Navigating the labyrinth: a look at shareholder agreements and unfair prejudice

In the complex world of business, personal relationships and business interests often intersect, sometimes leading to clashes that can result in claims of unfair prejudice. Two recent High Court cases, Saxon Woods Investments Ltd v Francesco Costa & Ors [2024] EWHC 387 (Ch) and Wells v Hornshaw [2024] EWHC 330 (Ch) have thrown a spotlight on the importance of transparency, equitable conduct, and clarity of agreed processes in such situations.

Decoding unfair prejudice

The term “unfair prejudice” is used to describe a situation where a company’s actions, typically orchestrated by its majority shareholders, are conducted in a manner that unfairly disadvantages one or more minority shareholders. This concept is anchored in the principle that all shareholders should be treated equitably and that the company’s affairs should be managed in the interest of all shareholders, not just the majority.

If a minority shareholder feels they have been treated unfairly – for instance, if the company makes decisions that solely benefit the majority shareholders or conducts business in a way that devalues the minority’s shares – they can bring a claim to the court. If the court decides that unfair prejudice has occurred, it has broad discretion to order remedies, with the most common remedy being to order that the aggrieved shareholder’s shares be bought at a fair value.

Saxon Woods Investments Ltd v. Costa & Ors: a tale of failed exits

The dispute in Saxon Woods Investments Ltd v Francesco Costa & Ors [2024] EWHC 387 (Ch) revolved around the company and its shareholders’ commitment to collaborate in good faith towards an “Exit” (defined in a shareholders’ agreement as either the sale of the shares in the company or the sale of its business and assets) by no later than 31 December 2019.

Franceso Costa, the chair of Spring Media Investments Limited and an indirect shareholder, instructed a financial adviser to start a sale process to realise the company’s value. However, it became clear that the scope of engagement he agreed with the adviser was broader than an “Exit”, encompassing alternatives such as additional fundraising rounds and reorganisations, with no explicit requirement in the engagement to achieve an “Exit” by the specified deadline. Mr Costa retained rigid control over the relationship with the financial adviser concerning the sale process, restricting others from communicating with the financial adviser and going so far as to intentionally exclude one minority shareholder from the process by withholding information and refraining from proper engagement with potential sale opportunities introduced by that other shareholder. No “Exit” was achieved by the end of 2019.

The court ruled that this conduct constituted a breach of the shareholders’ agreement and that Mr Costa’s actions resulted in a failure to act in good faith towards achieving the desired “Exit” objective and the neglect of other opportunities presented. The court determined that because of this Saxon Woods Investment Limited had suffered unfair prejudice as it had been unable to sell its shares as envisaged by the shareholders’ agreement, and that the proper remedy was for the court to make an order for its shares to be bought.

Wells v. Hornshaw: the vexations of valuation

The Wells v Hornshaw [2024] EWHC 330 (Ch) case concerned Transwaste Recycling and Aggregates Limited (TRAL), a waste management business owned by Stuart Wells and Paul and Mark Hornshaw.

After the company’s premises were raided by HMRC and the police, Mr Wells, holding 14.3% of TRAL’s shares, sent an email stating his decision to leave TRAL. This email was interpreted as an intention for a “clean break”, including the sale of his shares. This led to a dispute around the valuation of the shares and Mr Wells arguing against a minority discount. Dissatisfied with the process and arguing that there had been improper conduct by the Hornshaw brothers, including TRAL having made some excessive payments, Mr Wells brought an unfair prejudice claim.

The court found that although the actions of the other shareholders before the email had been prejudicial, they were not unfair actions as Mr Wells had the benefit of the sale mechanism in the shareholders’ agreement as a route to obtaining fair value for his shares. Further, it was decided that the acts of the Hornshaw brothers after that time were essentially excluded from being unfair or prejudicial as Mr Wells’ position had effectively crystallised on the date of the email.

Exiting the labyrinth: key takeaways

• Clear agreements: Both cases underline the importance of clear and comprehensive shareholder agreements that anticipate and provide for potential disputes. In the case of an “exit”, what exactly is it? When would obligations regarding an exit arise? What are those obligations – is it simply to consider opportunities as they arise or to take active steps to seek an exit, including engaging professional advisers? Majority or controlling shareholders will want clarity on any such exit terms to avoid a minority shareholder being inadvertently enabled to force an exit.

It’s crucial to be clear on what the “triggers” for any share transfer processes may be and to have clarity on exactly how and at what point in time the shares are to be valued for the purposes of that process.

• Transparency: Directors and controlling shareholders need to conduct corporate affairs in a manner that is not only legally compliant, but also perceived as fair by all stakeholders. Supplying clear, timely information and ensuring that all shareholders are treated equitably is crucial.
• Avoid conflicts: Directors need to be particularly cautious of actions that could be construed as self-serving or that neglect the interests of the company or any group of shareholders. It is important to take proactive steps to implement measures to identify and address potential conflicts of interest before they add to a situation where resentment builds.

These cases serve as a reminder of the complexities of shareholder disputes. They highlight the need for participants to navigate carefully through the maze of shareholder relations, ensuring they are well-prepared to handle any challenges that may arise.

If you wish to discuss any of the issues outlined in this article, then please contact Nick Burt in our Corporate Team or Laurence Weeks in our Commercial Litigation Team.