Unfair prejudice: is a buyout order the only solution?

The recent case of Re Macom GmbH (UK) Ltd [2021] EWHC 1661 (Ch) highlights the wide discretion of the court when considering unfair prejudice. Even when a court decides that a party’s conduct constitutes unfair prejudice, it does not always order a share buyout.

Facts

The petitioner (“P”) in this case was a German company and a majority shareholder (60%) in Macom GmbH (UK) Limited (“Macom UK”). Mr Bozeat (”Mr B”) and his wife together held the remaining 40% of the shares.

The parties entered into a shareholders’ agreement. Under the terms of that agreement, P appointed Mr Kottke (“Mr K”) as a director of Macom UK, the idea being that Mr K and Mr B would operate Macom UK together, with Mr K keeping an eye on P’s interests in the UK.

Mr K and Mr B could not work together. The relationship broke down.

P presented a petition, alleging that Mr B had (1) received unauthorised dividend payments; (2) excluded Mr K from management and governance; (3) breached the shareholders’ agreement: (4) failed to provide information to which P was entitled; and (5) made unauthorised disclosures of confidential information to his father with whom the petitioner had a connection – all of which had unfairly prejudiced P.

P asked the court to order that Mr and Mrs B buy out its shares.

Held

The court agreed that Mr B had acted unfairly and in a way that prejudiced P.

However, it held that the unauthorised dividend declarations were not unfairly prejudicial because they resulted in no long term financial loss to the company. Mr B was entitled to those dividends under the terms of the shareholders’ agreement – he just received payment earlier than usual.  

The court made an order regulating the future conduct of Macom UK’s affairs and requiring the parties to comply with the provisions of the shareholders’ agreement.

Key takeaways

What can we learn from this recent case?

1. Majority shareholders can bring unfair prejudice petitions too. Unfair prejudice petitions are usually a remedy for minority shareholders. This makes sense – a majority shareholder will usually have the controlling interest and can bring an end to conduct which may be unfair without the court. However, in this case P was actually the majority shareholder but did not have a casting vote due to the wording of the shareholders’ agreement. This was one of the rare occasions when a majority shareholder needed to bring a petition.

2. Remember that prejudice is not limited to a reduction in the value of shares. The court found that there was unfair prejudice even though there was no financial loss to P. P’s shares still held the same value as they would have even if Mr B had not engaged in unfair conduct. Prejudice can be unfair where a relationship of trust and confidence breaks down, particularly where a shareholder has invested in a company on the condition that he also be involved in the management of it.

3. Beware the court’s discretion. The court has a wide discretion under section 996 of the Companies Act 2006. That section requires it to consider the proportionality of any remedy it awards. Just because prejudice is unfair does not mean that a court will order a share buyout. There is no guarantee of the court agreeing that a “clean break” is necessary even when a relationship has broken down. Prospective petitioners should carefully consider their options and the extent of any financial loss they may have suffered before going down the route of costly legal proceedings. Petitioners should also consider carefully the financial means of the respondents – can they afford to buy the petitioner’s shares?

If you have concerns about the conduct of fellow shareholders and/or directors then contact our corporate disputes solicitors George Gwynn or Morgan Rees to seek specialist advice on the options available to you.