The High Court, in an appeal concerning a petition for unfair prejudice, examined the claims of a minority shareholder who alleged that the company and its founder had breached various agreements and unfairly diluted their shareholding.
Facts:
Company A was a start-up co-founded by Mr. Broadbent and Mr. Dixon. Both founders had made significant loans to the company. In 2021, Magic Investments invested approximately £1m into the company based on a valuation of around £45m. Magic’s investment was governed by three documents, specifically a subscription agreement, a deed, and a nomination agreement. The subscription agreement included provisions for the company to amend its corporate documents in the future and required the parties to act in "good faith" to do so. The nomination agreement stated that Magic would be entitled to nominate a person to the company's board of directors.
In late 2021, all shareholders, including Magic, consented to the termination of the original shareholders' agreement and adopted new articles of association. However, no new shareholders' agreement was put in place. In 2022, the company offered new shares. Mr. Broadbent converted over £1.1m of his founder’s loans into equity as part of this offer. However, Magic protested this action.
In response, Magic filed a petition under Section 994 of the Companies Act 2006, alleging that the conduct of the company's affairs was unfairly prejudicial to its interests. The petition was based on three main allegations, specifically breach of the nomination agreement, a failure to amend corporate documents in good faith, and unfair dilution through share issuance and loan conversion.
The first respondent applied for and was granted a reverse summary judgement dismissing all allegations. Magic appealed.
Decision:
The High Court dismissed the appeal based on the fact that the claims had no realistic prospect of success and had, therefore, been correctly dismissed in the initial summary judgement. The Court reasoned that the nomination agreement was a very informal document that conferred a right to "nominate" a director, but not a right to appoint one. A significant right, such as appointing a director, would typically be delineated in a formal shareholders' agreement or within the articles of association, rather than an informal letter. Moreover, the nomination agreement did not preclude the company from exercising its discretion.
The Judge viewed the relevant clause in the subscription agreement as a mere "agreement to agree" and not a binding promise. It stated that new corporate documents would be created "subject to the other shareholders… agreeing to the same". This meant there was no guarantee that any new agreement would be reached, and the company was only obliged to use good-faith endeavours to seek one, which the Judge found it had.
The Court determined that the aspirations of the subscription agreement were, in fact, performed by the deed of release and the adoption of the new articles of association. Since Magic itself had consented to this process, it could not later claim that the company had breached its obligations by failing to produce a new shareholders' agreement. The Court stated that the petition was effectively an attempt by Magic to "revisit and reopen agreements" it had already entered into.
The Court also dismissed the "pure dilution allegation," which claimed unfair prejudice because of the favourable conversion of the founder's loans. The Judge reasoned that all shareholders had the opportunity to participate in the share offering on the same terms, and Magic's choice not to participate did not constitute evidence of prejudice. The conversion of debt to equity by the founders was neither a breach nor prejudicial, as they were paying the same price per share as everyone else.
Implications:
This judgement sets a high bar for what constitutes unfair prejudice under Section 994 of the Companies Act 2006. It confirms that a shareholder's disappointment or a failure to achieve a desired outcome is insufficient to prove unfair prejudice. The Court will not intervene if a shareholder agrees to a course of action and then tries to challenge it later.
The case provides a stark warning about relying on informal or aspirational agreements. The Judge's reasoning that the nomination agreement is not a binding right to appoint a director, and that the subscription agreement is merely an "agreement to agree", highlights the necessity of having clear, formally executed contracts. For investors, this underscores the need for robust shareholders' agreements and articles of association that explicitly set out their rights.
The Court's analysis of the "good faith" clause in the subscription agreement shows that this duty does not guarantee a specific result. The company was found to have fulfilled its duty by making reasonable efforts, even if a new shareholders' agreement was never reached. The case clarifies that a good-faith obligation is about process rather than a promise of a particular outcome.
The Judge's rejection of the dilution allegation is a critical point, as it confirms that a shareholder who chooses not to participate in an offering made available to all shareholders on a non-discriminatory basis cannot then later claim they were unfairly prejudiced by the resulting dilution. This gives companies confidence that they can raise capital from existing shareholders without being vulnerable to such claims.