The owners of Blackpool Football Club have been ordered to pay £31m to buy out a minority shareholder after the High Court ruled they had acted in a manner that was unfairly prejudicial to that shareholder’s interests.
The Seasiders’ fans had become increasingly unhappy in recent years with the way in which the club had been run by its owners, the Oyston family. Blackpool FC were promoted to the Premier League in 2010 and back then the Oystons’ frugal nature was admired as a positive shift from the modern financial models of English football teams.
Since then, however, the team’s fortunes have declined with Blackpool plummeting down into League Two (before promotion back to League One in May 2017). Fans have been unhappy at the lack of investment in the club which they believe would have helped Blackpool to retain Premier League status. Instead, millions of pounds have been taken out of the club by the owners and protests against their conduct have become a regular feature of match days.
It was the outgoing payments that led a minority shareholder, Valeri Belokon, to claim that the club’s affairs were being conducted in an unfairly prejudicial manner. Mr Belokon also claimed that he was excluded from involvement in the club’s management and was not consulted before decisions were made.
Around 76% of the shares in Blackpool FC were held by the Oystons, with Mr Belokon owning around 20%. Mr Belokon had invested £4.5 million in return for his shareholding and a position on the board.
Mr Belokon believed that a ‘gentleman’s agreement’ existed between himself and the Oystons under which he would eventually receive an equivalent shareholding to that of the Oystons. Until then, the club would be run jointly and Mr Belokon would have a say in all decisions made at board level.
Between September 2010 and March 2013, following Blackpool’s promotion to the Premier League, numerous payments were made out of the club. Mr Belokon claimed that these were made without his consent and that he had been excluded from board decisions. He brought court proceedings, claiming that his interests were being unfairly prejudiced by (amongst other things) the failure to pay dividends, the making of improper payments and his exclusion from the management of the club.
The court acknowledged that there was an understanding that Mr Belokon would acquire a shareholding equal to that of the Oystons and that he would have a joint say in the club’s management. The allegations of unfair prejudice were considered on the basis of that expectation.
A previous case confirmed that, as long as there is an intention to create legal relations, a gentleman’s agreement can be binding even if it is not recorded as a formal contract.
Numerous payments were made by the club during the three year period, including an £11 million payment to a company owned by the Oystons which the club’s accounts listed as a director’s salary.
In total, the court found that £24 million had been paid out as disguised dividends. These payments clearly affected the interests of Mr Belokon, and other members, and were also fundamental breaches of directors’ duties. Paying out significant amounts of the club’s money, which was of no benefit to the club, detrimentally affected its value and there had clearly been discrimination between the interests of the Oystons and those of the other members.
Even without the gentleman’s agreement these payments would have been unfairly prejudicial to Mr Belokon in his capacity as a member.
As mentioned in a previous Talking Business blog, the payment of dividends is at the discretion of a company’s directors. However, the court will interfere with this where it is clear that dividends have been paid to one member at the exclusion of another and this amounted to unfairly prejudicial conduct.
By wrongly classifying the payments as loans, the Oystons had enriched themselves, prejudiced the club and behaved in a way that was discriminatory to other members.
Exclusion from the company
The gentleman’s agreement gave rise to a legitimate expectation that Mr Belokon would be equally involved in the governance of the club. The deliberate extraction of money from the club involved the exclusion of Mr Belokon in a situation where the Oystons knew he would likely object. The Oystons essentially made key decisions without consulting the board of directors. This was clearly unfairly prejudicial to the members.
The court required the Oystons to purchase Mr Belokon’s entire shareholding in the club, at a cost of £31 million.
Blackpool fans were hoping that the significant buyout order would result in the Oystons selling the club in order to fund the penalty and last week it was confirmed that the club had indeed been put up for sale.
The decision is a healthy reminder for company shareholders who are also family members. The Oystons fell into the trap of believing they had free rein over the running of the company and saw it as a family enterprise over which they had total control. But the court has reminded them in the strongest possible way that they could not ignore the interests of the minority shareholders or the duties which they owed to the club as its directors.