Unfair Prejudice: Flexible But Unpredictable?

• Published date: 19 August 2021
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Directors and Officers, Shareholders
• Law Firm: Gatehouse Chambers
• Author: Mr Jack Dillon

The core features of successful unfair prejudice petitions are well established - in short: conduct in the management of a company's affairs that causes unfair prejudice to the petitioner's interests as member. What is more difficult, because of the range of factual scenarios seen in practice and the breadth of the court's discretion, is predicting whether those features are present in certain cases. This round-up looks at the following themes and lessons from the following five recent unfair prejudice decisions: (1) the nature of a concession; (2) quasi-partnerships; (3) relevance of subjective intentions and motivations; (4) unfairly prejudicial conduct (including director's duties, conflicts and diversions, exclusion and self-exclusion); and (5) valuations.

Cases covered in this article

These cases amply demonstrate the breadth of factual situations in which unfair prejudice can arise:

• Re Cintep Development [2020] EWHC 3210 (Ch) - a JV company established between an inventor of a recycling shower and an investment company that later sought to 'kill off' the enterprise;
• Re Euro Accessories Ltd [2021] EWHC 47 (Ch) - a dispute over the approach to valuing an exiting member's shareholding in a company manufacturing concrete-pouring accessories;
• Re Gallium Fund Solutions Group Ltd [2021] EWHC 765 (Ch) (31 March 2021) - a shareholder taking control over an investment support services company from his co-shareholder and lifelong friend;
• Re Mansfield Hotel Ltd [2021] EWHC 630 (Ch) - a falling out over participation and dividends between founding members of a hotel business from a Coptic congregation; and
• Re Stratos Club Ltd [2020] EWHC 3485 (Ch) - a director asset-stripping (pun intended) a lap dancing company.

There are lessons to be learned from each, but the overall message is that unfair prejudice remains a flexible remedy offering justice in a wide range of cases but, perhaps for that very reason, can be unpredictable and requires particularly thorough consideration.

1. Concessions

The first lesson concerns a somewhat philosophical question over the difference between a concession and agreed directions. In Gallium agreed directions had been given for a 'valuation only' trial but at the PTR the respondent raised that it wished to contest liability. The petitioner argued that unfair prejudice had been conceded. Instead ICC Judge Jones treated the point as a case management issue: the respondent was resiling from a case management agreement, not a formal concession in its pleaded case. Directions were ultimately varied after the petitioner (commendably candidly) accepted that they could be ready for trial on liability. In a sense, this was all a bit academic: even if unfair prejudice is admitted generally, relief cannot be determined in a vacuum. Unless there is no material factual dispute - unlikely - findings on the underlying facts will almost always be required so that the remedy can be sculpted to remedy the unfair prejudice.

2. Quasi-partnerships

One of the themes running through the cases is quasi-partnership in the Re Westbourne Galleries Ltd [1973] AC 360 sense. This is an increasingly common basis on which petitions are brought because it widens the lens through which the court can see unfair prejudice - frustrated equitable and personal expectations not merely strict constitutional breaches - and introduces a rebuttable presumption that the petitioner will be bought out without a minority discount¹. This introduces difficulties: in cases not involving partnerships the expectations for the management of the company are generally set out in black and white in the company's constitutional documents; quasi-partnership cases ask questions about the very basis upon which the members formed the company.

Quasi-partnerships arose in Stratos through a...