07 July 2015 #Corporate
In assessing whether unfair prejudice has occurred, the courts will look at the facts objectively and, as a starting point, will examine the basis upon which the ‘aggrieved’ shareholder agreed to become a member of the company, i.e. looking at the articles of association and any formal agreements between the shareholders.
The above was put into practice in the recent Court of Appeal case of Arbuthnott v Bonnyman and Others  EWCA Civ 536). The case involved a minority shareholder, Mr Arbuthnott, who thought that the amendments to the articles of association were unfairly prejudicial to him, as it meant that he was forced to sell his shares at a gross undervalue.
One of the crucial points of the court’s findings was that there was no breach of the legitimate expectations of Mr Arbuthnott, who was a founding member of the relevant business. In other words, Mr Arbuthnott was involved in setting up the company and the original articles of association, and was a party to the original shareholders’ agreement. He had, therefore, agreed to drag-along provisions which meant that he could be forced to sell his shares if the requisite majority of shares had been sold.
The court found that the amendment of the articles had simply been a ‘tidying-up’ exercise (as opposed to, for example, the insertion of a previously absent drag-along provision). Furthermore, the amendment had not resulted in any significant change from the unamended, original articles. In the circumstances, the court found that there was no evidence of bad faith or improper motive. The changes made the articles clearer and more consistent with the Shareholders’ Agreement, and facilitated the transfer and registration of shares compulsorily acquired under the drag along provisions. This was, ultimately, for the benefit of the company, which is an important factor in unfair prejudice claims.
As far as the court was concerned, the shareholders were sophisticated investors with an intimate knowledge of the business and were entitled to think that their actions benefitted the company. The court explained that it was perfectly natural that shareholders would be willing to rely on the honest judgment of the majority (who agreed to sell) as to what were fair and reasonable terms for a sale. The court will not be concerned with questioning shareholders’ judgement provided that it was exercised in good faith and benefitted the company.
In cases like this, an aggrieved shareholder will need to satisfy the court that no reasonable person would have thought the amendment (or the action complained of) was in the company’s best interests. Mr Arbuthnott had not been able to do this and, as such, the court was entitled to find that there was no unfair prejudice.
Before bringing a claim for unfair prejudice regard must be had to the circumstances in which a shareholder ‘signed up’ to the relevant company. The aggrieved shareholder will also need to put aside his disagreement with the action and attempt to objectively assess why the action is being taken and whether it benefits the company as a whole. It cannot be used in circumstances where the aggrieved shareholder simply does not agree with the action.