Unfair prejudice: a powerful but remote remedy
Shareholders have the right to challenge decisions of a company that cause them unfair prejudice, under section 994 of the Companies Act 2006 (the Act). However, Courts have historically restricted the circumstances in which a petition for unfair prejudice will succeed. The recent decision in Re Cardiff City Football Club (Holdings) Ltd  EWHC 2023 (Ch) continues this trend and emphasises the Courts’ narrow application of the doctrine. It provides helpful guidance for shareholders and companies about the threshold for unconscionable conduct required to succeed in an unfair prejudice claim.
The Petitioner, Mr Isaac was a minority shareholder of 3.97% of the shares in the Second Respondent, Cardiff City Football Club (Holdings) Ltd (the Company). The First Respondent, Mr Tan, was the majority shareholder with 94.22% of the shares. Mr Tan also provided substantial lending to the Company.
At Mr Tan’s proposal, the board approved an open offer of shares made by the Company in May 2018. The offer allowed qualifying shareholders to subscribe for five new ordinary shares for every two existing shares at their nominal value of 10p per share (the Offer). Mr Tan was the only shareholder to take up the Offer, which resulted in Mr Tan’s shareholding increasing to 98.3% and Mr Isaac’s reducing to 1.18%.
Mr Isaac brought a claim under section 994 of the Act. He alleged that:
- Mr Tan had orchestrated the Offer for an improper purpose; namely, alleged personal animosity between them;
- The Offer was unfairly prejudicial as it had the effect of diluting Mr Isaac’s shareholding to a nominal amount; and
- The board of directors failed to exercise their own independent judgment (as required by section 173 of the Act) and/or their power to allot new shares only for a proper purpose (as required by section 171 of the Act).
The Respondents denied the allegations and said that Mr Tan’s motive in proposing the Offer and the board of directors making it, was to considerably improve the Company’s balance sheet and therefore for a proper commercial purpose.
The Court decided that Mr Tan had mixed motives for proposing the Offer: (1) animosity between him and Mr Isaac due to a previous disagreement which led to Mr Isaac’s resignation as a director of the Company; and (2) his wish to increase his shareholding to above 99%, thereby reducing Mr Isaac’s shareholding.
However, despite those mixed motives, the Court agreed with Mr Tan and the Company that the Offer was a genuine commitment to convert debt into equity and that, despite his agenda, Mr Tan was entitled to put pressure on the Company as its shareholder and creditor.
The Court also decided that Mr Tan’s actions did not constitute affairs of the Company – a requirement under section 994 of the Act. Rather, he had applied pressure as a shareholder and creditor, which were personal actions. It also held that while Mr Tan had “behaved unfairly in a general sense”, his actions were not unfair or unconscionable in a legal sense because there were no relevant legal or equitable restraints upon him (e.g., a shareholders’ agreement) and he was free to use either his shareholding or leverage arising from his position as a creditor as he wished. Finally, the Court rejected the submission that the board had breached their directors’ duties under the Act. The board had acted in the best interests of the Company by reducing its indebtedness. Consequently, there was no prejudice to Mr Isaac, despite the “moral" unfairness.
The decision reiterates the challenges in proving unfair prejudice petitions. The Court has emphasised that it is not sufficient for petitioners to demonstrate unfair conduct; that conduct must constitute the company’s affairs and, as a practical matter, petitioners will have to point to unconscionable actions beyond a shareholder/creditor’s right to exert commercial leverage.