Section 994 of the Companies Act 2006 PDF

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This is an essay on Section 994 of the Companies Act 2006, it is quite detailed and my tutor marked it well...

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Q. ‘Section 994 of the Companies Act 2006 is effective in protecting minority shareholders.’ Discuss. The assertion under consideration requires a detailed discussion as to the effectiveness of one of the protective measures employed to safeguard the rights of minority shareholders, namely the unfair prejudice remedy contained in section 994 of the Companies Act 2006. This essay will firstly elucidate the remedy and the constituent elements thereof, with a specific focus on the different hurdles a shareholder (in seeking to rely on this provision) must overcome to be successful, and the various remedies employed by the courts in such a case. In order to address the provision’s effectiveness, as an assessment of the statement primarily requires, the ability of the provision to protect the rights of minority shareholders must be analysed in detail in order to support this essay’s assertion that in modern company law, the unfair prejudice remedy provides the most effective form of protection for minority shareholders. The unfair prejudice remedy has evolved over a period of time into an extremely valuable remedy available to minority shareholders in the UK, especially those in small private companies. However, even though it has greatly enhanced minority shareholders’ protection due to its broad scope of application and flexible remedies, the unfair prejudice remedy is not without its problems. There remain numerous hurdles to a successful claim and the likelihood of success greatly impacts the effectiveness of the provision in providing adequate protection to minority shareholders. The unfair prejudice remedy originated from the oppression remedy, contained in section 210 of the Companies Act 1948. Before this provision was introduced, aggrieved shareholders could either bring a derivative claim at common law or petition for the winding-up of the company on the just and equitable ground. Due to the restrictive judicial interpretation thereof, in 1962, the Jenkins Committee reviewed the operation of the remedy and recommended its amendment to cover complaints where the affairs of the company were being conducted in a manner unfairly prejudicial to the interests of the petitioner. This was adopted in section 75 of the Companies Act 1980 and section 459 of the Companies Act 1985. The remedy now appears in a restructured form in section 994 of the Companies Act 2006. Section 994(1) stipulates that members may petition the court on the grounds that (a) the company’s affairs are being or have been conducted in a manner that is (b) unfairly prejudicial to the interests of its members (in whole or in part) or that any actual or proposed act or omission of the company is or would be so prejudicial. It applies to a petition brought by either a member of the company or a person who is not a member but to whom shares have been transferred by operation of law, for example, a personal representative and a trustee in bankruptcy by virtue of section 994(2).

The ‘conduct’ of the company’s affairs is described in various cases such as Re Legal Costs Negotiations Ltd as acts done by the company and not referable to the conduct of an individual shareholder in his private capacity. In Re Charterbridge Ltd, the Court of Appeal noted that it

