Unfair prejudice petitions: turning the tables in a shareholder dispute

If you are a minority shareholder of a company which is being run contrary to yours, or others, best interests, you probably feel distressed, frustrated and helpless. However, you have more power over the situation than you may realise.

Sections 994-996 of the Companies Act 2006 (“CA 2006”) provide a statutory remedy which allows company shareholders to bring a court claim, known as a petition, to seek relief from the court on the basis of ‘unfairly prejudicial’ conduct by the other shareholders, usually the majority shareholder or the directors.

One of our recent cases is the perfect example of a situation where the threat of a strong unfair prejudice petition combined with quality employment advice allowed us to negotiate a successful outcome for our shareholder client, without the need to commence court proceedings. Our strategy enabled our client, who had been suspended and threatened with termination under a ‘bad leaver’ clause, rendering his shares worthless, to buy out the other directors and shareholders. Our client now owns the business.

Overview

The company was an exciting venture for two friends seeking an innovative solution to businesses tech support needs. The company doubled in size and profits soared, but tensions at the heart of the board rose just as quickly.

Our team was approached by one of the company’s directors and minority shareholders, who was seeking advice following their exclusion from the company and unlawful suspension from their role as one of the key directors based on unsubstantiated accusations of gross misconduct.

We were instructed to either help our client re-enter the company they had grown from the ground up, or to negotiate a fair and lawful exit for them so that they could start afresh.

Investigations revealed that the misconduct accusations were deliberately engineered by two directors with a grudge. There was significant evidence of a biased HR process which enabled the plan to remove our client from the business and buy him out.

While our client was suspended, the two directors/shareholders who had actioned this removal were making poor decisions, including entering costly supplier contracts and hiring unnecessary staff without board approval, which put the future viability of the business at significant risk.

As our client was also the leading salesperson and key relationship manager, the company risked losing several key deals which were nearing completion at the time of their suspension. This had the potential to lose the company millions of pounds of income. The company’s value was rapidly declining, and, with it, our client’s share value.

Grounds for an unfair prejudice s994 petition

If you have read any of our previous articles on this topic, you may be spotting some of the key signs of unfairly prejudicial conduct.

The HCR team identified the following potential grounds for an unfair prejudice petition and employment claim:

1. Exclusion of the shareholder – the would be “petitioner” – from the management of the company, in breach of an agreement between the shareholders, and the majority’s conduct did not justify taking that step
2. Wrongful suspension and / or dismissal of the petitioner from their employment in the company, often seeking to rely on bad leaver provisions which can hugely discount the value of any shareholding
3. Being suspended as a director, with access to IT systems removed, banned from attending the premises, or both
4. Being excluded from board meetings and being involved in key decisions of the business.

Drawing on full-service legal expertise

Due to the impact of this situation on our client personally, and the significant damage to the business itself, a multi-disciplinary team comprising of solicitors from the firm’s Dispute Resolution, Corporate and Employment teams had to work quickly and collaboratively to ensure that we acted in our client’s best interests, both in the immediate and longer term.

The team made it clear to those now at the helm of the business that, if they continued with their plans, we were prepared to issue proceedings in threefold:

• An unfair prejudice petition
• An employment tribunal claim
• An injunction application, seeking to prevent further damage being inflicted upon the business.

Our client was then contacted by another of the directors and shareholders of the business. They had also been excluded from all decisions, including being kept in the dark about the action taken against our client, and our response  – both of which they ought to have been consulted about. They also had grounds for an unfair prejudice petition, due to both their exclusion from management decisions and the consequent devaluation of their shareholding. They informed our client that they would do whatever they could to assist re-entry, or follow our client to a new venture if the option arose.

With the board and shareholders now split down the middle in numbers, shareholding and voting power, and our client now privy to key company information they had been denied since their suspension, the two directors at the heart of the issue had lost their hold over the situation. This allowed HCR to use the threat of potential proceedings as leverage to enter negotiations with the other side, and to obtain both our client’s reinstatement and the removal of the two problematic director/shareholders, without the need to issue any of the proceedings threatened.

Key insights for businesses

• Ensure you have well-drafted shareholder or direct service agreements and employment contracts
• If you are a founding member, look to build in protections to prevent your removal, such as awarding greater voting rights in your shareholders’ agreement
• Ensure that you have clear HR policies which require the use of an independent advisor if any actions are to be taken against a board member
• Take immediate legal advice if you are considering suspending a board member, ideally prior to the suspension, or if you are a board member who has been suspended
• Speak to specialists, but don’t take our word for it. Here is what our client had to say:

“I found myself in an incredibly difficult and stressful position. Despite being one of the co-founders, out of the blue I found myself on the receiving end of a fabricated allegation, being suspended and then removed from a business that I cared deeply and passionately about.  Thanks to HCR, in particular Adam Finch and his Dispute Resolution team, Rachel Roberts and her Employment team plus Derek Callanan and his Corporate team, not only did I stop the shareholder action and employment process in its tracks but I wrested back control and have removed the errant directors. Without HCR’s support, I wouldn’t be sitting here today in charge of a fantastic business with amazing employees.”