The High Court examined whether the behaviour of the managing director of a family-owned company was unfairly prejudicial to other shareholders of the company.
Waldron and others v Waldron and another centred around a company (the Company) owned by four siblings, who had inherited their respective shareholdings from their parents. Sibling 1 was the Company’s majority shareholder and managing director. Siblings 2 and 3 were minority shareholders and a director and the Company’s secretary respectively. Sibling 4 was a minority shareholder but played no active role in the Company. Another corporate entity (SIG) held the balance of the shares.
At one point, Siblings 1 and 2 (the Company’s directors) identified an opportunity to buy assets from a business that had entered administration. Sibling 1 incorporated a new corporate vehicle, which bought the assets and hired them out to the Company at excessive charges. Siblings 2 and 3 alleged that Sibling 1 had entered into this arrangement in order to extract value from the Company.
In due course, Sibling 1 approached SIG to acquire its shares in the Company. Relations between the siblings subsequently broke down over the proportions in which they should acquire those shares. Sibling 1 wished to acquire all of SIG’s shares, whereas the other siblings argued for them to be distributed in proportion to their existing shareholdings.
This dispute escalated and culminated in Sibling 1 restricting the Siblings 2 and 3’s email access. Siblings 2 and 3 offered a small sum of money to the Company’s IT consultant to provide them with access to Sibling 1’s emails. When Sibling 1 discovered this, he dismissed Siblings 2 and 3 as employees of the Company.
Siblings 2 and 3 claimed that this behaviour amounted to unfair prejudice. Under English law, a member of a company can ask the court for relief if the affairs of the company are being, or may be, conducted in a manner that is unfairly prejudicial to the their interests as a member. Normally, if a court finds that there has been unfair prejudice, it will order a buy-out of the aggrieved member’s shares.
What did the court say?
The court decided not to grant an order.
The judge said that Sibling 1’s behaviour in authorising the lease of assets to the Company did indeed amount to unfair prejudice, because, in proposing the arrangement, Sibling 1 had put himself in a position of conflict of interest. He never sought the Company’s permission for this conflict and so had breached his duties to the Company. The fact that he believed the arrangement would benefit the Company was irrelevant. This breach of duty in turn amounted to unfair prejudice.
But Siblings 2 and 3 had discovered the hire-out arrangements shortly after they had been agreed and had done nothing about it. They had effectively acquiesced in the breach, and the court was not prepared to let them claim now. The same position applied to Sibling 4, who didn’t know about the hire-out but had been content enough to leave her brothers to run the Company.
By contrast, restricting Sibling 2 and 3’s email access did not amount to unfair prejudice. The judge said that, although a company's board is entitled to full information about every aspect of the company's affairs, a director is not automatically entitled to see all e-mails or documents generated in the course of the company's business. There may be circumstances where a managing director or chairman needs to deal with matters confidentially.
Moreover, dismissing Siblings 2 and 3 did not amount to unfair prejudice, because there had been a good reason for their dismissal. They had attempted to bribe a consultant of the company to provide unauthorised access to emails. Their behaviour had been, in the court’s words, “manifestly improper”.
How does this affect me?
For company directors and majority shareholders, the decision is a reminder to consider carefully how the way in which a company’s business is run may impact shareholders, particularly where they may have their own interest in the arrangement. The fact that putting an arrangement in place may benefit a company does not mean it can’t also amount to a breach of duty.
For shareholders who feel that a company’s business is being run to their detriment, the crux of the decision is to act quickly. By sitting on their hands in full knowledge of the issue and allowing it to continue, the shareholders in this case found they had lost their remedy.
It is also a reminder for directors that they may not have unfettered access to all records relating to their company. Whether a director is entitled to see a particular document will always depend on the nature of the document and the reasons for which the director is asking to see it.