In a recent case involving Cardiff City Football Club, a minority shareholder filed an unfair prejudice petition against the majority shareholder, alleging a dilution of his shareholding was unfair and motivated by personal enmity rather than commercial purposes.
The case was centred on the complex commercial arrangements involved in football club share valuation, which is a landscape infamous for turbulent fluctuation, significant levels of debt and unique contractual agreements.
In this blog we look at what unfair prejudice is, and how this recent case provides an invaluable insight into the intricate nuances involved when a court must consider an unfair prejudice petition and how it acts as a useful road map of the hurdles a petitioner must over come if they are to be successful.
What is unfair prejudice?
Unfair Prejudice is often analogised as being akin to corporate divorce.
Usually, unfair prejudice petitions are presented after relationships between breakdown in a private limited company. In these circumstances, it is often the case that a minority shareholder will petition the court for an order that their shares be bought out by the majority shareholder(s).
Section 994(1) of the Companies Act 2006 states that a member of a company may apply to the court for an order on the grounds that:
- a company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or
- an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial
Background to the case
The petitioner (Mr Isaac) was a minority shareholder of approximately 3.9%, in Cardiff City Football Club (Holdings) Limited, (the Company) which is the holding company of Cardiff City Football Club Limited, (the Club). The majority shareholder, Mr Tan held approximately 94% of the shares at the time.
Both the Club and Company were advanced significant loans by Mr Tan. The high levels of debt involved understandably became a matter of concern to the Club’s supporters, who were worried about the effect it had in the Club’s day to day operations. The situation reached a head in 2016 when the Club was prevented from acquiring new players under UEFA’s Financial Fair Play Regulations, which were first implemented in the 2011/12 football season, following which Mr Tan made a public pledge to reduce the indebtedness of both the Club and the Company, in February 2016.
The unfair prejudice petition
On 18 May 2018, the Company’s board of directors resolved to make an open offer of shares, which was only accepted by Mr Tan. The result was that Mr Tan’s shareholding increased to 98% and Mr Isaac’s shareholding was reduced to just over 1%.
Mr Isaac alleged that this dilution of his shareholding was unfair and prejudicial, and was motivated by Mr Tan’s enmity toward him, following a previous disagreement, rather than proper commercial purposes. In the course of his allegations, Mr Isaac also contended that the Company’s board of directors did not exercise their own independent judgment as they were required to (CA 2006, s 173)) and/or failed to exercise their power to allot new shares only for a proper purpose (CA 2006, s 171).
As a result, Mr Isaac petitioned for a court order to force Mr Tan to buy his shareholding at a fair value.
The Company and Mr Tan, as respondents to the unfair prejudice petition, denied any improper purpose to their allotment and argued that as Mr Tan paid for the new shares by agreeing to write off a substantial sum owed to him personally by the Company, it represented the culmination of the 2016 pledge.
The results of the case
In its decision the court made several rulings:
Mr Tan’s actions did not constitute conduct of the affairs of the Company.
The court found that Mr Tan was entitled as a shareholder and creditor to seek to apply commercial pressure in his own interests, and was therefore acting on his own account rather than conducting the Company’s affairs.
Whilst his motivation for doing so may have been questionable in the moral sense, it was not unlawful or unconscionable in the legal sense.
In respect of the claims under (CA 2006, s 173) and (CA 2006, s 173), the directors were found to have acted independently and with proper purpose, despite there being ulterior motives at play. Mr Justice Johnson found that the overarching commercial rationale for what the directors were being asked to do was sufficient enough that the board would have come to the same conclusion in the interests of the Company, despite Mr Isaac’s position.
Lessons
Unfair prejudice disputes are often lengthy and bitter. Broken relationships and ingrained positions can lead to claims that are out of touch with reality.
The court’s decision in Re Cardiff City Football Club (Holdings) Ltd, should serve as a stark reminder to the potential petitioner that the courts will usually meet sentiment with pragmatism and commercial reality.
In this case Mr Isaac could not point to any breach of a shareholders’ agreement or articles of association. He simply argued that Mr Tan’s actions were unfair. However, as the court found, moral unfairness and unfair prejudice in the legal sense are two distinct concepts.
How can Morr & Co help
If you would like to find out more about this unfair prejudice case or any other issue regarding your business, speak to our team today.
Contact us today on 01737 854 500 or email [email protected] to make an appointment to find out more.