Shareholder remedies – case update

Background

The statutory remedy for a company member who considers that the company’s affairs are being conducted in an unfairly prejudicial manner is contained in section 994 of the Companies Act 2006. This section allows a member to bring an action on the ground that:

• the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of the members generally or some part of its members (including at least himself); or
• an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.

The meaning of “unfairly prejudicial” conduct has been explored and developed by case law. For example, O’Neill and another v Phillips and others [1999] 2 All ER 961 decided that a member of a company will not normally be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. The mere fact that trust and confidence between the parties has broken down is not sufficient.

If a member succeeds in bringing an unfair prejudice action, one of the remedies open to the court is to order the purchase of shares held by certain members of the company by other members.

Case update

A recent case* on unfair prejudice considered the following issues:

• should one party (P) be ordered to buy the shares of the other party (S) or merely agree to do so;
• if an order was made, should the obligation on P to purchase the shares be dependent upon P having the financial means to do so;
• from which date should P be ordered to pay interest to S; and
• on what basis should S’s shares be valued.

The court decided that:

• there ought to be an order for the purchase of S’s shares, as would ordinarily be the case in an action for unfair prejudice;
• there should be no “escape clause” making the order to purchase S’s shares dependent upon P’s ability to pay;
• no interest should be paid; and
• S’s shares should be valued as at the valuation date, not on the date on which S resigned as a director.

Comment

This case is useful as it sets out some of the issues a court will consider when dealing with an unfair prejudice action.

*In the matter of Scitec Group Ltd sub nom Sudhir Sethi v (1) Alpesh Patel (2) Scitec Group Ltd [2010] EWHC 1830 (Ch)