Unfair prejudice: Waiver of the statutory right to claim unfair prejudice
Minority shareholders are afforded certain protections by statute, in particular, the right to bring an unfair prejudice petition under section 994 of the Companies Act… Read more
Minority shareholders are afforded certain protections by statute, in particular, the right to bring an unfair prejudice petition under section 994 of the Companies Act 2006. This right was designed to deal with disputes between the members of private companies (usually minority shareholders) who may be the subject of oppression but are prevented by the articles or a shareholders’ agreement from taking effective steps to resolve their difficulties or to realise the value of their investment in the company by a sale of their shares.
Section 994 provides that: “A member of a company may apply to the Court by petition for an order…… on the ground (a) that the 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 (b) 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.”
Common examples of what may constitute unfairly prejudicial conduct are:
- excessive remuneration of majority shareholders in their position as directors;
- the majority shareholder awarding excessive financial benefits to him or herself;
- failure to properly pay dividends;
- misapplication of company funds or property;
- diversion of business to another company in which the majority shareholder holds an interest;
- abuses of power and breaches of a company’s articles of association.
In addition to the protection provided by statute, it is typical for shareholders to enter into a shareholders’ agreement seeking further protection. However, a shareholders’ agreement may provide for any disputes arising under the agreement to be arbitrated, thus preventing the shareholder from applying to the court to bring a claim for unfair prejudice. In this article, we consider whether a shareholder can agree to waive such a statutory right.
Previously, there were two conflicting first instance High Court judgments on this issue. In Re Vocam Europe Ltd  BCC 396, the petitioners were minority shareholders who had been removed as directors of a joint venture company. There was a shareholders’ agreement under which all disputes between the parties whether or not arising under the agreement were to be resolved by arbitration. The High Court judge ordered a stay of the unfair prejudice petition.
The case of Exeter City Association Football Club Ltd v. Football Conference Ltd  1 WLR 2910, the rules of the Nationwide Conference League under which a member club was required to pay football creditors in full as part of any corporate voluntary arrangement (CVA) had caused Exeter City unfair prejudice because it exposed the club to an application by HM Revenue & Customs for the revocation of the CVA. The Football Conference then applied for a stay of the petition under s.9(4) of the Arbitration Act 1996 because the dispute was referable to arbitration under the rules of the Football Association. The High Court in this case refused a stay on the basis that the statutory rights conferred on shareholders to apply for relief were inalienable and could not be diminished or removed by contract (such as an arbitration agreement) or otherwise.
The above two conflicting cases were considered by the High Court in the case of Fulham Football Club (1987) Ltd v Sir David Richards and The Football Association Premier League Ltd  EWHC 3111 (Ch). The Fulham decision arose from Peter Crouch’s transfer from Portsmouth FC to Tottenham Hotspur FC. Fulham FC contested that transfer alleging that Sir David Richards, the chairman of the Football Association Premier League Limited (FAPL), had acted unfairly in the transfer negotiations. By doing so, Fulham alleged that both he and the FAPL had unfairly promoted the interests of one member club over another in breach of its articles of association and its rules (FAPL Rules). Both the FAPL Rules and the FA Rules provided for members to arbitrate disputes. On application to the High Court, the High Court followed the earlier case of Re Vocam Europe Ltd  and a stay of the unfair prejudice petition was granted at first instance.
On appeal, the question for the Court of Appeal was whether it had been open to the parties to agree that matters giving rise to an unfair prejudice petition would be referred to arbitration, and thereby to fetter the shareholder’s right to bring a section 994 petition. The Court of Appeal unanimously dismissed the appeal (Fulham Football Club (1987) Ltd v Richards  EWCA Civ 855) and stayed the unfair prejudice petition to allow referral of the matters to arbitration. Patten LJ, delivering the leading judgment, held that section 994 (“a member of a company may apply to the court”) should not be construed as granting an unfettered right of access to the court. Further, he held that “there is no statutory restriction or rule of public policy which prevents the parties from agreeing to submit such disputes to arbitration”.
This result is in accordance with the judicial tendency to uphold arbitration clauses, unless there is clear language to exclude certain matters from the arbitrator’s jurisdiction. On further application to appeal by the FCC, the Supreme Court refused permission to appeal the Court of Appeal’s ruling.
Based on the above, it therefore seems likely that the court will uphold an agreement by the shareholders to waive their right to bring an unfair prejudice claim. In practice, the Court of Appeal’s decision should be taken into account while drafting dispute resolution clauses in shareholders’ agreements and other constitutional documents, in particular when deciding whether or not to include an arbitration clause.