The High Court has delivered a significant judgement highlighting the nuanced interpretation of "unfair prejudice" in shareholder disputes, particularly concerning the delicate balance between informal company practices and strict adherence to constitutional documents.
Background:
European Automation Projects Ltd. was a spin-off from a failed previous venture, Oilband Ltd.. Mr. Gu, Mr. Whibberley, Mr. Briggs, and other individual respondents were all former employees of Oilband and later became shareholders in European Automation. The company's business involves providing automation systems, software, and engineering services to the petrochemical industry. It was incorporated in February 2010 and began trading in May 2010.
Initially, the company's share capital was set at 41 shares of £1 each, with each employee being allotted 7 shares, save for Mr. Whibberley, who held 4 shares and his wife 3, while Mr. Dootson held only 6 shares. These shares were issued at a premium of £1,000 per share.
The Articles of Association (AoA) were agreed upon in November 2010. Article 30 (1) allowed directors to pay interim dividends, while (3) mandated that no dividend be declared or paid unless "in accordance with shareholders' respective rights." The Shareholders’ Agreement (SHA) was signed in May 2011 by all individuals except Mr. Gu. The company was run extremely informally, despite the existence of formal documentation, including the AoA and SHA. There were no formal board or general meetings.
From 2011, based on the accountant's advice for tax efficiency, a significant proportion of employee "salaries" were paid as interim dividends rather than as monthly wages. Additional interim dividends were periodically declared by Mr. Whibberley (with Mr. Briggs' agreement) when there was sufficient cash. These were viewed as "bonuses" or additional remuneration.
Despite the existence of different share classes (A, B, C, D, E, F), the company's documents and agreements provided for dividends to be paid proportionately to shareholdings, meaning that all shares effectively ranked equally with respect to dividends.
Mr. Gu's resignation was withdrawn, and he agreed to work part-time for the company when in the UK, with some flexibility concerning his Chinese residency, whereupon his remote work would be paid. Mr. Gu, however, claims that it was not agreed that his additional dividends (to which he was entitled as a shareholder) would be pro-rated based on his work time. Only his "regular monthly remuneration" would be pro-rated. Mr. Gu's petition under Section 994 of the Companies Act 2006 alleges that the affairs of European Automation were conducted in a manner which was unfairly prejudicial to him as a minority shareholder.
Decision:
The High Court considered that the appropriate remedy was to order that Mr. Gu's shares be bought by the company at the Transfer Price, without a discount, as of December 2022. The company must also pay Mr. Gu additional dividends (and not the salary top-up dividends) from and including the 20th December 2022 dividend to the date of sale of his shares pursuant to the Court order, at the same rate per share as was paid to the other shareholders.
The Vice-Chancellor began by affirming that a failure to declare and pay dividends according to a shareholder's entitlement can indeed constitute unfairly prejudicial conduct under Section 994 of the Companies Act 2006. Such conduct is inherently prejudicial and becomes unfair if unjustified. Generally, if the conduct is unlawful and prejudicial, it will also be considered to be unfair. However, the Court emphasises that this is not always the case, as there can be specific circumstances where otherwise unlawful conduct is not deemed unfair to a particular shareholder.
The Judge found that the situation regarding the additional dividends is one of those exceptional cases where, despite a technical breach of the AoA and SHA, the conduct was not unfairly prejudicial to Mr. Gu. However, the Court also found that the company's deliberate failure to activate the share exit mechanism in the SHA after Mr. Gu's resignation was indeed unfairly prejudicial.
Implications:
This judgement highlights that while an act may be "prejudicial" and even "unlawful", it is not automatically "unfair" for the purposes of s.994. The Court will consider the context, the understanding between the parties, and the petitioner's own conduct and expectations. However, what might not be "unfair" at one point in time due to an implied agreement or common understanding can become unfairly prejudicial as and when circumstances change.
While informality is not prohibited, such informality cannot override clear contractual obligations when they are deliberately breached to the prejudice of a given shareholder. The directors' deliberate failure to activate the share exit mechanism was a clear breach of their duties to the company and, implicitly, to its shareholders. Companies and their directors must ensure their formal agreements, including SHAs, are understood, respected, and actively managed, particularly when they involve critical issues such as shareholder remuneration and share exit mechanisms.