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Section 994 of the Companies Act 2006 states that a member of a company may apply to the court by petition for an order on the ground that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of some or all of its members, or that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial. If the court is satisfied that such a petition is well founded, it may make such an order as it thinks fit for giving relief in respect of the matters complained about.
If shareholders bring such a petition, believing that the company’s affairs are being conducted in a manner that is unfairly prejudicial to their interests, what do they have to prove? The Court of Appeal has recently clarified this question.
The case concerned Kings Solutions Group Limited, a company providing security and fire services. In 2013, Primekings Holding Limited bought shares in Kings Solutions from James and Susan King. After subscribing for further shares, Primekings held about 76% of the shares in the company. Anthony King, a shareholder and director, was granted a put option by which, after three years, he could require Primekings to acquire up to 50% of his shares at fair value.
Various disputes arose between the parties. James, Susan and Anthony King issued a claim for misrepresentation, alleging (among other matters) that Primekings and others had made fraudulent misrepresentations about the unwillingness of the company’s bankers to continue to support the company. The claim was brought to trial, but was withdrawn before the trial was concluded. Primekings was awarded its costs on an indemnity basis, with an interim payment of £1.7 million to be made by the Kings within a month.
The Kings failed to make the interim payment when due, and Primekings applied to the court under Part 8 of the Civil Procedure Rules for an order for the sale of James, Susan and Anthony King’s shares. The judge made an order for the sale, but the parties were unable to agree a mechanism by which the shares could be valued. The Kings eventually made the required interim payment for costs in the misrepresentation claim; they were then ordered to pay Primekings’ costs in the Part 8 claim. Costs were assessed as £2.7 million in the misrepresentation claim and £0.4 million in the Part 8 claim.
The Kings brought a further claim against Primekings alleging an unlawful means conspiracy, pleading that Primekings had pressured them to withdraw the misrepresentation claim by fraudulently inflating its bill of costs. The conspiracy claim was struck out.
The Kings then presented an unfair prejudice petition shortly before the Part 8 claim was heard. The petition alleged that Primekings and the other directors of Kings Solutions had conducted the affairs of the company in a manner that was unfairly prejudicial to the interests of the Kings. Primekings applied for the petition to be struck out. In the High Court, the judge struck out certain paragraphs of the points of claim, but declined to strike out other paragraphs. Primekings appealed.
The disputed paragraphs in the Kings’ unfair prejudice petition alleged, in summary, that Primekings had unfairly obtained the interim costs order and enforced it through the Part 8 claim; that Primekings had obstructed Anthony King’s exercise of the put option; and that Primekings had inflated its costs in the Part 8 claim.
Primekings’ case was that those allegations could not amount to conduct of the affairs of the company. The Kings argued that the actions about which they complained constituted a campaign by Primekings against the Kings to obtain their shares for as small a cost as possible and to exclude the Kings from the business, and that the campaign had caused harm to the company’s business by diverting funds and management time. In the High Court, the judge declined to strike out the disputed paragraphs on the grounds that, if the Kings could prove at trial that Primekings had mounted such a campaign, this could justify the granting of relief under section 994. Primekings appealed.
Giving judgment in the Court of Appeal, Snowden LJ, with whom Nugee and Green LJJ agreed, held that section 994 requires that the acts complained of in an unfair prejudice petition ‘must either (i) be an act or omission of the company, or (ii) be conduct of the company’s affairs rather than acts done in the conduct of a shareholder’s personal affairs’. It was therefore necessary to show a causal connection between the acts done by the shareholders and the conduct of the affairs of the company.
Applying this principle to the matters complained of, Snowden LJ held that, even if Primekings had embarked on a campaign, as alleged, this would not amount to a cause of action under section 994 ‘except if and to the extent that it involved conduct of the affairs of the Company’. As to the put option, that was ‘a personal matter between Anthony King and Primekings’, and so ‘the personal conduct of Primekings in allegedly obstructing the exercise of that Put Option could not conceivably amount to an act or omission of the Company or any conduct of its affairs’. Obtaining the interim costs order, similarly, was a personal action of Primekings; moreover, any order for the sale of the Kings’ shares would have been for a fair price, and so would not have been unfairly prejudicial to them. Finally, the pursuit by Primekings of the detailed assessment of costs of the misrepresentation claim and the Part 8 claim ‘could not possibly amount to conduct of the affairs of the Company, and could also not be said to be causatively connected to any other matters which were conduct of the affairs of the Company’. Primekings’ appeal was therefore allowed.
This case has established that, to succeed in an unfair prejudice petition in relation to the conduct of a company’s affairs, shareholders must show a causal connection between the actions complained of and the conduct of the company’s affairs which led to the unfair prejudice. A link of some other kind between the actions in question and the company’s affairs would not be sufficient.
Click here to read the full judgment on Primekings Holding Limited and others v Anthony King and others  EWCA Civ 1943.
For more information on this article, please contact Brendan Biggs.