A recent decision has highlighted areas of potential exposure to, amongst others, shareholders, and also to directors and officers and their D&O insurers.

The case concerned improper attempts by a significant shareholder in a company to assert control over the company. The court held that this can amount to conduct which is unfairly prejudicial to the interests of the members of the company, or to some of the members. Further, the court may, in appropriate circumstances, order the shareholder who has caused the prejudice to sell his shareholding to the member who brings the petition. A recent decision has highlighted areas of potential exposure to, amongst others, shareholders, and also to directors and officers and their D&O insurers.

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A recent decision has highlighted areas of potential exposure to, amongst others, shareholders, and also to directors and officers and their D&O insurers.

The case concerned improper attempts by a significant shareholder in a company to assert control over the company. The court held that this can amount to conduct which is unfairly prejudicial to the interests of the members of the company, or to some of the members. Further, the court may, in appropriate circumstances, order the shareholder who has caused the prejudice to sell his shareholding to the member who brings the petition.

In a recent decision, the court was faced with a relationship between two shareholders, in a jointly-owned company which had completely broken down. The petitioner was a venture capital fund that had invested in a private company founded by an entrepreneur. Under the terms of the investment, a new CEO and COO approved by the fund were appointed as additional directors, and the entrepreneur became Chief Technical Officer with primary responsibility for R&D and for protecting the company's intellectual property. It was submitted in evidence that the entrepreneur found it difficult to accept that he "no longer had overall management control of the company as part of his employment responsibilities".

When relations broke down, and the entrepreneur sought to take control of the company at board level, the fund brought a petition under s.994 of the Companies Act 2006 alleging that the conduct of the entrepreneur amounted to unfair prejudice. The court categorised the relationship between the two shareholders as a "quasi partnership": a relationship based on mutual trust and confidence where the shareholders have an understanding that they each expect to be involved in the running of the company (which might not be reflected in the articles of association and other formal documents). In this case there was an agreement that both parties would co-operate in the conduct of the company's affairs.

The court reiterated that where a quasi-partnership relationship irrevocably breaks down as a result of the conduct of party to the partnership, that can amount to unfairly prejudicial conduct. The court went on to hold that:

1. mismanagement of a company's affairs may amount unfairly prejudicial conduct, although this must be more than conduct which at the time was reasonable, but subsequently turns out not to have been in the company's best interests;

2. a significant shareholder who improperly asserts rights of control over the practical management of the affairs of the company may be acting in an unfairly prejudicial manner. Further, this improper exercise of management functions need not be as a director; acting as a senior manager may be enough; and that

3. in this case, the failure of the entrepreneur to adhere to his agreed management role; his failure to accept decisions of the board of directors as to expenditure; his failure to give consideration to further financing options for the company; and his improper attempts to wrest control of the company, amounted to unfairly prejudicial conduct.

In the event of a successful petition for unfair prejudice, the court will usually order that the wrongdoer purchase the petitioner's shareholding. In this case, however, the court ordered that the entrepreneur had to sell his shares to the petitioner. This is a welcome remedy, particularly in situations where the wrongdoer is unlikely to be able to afford to buy the shares (especially if they are valued as at the date prior to the breakdown in the relationship, rather than the date of the petition or the date of the purchase).

Further reading: Oak Investment Partners XII Limited Partnership v Boughtwood & Others [2009] EWHC 176 (Ch)

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 16/02/2009.