Football is known as the beautiful game, but off the field what goes on in the boardrooms of companies that own football clubs may become dirty business. When shareholder disputes lead to actions to oust investors or wrestle control from individuals, appealing to court for an unfair prejudice remedy may be the only route available to those adversely affected.
But business is a team game: what may be unfair to an individual may not be unlawful if it is ultimately to the economic benefit of the company.
The Cardiff City Football Club case
In a recent case concerning a dispute between shareholders of Cardiff City Football Club[1], the court had to determine whether the conduct of the majority shareholder (Tan) and the club’s board of directors, was unfairly prejudicial to the club’s minority shareholder (Isaac).
The club’s board had allotted new shares in such a manner that Isaac’s shareholding was diluted. Isaac claimed that this action arose because of Tan’s personal animosity towards him and not for a proper business purpose. Isaac alleged that the board had simply rubber-stamped Tan’s share offer, contrary to their duties as directors under the Companies Act 2006, because certain members of the board had not exercised their own independent judgment and also failed to exercise their powers to allot new shares for a proper purpose[2].
Tan had provided significant loans to the club and had earlier pledged to reduce the club’s indebtedness. Tan therefore contended that his actions were in fact motivated by a desire to improve the club’s balance sheet, as his share offer involved him agreeing to write off some £67 million owed to him by the club.
Although the judge found that Tan was partly motivated by vindictiveness towards Isaac, and in that sense the actions were unfair in the moral sense, this did not mean that these were unfair or unconscionable in the legal sense. The board may have been under the influence of Tan, but it still had a proper reason for making the resolution concerning the share offer, as this assisted the club with the problem of its indebtedness. Isaac’s petition for unfair prejudice was rejected; Tan played a dirty game, but ultimately acted in the interests of the club.
What is unfair prejudice?
We consider in more detail unfair prejudice petitions here, but it is worth a recap when looking at this case.
Unfair prejudice is the protection of the interests of minority or equal shareholders, offered by section 994 of the Companies Act 2006, against abuse of power and mismanagement by other shareholders. It allows the shareholder who suffers prejudice because of an act or threatened conduct, in a manner that is unfair, to ask the court to intervene and give appropriate relief.
What happened amongst the shareholders of Cardiff City FC can happen in any company. If the views and interests of shareholders diverge, boardroom disputes may erupt, and the interests of one shareholder may be adversely affected. To successfully claim for unfair prejudice in such circumstances there must not only be financial loss or some sort of disadvantage, but there must also be conduct that is unfair in the specific context of a company’s history and business.
Quasi-partnerships
A company that is established specifically on mutual trust and confidence between the founding members – such as a family business or a small enterprise started by long-term close friends – can be a quasi-partnership. Individuals in such businesses will expect to have full involvement in the management of the company and some degree of control over who can and cannot be a member of the company. The importance of establishing whether a quasi-partnership exists is that its unique characteristics mean that special rules and remedies apply if unfairly prejudicial conduct is established. For example, in a company where the shareholders were three siblings who were also directors, all with a legitimate expectation of being involved in day-to-day management, an attempt to remove one of them as a director allowed that person to successfully petition for unfair prejudice and seek an order from the Court that their shares be purchased by the remaining members for market value without a minority discount being applied.
We talk more about quasi-partnerships here.
Unfairness v unlawfulness
Although unfairness may derive from a breach of the rules of a company, the test of unfair prejudice is not simply one of unlawfulness. An act may be strictly lawful in the sense that it is allowed under a company’s articles of association or even a shareholders’ agreement but may still constitute unfairly prejudicial conduct. Conversely, as we have discussed above in the Cardiff City case, even if the conduct complained of is potentially unfair on a shareholder, if there is a proper and justifiable business purpose, such conduct may not be unfairly prejudicial.
Who can bring an unfair prejudice petition?
An unfair prejudice petition must be brought by a shareholder in their capacity as a shareholder, and not merely as a director, employee or third party. Thus, an act or omission which affects a shareholder acting as an employee, for example, may not alone be sufficient for the purposes of petitioning for unfair prejudice.
When to bring an unfair prejudice petition?
In most cases, a petition is commenced after the unfairly prejudicial act has taken place. However, in certain circumstances the law also protects shareholders from proposed acts or omissions. This means that a pre-emptive remedy may be sought for threatened future conduct, to prevent the unfair prejudice from occurring.
What is the remedy for unfair prejudice?
Unfair prejudice remedies will be tailored to the circumstances of each case. Sometimes this will involve winding up the company or declaring an action invalid. But often the remedy sought will be an order that the shares of the aggrieved shareholder be purchased by the remaining shareholders for market value. Valuing the shares will need expert evidence and often depends on the history of the shareholders’ relationship and the nature of the business.
Valuing shares and minority discount
Although the court in the Cardiff City case did not have to value the shares - as Isaac had not shown unfair prejudice - it nevertheless commented on how it would have calculated this if the petition had been granted. It considered that the relevant date for valuing the shares was before the dilution of Isaac’s shareholding. The value would be calculated by looking at similar football clubs, and a minority discount would have been applied.
A minority discount is an amount deducted from the ordinary value of shares to reflect the fact that a small interest in a company is less marketable than a controlling interest. Various factors will affect this discount such as the size of the minority shareholding and provisions in shareholders’ agreements or the company’s articles. No minority discount is usually applied if there is a special relationship between the shareholders, such as a quasi-partnership.
Are there ways to protect against unfair prejudice?
The Companies Act gives all shareholders certain basic rights. Shareholders may enhance these rights by ensuring that protective terms are included in the company’s articles of association or in a written shareholders’ agreement. A properly drafted shareholders’ agreement can ensure that the interests of all parties are fairly protected in the event of any disharmony occurring. This is particularly the case where companies are incorporated between family members, close associates and/or friends.
The shareholders in the Cardiff City case never entered into a shareholders’ agreement. By the time their dispute arose, it was too late to attempt to negotiate such a contract – Tan would have had no interest in voluntarily curtailing his power as a majority shareholder. It is therefore always preferable for shareholders – whatever their relationship – to enter an agreement at the outset of an arrangement and before any conflict arises.
What to do if you are involved in a shareholder dispute
The law offers shareholders in dispute various routes to resolve or redress the situation. An unfair prejudice petition is one such route. There may be more appropriate routes to explore, such as a voluntary winding up on the company, depending on the nature of the relationship between the shareholders. Whichever the appropriate route, exploring the possibility of an early negotiated settlement of the dispute is usually preferable. Our dispute resolution team has experience advising shareholders in many types of disputes. We are always happy to discuss which solution will be best in your specific situation.
[1]Cardiff City Football Club (Holdings) Ltd, Re [2022] EWHC 2023 (Ch), also known as Isaac v Tan
[2] Sections 171 and 173 of the Companies Act 2006