‘plainly covers all matters decided by the board of directors’. Sales J adopted a purposive approach to the provision in Oak Investments Partners Ltd v Boughtwood and stressed that it is concerned with ‘the practical reality on the ground’ and that the precise distribution of management decision-making authority in a company may be a matter of chance. The conduct of a significant shareholder or director who improperly asserts control over the management of the company’s affairs may be acting in an unfairly prejudicial manner and this conduct need not be as a director. The aforementioned case law illustrates that the courts have adopted a more flexible approach towards this requirement, which may prove beneficial for the protection of minority shareholders as the misconduct complained of can be that of a director and a shareholder, depending on the circumstances of the case. The second requirement is that the conduct complained of must be unfairly prejudicial to the interests of the petitioner qua member. Even though early case law took a narrow view of the term ‘interests’, more recent case law is wider in its approach to the scope thereof. This points to a wider range of interests that a minority shareholder can claim for under this provision. In Re a Company, Hoffman J stated that the application of the provision must take into account that ‘the interests of a member are not necessarily limited to his strict legal rights under the constitution of the company’, thereby recognising shareholders’ legitimate expectations. This approach strongly influenced the development of the unfair prejudice remedy in a way that has enabled the protection of minority members’ wider interests and expectations beyond their strict legal rights (under the articles and the Companies Act). Additionally, the judge in Re Sam Weller & Sons Ltd observed that ‘the word interests is wider than a term such as rights’ and that its presence as part of the test ‘to my mind suggests that Parliament recognised that members may have different interests, even if their rights as members are the same’. Therefore, it can be said that the use of the term ‘interests’ is meant to be expansive in effect. This is another indication of the wide range of application of section 994, as a result of which, more and more rights of minority shareholders can be protected. The third element the petitioner must establish is that the conduct in question is ‘both prejudicial to the relevant interests and also unfairly so’ (Re a Company, ex parte Schwarcz). In O’Neill v Phillips, the only House of Lords decision on the unfair prejudice remedy, it was held that a member would be unlikely to be entitled to claim that the conduct was ‘unfair’ unless there had been a breach of certain terms on which the members agreed that the affairs of the company were to be conducted or there was a use of established rules in a manner that equity would regard as contrary to good faith. Lord Hoffmann noted that fairness is to be determined by reference to general equitable principles. The application of equitable considerations depends on both the nature of the company and the relationship among its members. Where the company is purely based on commercial gain, as is a public company, the entire relationship of the parties is exhaustively determined by the constitution and there is therefore no scope for equitable considerations to arise. However, the same equitable considerations may make it unfair for those conducting the affairs of the company to rely on their strict legal rights to avoid liability. Where the company is akin to a

quasi partnership, and is founded upon mutual confidence and trust, shareholders tend to play a role in the management of the company, based on informal agreements that they would either be entitled to participate in management (Re Saul D Harrison & Sons plc). It can be seen that the courts have strived to create a balance between certainty and flexibility in the establishment of the aforementioned principles and have taken a purposive approach towards the provision which, of course, was introduced as a protective measure for disadvantaged minority shareholders. Even though the aforementioned requirements act as hurdles that a shareholder must overcome in order to establish a petition but the courts have also been quite accommodating in employing equitable principles to reach a fair and just outcome for the parties involved. There are numerous examples of unfairly prejudicial conduct that the court will accept in a petition under section 994 including exclusion from management, which encompasses the majority of petitions (Re BC & G Care Homes Ltd), especially where a small quasi partnership company is involved (Brownlow v GH Marshall Ltd). Other typical allegations include breaches of the company’s articles of association, breaches of directors’ duties involving misappropriation of corporate assets (Re Little Olympian Each-Ways Ltd), improper allotments of shares (Dalby v Bodilly), allegations of mismanagement or managerial incompetence, the scope of which is limited as the courts have repeatedly stressed that they would be reluctant to find that management decisions could amount to unfair conduct. According to Re Elgindata, the only breach of duty that could support a petition under section 994 is a breach by a director of his duty of skill and care. However, the court has been willing to find unfair prejudice absent a breach of the aforementioned, albeit in exceptional circumstances (Re Macro (Ipswich) Ltd). If the directors breach their fiduciary duty, the courts are more willing to find liability (Re London School of Electronics Ltd, Re Elgindata). They are also willing to do so where directors have taken excessive remuneration or have failed to pay dividends (Re Cumana Ltd, Anderson v Hogg). Although there are always cases to the contrary, it appears that section 994 is a fairly wide provision under which minority shareholders are able to bring claims regarding a number of different types of misconduct. In the event that an action is successful under section 994, the section 996 contains various remedies that are available to the petitioner. Unlike winding-up on the just and equitable ground, it can be seen that the court has a wide discretion as to what type of relief should be granted in the given case. This is advantageous to shareholders as this provision allows the court to fashion a remedy according to the exact nature of the wrong done (Re a company, ex parte Estate Acquisition & Development Ltd). The court can order a company to refrain from the misconduct (Whyte Petitioner), it can allow the petitioner to bring a derivative claim (Re Cyplon Development Ltd) in which case it is even possible for a Wallersteiner order to be granted in respect of costs. Nevertheless, based on its survey of unfair prejudice cases, the Law Commission Report concluded that the relief most commonly sought was an order for the purchase of the petitioner’s

