In the recent case of Re Motion Picture Capital Limited  EWHC 2504 (Ch), the Court greenlit an unfair prejudice petition presented by a minority shareholder who no longer held shares in the relevant company at the time his petition was heard. The petitioner’s position was "Show me the money!", requesting an order that the company purchase his shares at a price reflecting the company’s value, even though his shares had already been transferred into the names of the company’s nominees.
Unfair prejudice petitions can be brought under the Companies Act 2006 s.994 which provides:
“(1) A member of a company may apply to the court by petition for an order under this Part on the ground—
(a) that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or
(b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.” (emphasis added)
The company in this case provided services for film and television production and the petitioner had been its CEO and a 19.61% shareholder. The petitioner was removed as a director due to his alleged misappropriation of company funds (though he retained his shareholding) and a settlement deed was entered into providing for the repayment of those funds by the petitioner to the company, secured by a charge over his shares in the company. The deed also provided that in the event of default, the company was entitled to enforce the charge and transfer the petitioner’s shares to itself. The petitioner made no repayments so the company issued proceedings and obtained default judgment but took no further action at that time regarding the shares.
In January 2019, 11 months later, the petitioner presented an unfair prejudice petition alleging breaches by the company directors of the shareholders’ agreement, including that they had diverted opportunities and income to other businesses they owned to the detriment of the company and its shareholders, including him. The relief sought by the petitioner was for his shares to be purchased at a price which fairly reflected the real value of the company.
Just before the Case Management Conference (CMC) in those proceedings, the company exercised its entitlement under the settlement deed and transferred the petitioner’s shares into the names of its nominees, thereafter arguing that the petitioner’s unfair prejudice petition should fail because he was no longer a member of the company.
Considering the company’s preliminary issue application the Court held that the petitioner’s unfair prejudice petition was allowed to proceed based on the following findings:
At the time of the company’s application, the petitioner was no longer a member of the company pursuant to the Companies Act 2006 s.112.
However, s.994(1) provides that a petitioner must hold shares in the relevant company at the time of commencement of proceedings, there is no requirement that a petitioner must continue to hold shares up until the final hearing of the petition.
Continuing interest in pursuing petition
This Court’s role was to decide as a preliminary issue whether it was plain and obvious that the remedy the petitioner was seeking (the purchase of his shares) would not be granted at trial, not whether the remedy would in fact be granted.
The question was whether there had been a proper exercise of power by the company directors, and the Court looked to various duties in the Companies Act 2006 including: to exercise powers for the purposes for which they are conferred (s.171(b)); to act in a way that they consider, in good faith, would be most likely to promote the success of the company for the benefit of the members as a whole (s.172(1)); and to avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company. The Court also looked at the duty of a mortgagee (in this case the company was holding the charge over the petitioner’s shares) to act in good faith.
The Court found that the only obvious benefit of the transfer of the petitioner’s shares was that the company directors believed this would enable them to succeed in having the petition dismissed on the grounds of standing, thereby avoiding the Court having to determine the allegations of wrongdoing against them. The Court did not accept the directors’ argument that they were correcting the petitioner’s failure to comply with the settlement deed by transferring the shares.
The petitioner, therefore, had a real prospect of establishing at trial that the company directors had exercised their powers for an improper purpose, they had neither acted in good faith nor in the company's interests in effecting the transfer of his shares, and these actions amounted to unfairly prejudicial conduct against the petitioner.
This finding was on a preliminary issue and the case continues. This is an unusual case - because of events which took place after he presented the petition, the relief sought by the petitioner is for the purchase of shares he technically no longer holds. The Court has a wide discretion to make such order as it thinks fit to remedy any unfair prejudice so it will be interesting to see what orders will be made following trial, for example, will the share transfer be set aside or reversed, or will the Court order payment for the shares from the company or the directors?
It seems likely that if the petitioner succeeds the Court will have no hesitation in making orders to put him in the position he would have been in had he been able to sell the shares for market value. However, there are circumstances where relief can be refused – see our blogs on the Sprintroom case and the Simply Alarming case.
What this case does confirm is that a petitioner need only own shares at the point the unfair prejudice petition is presented and, perhaps unsurprisingly, it shows that attempts to strip a petitioner of their shares in order to defeat a petition will not be viewed favourably by the Court.