Is Unfair Prejudice Caused By A Private Equity Investor Invoking Enhanced Voting Rights Upon Insolvency?

• Jurisdiction: European Union
• Law Firm: Gowling WLG
• Subject Matter: Corporate/Commercial Law, M&A/Private Equity, Corporate and Company Law
• Author: Mr David W. Howell, Catherine Naylor, Sean Adams and Louise Macdonald
• Published date: 21 February 2023

In a recent judgment (Durose & Ors v Tagco BV & Ors [2022] EWHC 3000 (Ch)), the Court was asked to decide whether the actions of a private equity investor demonstrated "unfair prejudice". In this insight we cover what steps companies should take in light of the Court's ruling.

The circumstances of this case concerned where a private equity investor, on the occurrence of an insolvency event, had invoked enhanced voting rights which effectively caused the original shareholders to lose control of the business.

The original shareholders pleaded that the private equity investor had deliberately engineered the insolvency event in order to obtain majority control. The case brought the court to consider the causes of the insolvency and the actions of the private equity investor to determine whether unfair prejudice had come into play.

Summary of the case

The petition was dismissed. His Honour Judge Bird considered that the petitioners entered into a commercial arrangement where the terms were "tightly regulated by a full suite of professionally drawn contracts and documents". On the evidence, the judge concluded that the private equity investor had always acted in accordance with the agreed terms. In the circumstances, it was fair and just to hold the petitioners to the terms of the legal agreements, and they were not permitted to complain that their treatment was "unfair".

The relationship between the parties was purely commercial. All material dealings were carried out via lawyers. The judge was satisfied that all signatories to the investment agreements had had an opportunity to consider the documents, to input into them and to take legal advice on the contents. He found that the petitioners were well aware "this was not a risk-free endeavour" and that an insolvency event would trigger the enhanced voting rights (swamping rights).

The judge found that the causes of the insolvency arose from a combination of factors that included: (i) failure to control the finances of the company after the investment; (ii) control failures leading to over-spending by the company, so that working capital was exhausted; (iii) failure to raise working capital through sales, at least to the extent needed to fund outgoings; and (iv) failure of the first and second petitioners to pay the sums they were obliged to pay.

The judge also found that the company was entitled to exclude and suspend the first petitioner from the company. They had lost trust and confidence in him because he had...