Case law: Failure to observe underlying understanding led to successful unfair prejudice claim by minority shareholder
Parties involved in a private company must comply with any non-contractual arrangements and/or understandings between them, as well as the company's constitution and other formal agreements, or risk a successful claim from an 'unfairly prejudiced' shareholder.
This update was published in Legal Alert - January 2018
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A businessman was the majority shareholder of a company (Co A) which was, in turn, the majority shareholder of a football club.
Another company (Co B), wholly owned by a second businessman, acquired a 20% shareholding in the football club. The second businessman's daughter subsequently made two loans to Co A.
The football club won promotion to the premiership, creating a significant increase in revenue. The parties involved fell out with each other, and Co B claimed 'unfair prejudice'.
A company shareholder can claim unfair prejudice if they believe the company's affairs are being conducted in a way which is unfairly prejudicial to them in their capacity as a shareholder of the company. If a shareholder successfully claims unfair prejudice the court can order a variety of remedies. The most common remedy is for other shareholders to buy the claimant out at fair value.
Co B argued that there had been unfair prejudice because the daughter's loans had been made on the basis of an understanding that Co B would, in due course, become an equal shareholder in the football club with Co A and, until then, Co B and Co A would manage the football club jointly.
The court found that the written contracts did not contain the full arrangement between the parties, and that this had been deliberate. It therefore agreed that it should take the non-contractual understandings into account when deciding whether Co B had been unfairly prejudiced, as well as the formal contracts. It did so on the basis that when considering whether there has been unfair prejudice, 'the interests of a member are not limited to his strict legal rights under the constitution of the company' but can take into account 'wider equitable considerations', such as the underlying understanding between the parties.
Equitable considerations overriding legal rights will only arise in cases where the relationship between the shareholders is of a personal character, and it is unjust or inequitable to insist on legal rights or to exercise them in a particular way.
Here, Co B was able to show that:
- Co A had made large, improper payments from the club's assets, without its consent, for the personal benefit of the first businessman
- Co A had excluded Co B from the club's decision-making, and withheld material information
The court ruled that:
- This conduct amounted to acts and omissions of the club, as required by the unfair prejudice rules
- The improper payments were disguised dividends, designed to distribute profits to Co A without having to pay a dividend to Co B
- The underlying understanding between the parties was that Co B had a legitimate expectation that it would be treated as an equal participant in the management of the football club, but it had been excluded
The court therefore ordered Co A to buy out the shares of Co B at a fair price.
- Parties involved in a private company should ensure they comply with any non-contractual arrangements and/or understandings between them, as well as the company's constitution and other formal agreements, or risk a successful claim from a shareholder on the basis they have been unfairly prejudiced
Case ref: VBFA v Blackpool FC (Properties) Ltd & Ors  EWHC 2767
Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.