Unfair prejudice: Recent developments

Unfair prejudice must result from the conduct of the company’s affairs - Primekings Holding Limited and others

Unfair prejudice claims often include allegations both directly relevant to the conduct of the company’s affairs and allegations of a broader nature relating to the conduct of relevant individuals (e.g. directors). Primekings Holding Limited and others v Anthony King, James King and Susan King [2021] EWCA Civ 1943 involved long running litigation where the parties had made a number of claims against each other, including an unfair prejudice petition and other claims such as misrepresentation. The respondents applied to strike out portions of the petitioners’ points of claim on the basis that the allegations related to their personal conduct, not to the affairs of the company. The respondents argued that their personal conduct was not capable of being unfairly prejudicial conduct within the meaning under s. 994 Companies Act 2006.

The Court of Appeal confirmed that “a causal connection [must] exist between the personal actions of the shareholder or third party and some other act or omission constituting conduct of the company's affairs within Section 994”, applying Graham v Every [2015] 1 BCLC 41. The offending allegations which failed to meet this test were struck out (deleted) from the petitioners’ points of claim. The court also underlined that unfair prejudice petitions (like other statements of case in litigation) should only “set out the facts that go to make up each essential element of the case” and should not “raise myriad grievances and complaints of diverse forms”.

This case is a useful reminder of the need to ensure that allegations are formulated in order to show a clear link with the conduct of the company’s affairs. Allegations which do not have such a link will not be legally effective to support a claim for unfair prejudice.

Pitfalls of relying on overly generalised complaints – Loveridge v Loveridge

In Loveridge v Loveridge [2021] EWCA Civ 1697, the Court of Appeal considered an appeal against an application to strike out an unfair prejudice petition (and whether to allow pleading amendments). The case concerned five family companies operating in the caravan business, where disputes had emerged between family members.

The Court of Appeal allowed the appeal, finding that the petition did not have a real prospect of success and should be struck out. It made a number of observations which have general relevance in relation to the formulation of unfair prejudice petitions.

It noted that the question of unfairly prejudicial conduct “must be determined by reference to each individual company, and the [petitioner’s] interest in it”. Although an overly strict/technical approach should not be taken, the court cannot apply conclusions from one entity to another, even if part of the same overall business.

It criticised an overly broad approach taken at first instance as to whether the petitioner was excluded from the management of the relevant companies, emphasising the importance of a proper analysis of the relevant fact pattern. In relation to one relevant company, the petitioner was a 50% shareholder and one of two directors (and made no allegations of being excluded as a director). Accordingly, it was not maintainable that the petitioner could be said to be excluded from management of this particular company. In relation to another company, the petitioner was exceptionally not a director (he was a director of all other relevant companies) and had only recently become a shareholder. The Court held that this was significant and in the absence of other evidence, the petitioner had not demonstrated he was entitled to participate in the management of this company.

The Court also addressed the petitioner’s argument that unfair prejudice had arisen on the basis of the parties’ association having broken down. It considered that, applying O'Neill v Phillips [1999] 1 WLR 1092, a breakdown in relations was not sufficient to found an unfair prejudice petition where there has been no exclusion from management (which was only arguable in relation to one company).

Unfair prejudice petitions must be properly pleaded - Griffith v Gourgey

In Griffith v Gourgey [2019] EWCA Civ 204, the Court of Appeal emphasised the need for unfair prejudice petitions to be fully and properly pleaded (i.e. the facts supporting the claim to be clearly set out in the petition).

The case involved companies in the hotels and property industry, where there were disputes about substantial payments made by those companies to third parties. There had been various procedural disputes between the parties relating to pleadings over the course of six years. This included whether the petitioner was entitled to seek relief in relation to grounds alleged in the points of claim (detailed pleading) but not the original petition. The Court of Appeal noted that the purpose of the petition was to define the “ambit of the case” and that “the petition must specify the grounds [for the petition], but that does not mean that they need to be fully particularised. That is the function of the points of claim”. It further noted that “where the petition is the only pleading, it follows that the petitioner's case must be fully and properly pleaded in the petition, amplified by further information where appropriate”.

In this particular case, the court allowed the omission from the petition to be cured by amendment so that it conformed to the points of claim, relying on the fact that the respondents had been on notice of the relevant allegations for six years. Parties cannot necessarily expect the same treatment with different facts and context and so would be well advised to follow its guidance on the preparation of pleadings.

