The High Court has given further insight into the breadth of remedies available to the court when considering unfair prejudice petitions.
VB Football Assets v Blackpool Football Club  EWHC 2767 (Ch) is a shareholder dispute regarding the manner in which the majority shareholder conducted the affairs of Blackpool Football Club, to the detriment of the minority shareholder.
This article summarises the key lessons that can be learned from this case.
An unfair prejudice petition is a statutory cause of action available to shareholders. The test is set out in section 994 of the Companies Act 2006. In order to bring a successful unfair prejudice petition, a party must show:
- that the conduct complained about is the conduct of the company’s affairs;
- that the conduct prejudiced the petitioner’s interests as a shareholder; and
- that the conduct complained of is unfair.
We consider this in more detail in our earlier article, “Unfair prejudice petitions – lessons to be learnt and recent developments”. Click here to read this article. This type of claim can be a very effective tool when a shareholder wishes to regulate the management of a company or seek redress at shareholder level for breaches of fiduciary duty.
In July 2006, Segesta, a company which owed 95 per cent of Blackpool FC, entered into a Subscription Agreement which resulted in the petitioner, VB Football Assets, acquiring a 20 per cent stake in Blackpool FC from Segesta. Segesta, the majority shareholder, was owned by Owen Oyston. VB Football Assets, the minority shareholder and petitioner in the proceedings, was owned by Valeri Belokon.
In June 2006 and April 2007, Mr Belokon’s daughter agreed to loan Segesta £1m and £1.7m respectively.
In addition, Mr Belokon understood that there was also an unwritten “gentleman’s agreement” between himself and Mr Oyston that, in return for the subscription monies and the loans, VB Football Assets would, in due course, receive a shareholding on par with that of Segesta and that in the meantime Blackpool FC would be run jointly. Mr Oyston denied the existence of such an agreement.
The relationship between the parties deteriorated after Blackpool FC was promoted to the Premier League and received a vast influx of cash. VB Football Assets brought an unfair prejudice petition against Segesta complaining about the following behaviour:
- substantial payments were made out of Blackpool FC which were improper, made without VB Football Assets’ consent and were for the personal benefit of Mr Oyston and his son;
- VB Football Assets was excluded from the management of Blackpool FC; and
- Blackpool FC adopted new articles of association that were unfairly prejudicial to VB Football Assets.
As a preliminary point, Mr Justice Marcus Smith found that despite the existence of three carefully crafted written agreements, there was an unwritten oral gentleman’s agreement which affected the rights of the parties. He based that decision on the fact that “taken by themselves, the three written agreements appeared to be incomplete when viewed in their overall factual context”. Hence, when considering the grounds of unfair prejudice, he did so “not merely on the basis of the strict legal rights… but also on the basis of the legitimate expectation that I have described and found to exist”.
Finding in favour of the petitioner, Smith J found that:
- A number of substantial payments were made which were not for the benefit of Blackpool FC. Smith J found that, in total, £26.77m of improper payments were made and he described those payments as “disguised dividends”.
- As a result of the gentleman’s agreement, VB Football Assets had a legitimate expectation that it would be treated as an equal partner in the governance of Blackpool FC. It was excluded from certain decisions where it was anticipated that Mr Belokon would disagree with the majority shareholder.
- However, the adoption of the new articles of association were not so clearly unfair as to be unfairly prejudicial.
This decision is a timely reminder of the importance of making sure that all agreements or understandings are properly reflected in the documentation and that they tell the whole story. As we have said previously, parties need to be mindful of what exists beyond the documents.
The most interesting aspect of this case though is how it demonstrates the Court’s use of the discretions available when it comes to remedies. Indeed, Smith J noted that, when “considering the appropriate remedy the Court is not bound by the relief sought by the petitioner”.
The most typical remedy is that the majority is ordered to buyout the minority at fair market value, potentially with a minority discount. Expert evidence will therefore be key to the judge’s determination of the value of the petitioner’s shares. However, in this case, having been provided with two very different valuations of Blackpool FC (ranging between £5.5m and £59.7m), Smith J decided that neither of the valuations were appropriate. As such, he adopted his own approach, which amounted to:
- unwinding the initial investment made by VB Football Assets (£4.5m made up of the subscription monies and the loans); and
- ordering a further £26.77m to be paid to VB Football Assets as a dividend payment (having found the substantial payments to have been “disguised dividends”) so that it was in the position it would have been in had the unfairly prejudicial conduct in relation to those payments not taken place.
Smith J then posed the question of whether a buyout order of £31.27m was the most appropriate relief, or whether there could be fashioned a bespoke arrangement that was fairer taking into account: (i) the risk of prejudice to other minority shareholders; (ii) the fact that a buyout reflecting the value of the disguised dividends would merely condone the wrong done; and (iii) the fact that a buyout order felt disproportionate.
In considering a bespoke arrangement, Smith J appeared to be minded towards seeking to re-establish the spirit of the agreement or partnership between the parties, notwithstanding their own objections to such an approach. He said “[t]he temptation to attempt a bespoke arrangement is considerable, notwithstanding the clear difficulties that arise”. However, events outside his control meant that neither Mr Belokon nor his nominees were able to sit on the board of Blackpool FC. That was fatal to the bespoke relationship plan and, as such, he ordered a buyout order.
Had those events not taken place, we may really have seen the extent of the Court’s discretion irrespective of the fact that does not appear to have been the relief that the petitioner was seeking. But in any event, the lesson is clear – the equitable relief available in unfair prejudice petitions spans a broad spectrum. The underlying requirement is to deal fairly with the circumstances that have occurred. As such, petitioners do not have control over the relief they receive and it may be a case of being careful what you wish for.