unfair prejudice

Question 1

what recomendations led to the up remedy?

Answer 1

the jenkins committee - aruged that there should be a remedy in cases that fell short of illegality

Question 2

what is the statutory provisions for unfair predudice?

Answer 2

• s994: ‘the company’s affairs are being conducted or have been conducted in a matter that is unfairly prejudicial to the interests of members generally or some part of its members’
• repeat rather than a reform of s459 of the CA 1989

Question 3

evaluation of s994

Answer 3

• Kershaw: this provides a potentially expansive remedy for minority shareholders faced with unfair actions/proposed actions of the controlling shareholders, and more generally a remedy for any shareholder that is aggrieved by the conduct of the company’s affairs even where there is no controlling shareholders
• Pettet: the floodgates of litigation were well and truly thrown open, and it was later realised the new remedy was capable of being oppressive towards the respondents.

Question 4

what does Re Stewarts [1985] say about what consitutes a company’s affairs?

Answer 4

a director’s establishing a rival company, and his diversion of business to this company, were acts falling within the affairs of the company.

Question 5

‘Conduct of the companies affairs’

Answer 5

wide interpretation

Question 6

Can controlling shareholders use section 994?

Answer 6

1. No exclusion but normally any prejudice they suffer will be remediable through the use of their position and therefore there may not be the element of unfairly prejudicial.
2. It is a mechanism for the protection of non-controlling shareholders (not necessarily minority-since often there is equal division of shares).

Question 7

what is the Judicial Construction of Criteria by which to Judge ‘Unfairness’?

Answer 7

• Legitimate Expectations or Equitable Considerations
• Courts have recognised that the remedy protectsexpectations and not just rights.
• Borrowing from public law ‘legitimate expectations’ of the petitioner, though more recently courts have tended to use the term ‘equitable considerations’.

Question 8

What are the equitable considerations meriting a judicial response?

Answer 8

• Informal arrangements among the member
• Dividends and Directors’ remuneration
• Other categories of Unfair Prejudice not clearly defined

Question 9

Informal arrangements among the members

Answer 9

• Arises out of a fundamental understanding between shareholders which formed the basis of their association but was not put into contractual form’
• The court recognises that the totality of agreement is not put into contractual form-could be a desire to avoid transaction costs.
• Most common in the small ‘quasi-partnership’ companies and limited to very small companies
• Most commonly protected is undoubtedly the petitioner’s expectation that he or she would be involved in the management of the company
• Starting point will be the articles and something more will be required to move court from view that basis of association is exhaustively laid out in the articles

Question 10

O’Neill v Phillips [1999] facts

Answer 10

in the case, the founding entrepreneur who had increasingly built up the business handed over a 25% share of the company to a trusted employee (the petitioner O). Later the petitioner became MD of the company receiving half the profits (the Petitioner was handling the day-to-day business) and there were talks about acquiring one-half of the share capital. However, economic downturn meant that the prospects of the company faltered and founder removed petitioner as MD, took back reins and paid petitioner only salary and dividends on his 25% share.

Question 11

O’Neill v Phillips [1999] ratio

Answer 11

HL held: The treatment of the petitioner (who resigned) was held not to be unfairly prejudicial because there was no agreement between the parties even at informal level that the petitioner should be entitled to receive half the profits (except so far as he was MD) or that he was entitled to increase his shareholding to one-half.

Comment: contractual approach to assessment of unfairness in the interests of legal certainty but at a cost of limiting scope

Question 12

Dividends and Directors’ remuneration

Answer 12

Frequent cause of dispute is excessive remuneration to directors and the failure to declare dividends (where petitioner has never been or ceased to be a director).

Question 13

Irvine v Irvine (No.1) [2007]

Answer 13

• Shareholders, even in small quasi partnership companies, have no automatic right to expect dividends
• There has to be specific additional circumstances
• In this case, the fact that the majority shareholder was paying himself excess numerations was enough

Question 14

re Sam Weller & Sons Ltd

Answer 14

the court refused to strike out a petition alleging that non-payment of dividends produced a disparity between the petitioner and the respondent as far as their participation in the profits of the company was concerned because the Respondents obtained their return through the payment of directors’ remuneration and other benefits, whilst the petitioners (as non-director) were excluded from any substantial return

Question 15

Re A Company

Answer 15

• the court used provisions of the City Code on Takeovers and Mergers as a guide to what the directors of a target company should do by way of communication with the shareholders, even though the target was a private company and outside the scope of the Code.
• the exclusion of a member form the board of directors amounted to unfair prejudice

Question 16

McGuiness v Bremner Plc

Answer 16

court used by analogy art.37 of Table A (even though the company had not adopted Table A), when determining whether delay on the part of the directors in reconvening a meeting of the petitioners was unfairly prejudicial.

Question 17

does the claimant have to come to court with clean hands?

Answer 17

• no but the petitioner’s conduct might mean that the harm inflicted upon him was not unfair or that the relief granted should be restricted.
• Grace v Biagioli [2006] CA: the petitioner had been removed from his directorship contrary to the agreement between when the company was set up, which would normally be a clear example of unfair prejudice. However, the petitioner had put himself in a position of conflict by seeking to purchase a competing company

Question 19

when a wrong has been done to the company can a shareholder leap over the restrictions on bringing a derivative action by presenting an unfair prejudice petition?

Answer 19

• It is generally accepted by courts that the actual availability of a derivative action is no bar to an unfair prejudice petition
• Hoffman LJ ‘Enabling the court in appropriate cases to outflank the rule in Foss v Harbottle was one of the purposes of the section’- Re Saul D Harrison & Sons Plc

Question 20

Clark v Cutland

Answer 20

Petition concerned a two-person company where controlling director had made a large and unauthorised payment to himself, by way of contributions to pension fund. This clearly constituted a breach of fiduciary duty.When the misappropriation came to light, Mr. Clark commenced a derivative action on behalf of the company against the trustees to recover the monies, which had been misapplied. Later he commenced unfair prejudice proceedings. The derivative action was in due course consolidated with the unfair prejudice proceedings. Here court ordered that the unauthorised payments be returned to the company (but petitioner could seek an order against the company for payment to him of costs).