shares by either the company or the respondents as seen in the case of Grace v Biagioli, and Harborne Road Nominees Ltd v Karvaski (2011) When a court makes such an order, it has a choice as to the date and basis of the valuation of shares; following a review of the approach to the valuation of shares in Re Bird Precision Bellows Ltd, it was decided that the guiding principle would be to fix a price that is fair in all the circumstances. In Birdi v Specsavers it was stated that ‘the price payable for a petitioner’s shareholding should include a sum to make good the prejudice which has been unfairly suffered by the petitioner’. This illustrates that not only are there a number of options available to the courts in deciding the most appropriate remedy, but the courts also intend on ‘making good’ the prejudice in the interests of fairness. An article in the New Law Journal (Issue 7730) by Daniel Lightman QC refers to the unfair prejudice provision as ‘the flexible friend’ and states that ‘recent case law has emphasised just how versatile a weapon the power to present an unfair prejudice petition under s 994 of the Companies Act 2006 can be for a minority shareholder’. He goes on to state that as the courts are mindful of the fact that Parliament intended the courts to adopt a flexible approach towards the provision, they have taken a view akin to that of Lady Justice Arden in Re Macro (Ipswich) Ltd that section 994 “has an elastic quality which enables the courts to mould the concepts of unfair prejudice according to the circumstances of the case” and this is why the courts have consistently interpreted the provision quite broadly. However, the Law Commission (1996) criticised the provision as enabling petitioners to argue about facts that may be remotely relevant to the case, leading to complex, costly and vexatious litigation. According to Sealy the provision may be used as a means of oppression by minority shareholders because of both its broad scope and easy access. Given the fact that the provision appears to be a personal remedy, it can perhaps be seen as being too widely interpreted in certain circumstances; there are recent cases to support the proposition that the provision may include relief for corporate wrongs. In Clark V Cutland it was held that relief in relation to a corporate wrong may be obtained. Similarly, In Atlasview Ltd v Brightview Ltd, the court accepted that a breach of duty would be the classic example of conduct which is unfairly prejudicial to the interests of members ‘generally’. Thus in circumstances where a wrong is done to the company, it appears that the court may award corporate relief directly under the unfair prejudice remedy. Hannigan argues such a petition should be struck out and the claimant should be required to seek permission to continue a derivative claim under Part 11. Using Section 994 to redress corporate wrongs without going through the hurdles of derivative proceedings may lead to abuse of process. Thus, the courts face the challenge of balancing their wide discretion to protect minority shareholders from unfairly prejudicial conduct on the one hand and preventing malicious and vexatious lawsuits on the other. Even though the earlier case law on the matter suggests that the court was willing to participate in a fact intensive exercise in order to apportion fault, more recent case law does show that the court may now be less willing to do so, showing a move away from the fault based approach (Re RA Noble & Sons (Clothing) Ltd, Phoenix Office Supplies Ltd v Larvin, Re Tottenham Hotspur Ltd). Therefore, the court may be willing to intervene to

provide effective protection to minority shareholders, while also limiting the application thereof to cases where it is appropriate to do so. In seeking to conclude this essay, it can be said that the unfair prejudice remedy appears to be the most effective form of redress for minority shareholders in modern company law due to its broad scope of application and flexible forms of relief (Apex Global Management Ltd v Fi Call Ltd (2013). Compared to the complex procedures in derivative actions and the extreme consequences of a winding-up order (section 122(1)(g) Insolvency Act 1986), section 994 provides a wider and more balanced course of action for minority shareholders. Recent cases such as Thomas v Dawson (2015), Wootliff v Rushton-Turner (2016), Sikorski v Sikorski (2012), Re Neath Rugby Ltd (No 2), Patel v Ferdinand (2016) all illustrate that the unfair prejudice provision is geared towards the effective protection of minority shareholders in a wide and flexible manner. In Re City Index Limited (2014), Robin Hollington QC stated that ‘the whole purpose of the unfair prejudice remedy is to grant the oppressed minority a remedy which it would not otherwise have’....