Dispute resolution

Careful what you wish for: judicial intervention in unfair prejudice remedies

Published on 28th Jun 2021

Failure to keep your eyes on the prize until after you have won can lead to some unexpected, and potentially undesirable, outcomes

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In a sometimes entertaining judgment, In the Matter of Macom GmbH (UK) Limited, the High Court has provided a reminder that, in legal proceedings, it is not just winning but what you win as a result that matters.

A common complaint

The claim in Macom was for an unfair prejudice petition - that is, the actions of one shareholder had resulted in unfair prejudice to another shareholder's interests in the company and the wronged party was petitioning for the court's assistance to resolve matters.

The allegations made were very common for such disputes: of shareholders' agreements being disregarded, director-shareholders over-compensating themselves, and a general failure of good corporate governance.

Unusually, it was the majority shareholder, who brought the petition: usually, it is minority shareholders with insufficient voting power to influence matters who seek the help of the court.  Here, the shareholders' agreement and articles of association gave control to one of the minority shareholders as director, save in respect of a limited number of matters.

On the facts, the court found that the alleged unfair prejudice had been suffered and that the petition should therefore be granted.

An unusual cure

The difficulty for the court was finding the appropriate remedy.

The court has very wide powers under section 996 Companies Act 2006 to "make such order as it thinks fit for giving relief in respect of the matters complained of" and the list of examples listed in that section are explicitly "without prejudice to the generality" of that intentionally broad power.

The most common remedy is an order for one shareholder to buy out another: it is so common that it has become the norm. Either the petitioner is bought out by the wrongdoer (at a price that ignores the effects of any wrong-doing), or the petitioner buys out the wrongdoer (at a price that takes those effects into account).

However, the court also has the power to make any order governing the future conduct of the company, for example, forcing certain actions to be taken, or not taken, on penalty of contempt of court.

It was this remedy that Judge Hodge QC found to be most appropriate in Macom, despite the fact that the petitioner's primary remedy sought was a buy-out of its shares.

In the final day of submissions at trial, the minority shareholder said that if he was ordered to buy out the petitioner based on the agreed valuation of the company it would bankrupt him (and the petitioner would not, in fact, get the remedy it sought) although, as the judge rather bluntly put it: "that is a potential problem for the petitioner in terms of enforcement".

Further, under the strict terms of the articles, the petitioner would have been restricted from setting up any business in the UK for three years and, therefore, it was no longer quite as enthusiastic about the remedy as it had been when the proceedings commenced. Again, the judge was not impressed by these counter-submissions noting simply that it was "a matter for the petitioner and it should not affect the exercise of the court's powers under s. 996 if the petitioner chooses, and elects, to seek a buy-out order in relation to its shares".

Alternatively, if the minority shareholder was bought out by the petitioner, that would unfairly reward him for his own unfairly prejudicial conduct.

As neither buy-out option would do justice in all the circumstances, the judge noted that in the petition's prayer for relief, in the alternative to a buy-out order was "such other relief as the court think fit".  As the judge, perhaps wryly, noted:

"for the future, those who draft unfair prejudice petitions may wish to consider limiting such rolled-up relief to 'such other relief as the petitioner may invite the court to grant'" (emphasis added).

In light of the broad statutory powers under section 996, and the open door of the prayer for relief, the judge declined to make a buy-out order and instead made orders as to the future conduct of the company.

It is clear from the Addendum to the judgment that this suited neither the petitioner nor the respondent, with indications of an appeal quickly being made. However, as the judge observed:

"where both children have started throwing their toys out of their respective prams (as has been the case here), nanny may sometimes have to impose order upon them".

Following a further 19 paragraphs of additional judgment, it appears that the parties conceded to the appropriateness of the remedy in all the circumstances, and acceded to "nanny's" order.

Osborne Clarke comment

This case is unusual in many respects and it is unlikely that such specific facts will arise in every case.   However, the judgment is a reminder that it is critical to give clear thought as to what it is the court is being asked to do.

The English courts have very broad powers of case management and, in some cases, to grant whatever remedies they think fit, particularly in unfair prejudice petitions. Sometimes the objectively equitable exercise of those powers can give rise to a result which none of the parties are happy with.

To avoid such surprises, it is important – from the outset of any claim, and in the rush to issue proceedings – to keep your focus on your desired outcome.

 

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