The court’s wide discretion on remedies - Ming Siu Hung v JF Ming Inc

In Ming Siu Hung v JF Ming Inc [2021] UKPC 1, the Privy Council considered an appeal to re-instate a buy out order granted at first instance in the British Virgin Islands and reversed on appeal to the Eastern Caribbean Court.

The case concerned a business based in Hong Kong owned by family members. At first instance, the court founded that the respondent had conducted the affairs of the company in a manner which was unfairly prejudicial to the appellants. It granted the petitioner’s request for a buy-out order. The Court of Appeal upheld the finding of unfair prejudice but made a more limited order, simply requiring the majority shareholder to furnish the minority shareholder with the financial information for the past and for the future. This ruling was further appealed to the Privy Council.

The Privy Council upheld the appeal and re-instated the buy-out order. It found that relief for unfair prejudice takes account of all factual findings and is not limited to the pleaded case: “In short, nothing is off-limits subject only to the twin tests of relevance and weight, in relation to the choices to be made in the exercise of the discretion. Secondly, the court necessarily looks not only to the past but to what the court finds is likely to happen in the future”. The Privy Council also cited Fage UK Ltd v Chobani UK Ltd [2014] EWCA Civ 5 in relation to the need for an appeal court to show restraint in revisiting issues of the first instance court’s discretion: “While it is true that in the case of discretion the appeal court may be as well placed as the trial court to exercise it, the primary responsibility rests with the trial court not the appeal court."

Drafting considerations

Each expert determination clause should be tailored to the specific type of agreement concerned. Key issues to consider include:

1. Scope of the issue for expert determination

• Expert determination clauses usually govern a specific category of dispute (e.g. share valuation) in the relevant agreement, with disputes involving significant contested factual/legal issues remaining subject to arbitration or litigation. However, inevitably the emergence of a dispute can have consequences not necessarily foreseen by the drafting, such as an issue falling to be determined by the expert which is of a more high value / high stakes nature than envisaged by the parties. Unambiguous drafting in order to identify the scope of disputes referred to expert determination (and therefore not subject to arbitration/litigation) is therefore very important.

2. Method for appointment of the expert

• The clearer the process for choosing and appointing the expert, the narrower the scope of future disagreement / deadlock. It is advisable to include fallback provisions to govern the position if the parties cannot agree the identity of an expert. This may include requiring the parties to jointly apply to an appointing authority. Note that appointing authorities may not accept instructions from a single party without a court order.
• Expert determination clauses also commonly contain provision about the expert’s experience/qualifications. It is also possible to pre-agree the identity of the expert (or agree a shortlist of experts). However, the downside to this approach is lack of flexibility: the chosen expert(s) may be unwilling/unavailable to act, lack the required expertise, or be conflicted. It is also advisable to require the parties to adopt market standard engagement terms for the expert.

3. Procedure

• The conduct of an expert determination will depend on the expert’s terms of reference (and any procedural rules which are incorporated). Expert determination is intended to be a flexible and efficient procedure, so highly detailed rules are not necessarily an advantage. However, it is sensible for the parties to adopt a clear framework for how the expert determination will be conducted for reasons of certainty (particularly given continued cooperation cannot be guaranteed in the event of a dispute).

4. Scope of grounds for challenge the expert’s decision

• As explained above, in England & Wales, the parties have no inherent right (under statute or otherwise) to challenge expert decisions. The case law relating to challenging expert decisions is also less developed than in relation to arbitration. As a result, to avoid uncertainties, it is advisable for the parties to clearly specify the grounds on which a decision may be challenged and be mindful of the narrow scope of terminology such as ‘manifest error’.

Conclusion

As these cases illustrate, while the possibility of disagreement between shareholders is universal, the boundaries of an effective claim for unfair prejudice are much more limited. When bringing or defending an unfair prejudice claim, the ambit of unfair prejudice set out in s. 994 and relevant case law is always key. Parties need to analyse carefully how their fact pattern engages with these requirements so as to secure the relief they seek (or to defend a claim made against them). As a petitioner, an expansive approach may be tempting, on the basis that at least some of the allegations will ‘stick’. However, there are significant downsides to such an approach including delaying resolution, increasing legal costs so impacting the cost/benefit of litigation, impacting management time and attracting negative judicial comment. As a result, parties would be well advised to seek early advice as to what is and what is not legally actionable unfair prejudice.