variation of the resolution before it was put to the vote.
In respect of the actions of Mr T, the Court found that, whilst he had a genuine commitment to reducing the Club's indebtedness and thereby allowing it to transfer players freely, he would also have known that the end result would be the dilution of Mr I's minority shareholding.
However, the Court was not prepared to find that this meant that unfair prejudice under s994 of the Act was established. S994 was only engaged in relation to the conduct of the company's affairs, i.e., it only applied to acts of a company and not to acts of shareholders acting in their personal capacities. In this instance, Mr T had used his position as the majority shareholder of the Company to influence the Board in relation to his proposals regarding the May 2018 resolution. However, any such acts were taken in his personal capacity as a shareholder and did not amount to conduct of the Company. Whilst the result of the resolution was ultimately unfair on Mr I, Mr T had not acted unlawfully in exercising his leverage on the Board in his capacity as majority shareholder.
The case serves as a useful reminder to directors to act independently and for commercially justifiable reasons. This may include, for example, making further enquiries in respect of proposals made by influential shareholders, being open to discussion of such suggestions, as well as considering how minority shareholders may be impacted by their decisions. The judgment also clarifies that whilst actions of majority shareholders may be unfair in a wider sense as between shareholders, where they act in their personal capacities, they will not be acting on behalf of the company nor in an unlawfully prejudicial way, for the purposes of s994.