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Court of Appeal decision is warning to shareholders preparing statements of case in unfair prejudice petitions

Posted on 19 January 2022

Directors and shareholders alike should pay close attention to the recent decision of the Court of Appeal in Primekings Holding Limited and Ors v King and Ors. The judgment serves as a warning to minority shareholders when framing their statements of case in unfair prejudice petitions made under section 994 of the Companies Act 2006 ("s.994 Petition").

Background

The Kings (the "Respondents") were minority shareholders in Primekings Holding Limited (the "Appellants"). Following a long-running and multifaceted dispute with the company, they presented a s.994 Petition, seeking an order for a buy-out of their shares. The Points of Claim in support of their petition included various allegations about Primekings' directors relating to the conduct of costs proceedings against the Kings. Primekings and its directors sought to strike out those parts of the Points of Claim, but their application was refused at first instance. Primekings and its directors subsequently appealed the decision.

Unfair prejudice petitions

A s.994 Petition can be a powerful tool in the hands of a minority shareholder. If it can be established that:

  • the affairs of the company are being, or have been conducted in a way that is 'unfairly prejudicial' to its shareholders generally, or some of them (including at least the petitioner); or
  • an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial,
  • then the court has a wide discretion to make such order as it thinks fit. In many cases that will include an order for a buy-out.

However, the potential breadth of the remedy, and the opportunity to make extensive allegations aimed at company directors and fellow shareholders, is mitigated by the express requirement for the acts complained of to be an act or omission of the company, or conduct of the company's affairs rather than acts done in the conduct of shareholder's personal affairs. 

Nevertheless, in Graham v Emery (2015), it was held that conduct of shareholders or third parties could be included in a s.994 Petition, provided the petitioner can establish a causal connection between those acts and some other act or omission constituting conduct of the affairs of the company.

The issues before the Court of Appeal

The key issue before the Court of Appeal in Primekings was whether, and if so in what circumstances, it is permissible to include allegations of personal conduct by the respondents to a s.994 Petition, even though the allegations are not of themselves within the scope of s.994.

The first instance judge, with regard to Graham v Every, held that the Respondents had pleaded a sufficient causal link or connection between the Appellants' alleged personal conduct and the conduct of the affairs of the company. However, the Court of Appeal noted that this amounted to a reformulation of the test in Graham v Every, and to the extent that it suggested that some "link" other than a causal connection might suffice, then the judge was wrong.

Lord Justice Snowden highlighted the particular importance to s.994 Petitions of the principle that statements of case should only set out the facts that go to make out each essential element of the cause of action relied upon. The Points of Claim in this instance came under fire by the Court of Appeal for being extensive and repetitive and drafted in a narrative akin to an advocacy piece for a trial opening.

It may be legitimate for a concise statement of personal acts of the respondents which are causally connected to an act or omission of the company (or causally connected to conduct of the company's affairs) to be pleaded in a statement of case under s. 944. However, the Court of Appeal concluded there was no justification for allowing other allegations of personal conduct to be included. The conduct complained of in this case was not causally connected, and so the relevant paragraphs of the Points of Claim were struck out.

Concluding thoughts

The acrimonious nature of shareholder disputes means that there can be an unfortunate tendency for s.994 Petitions and pleadings to raise personal grievances and complaints against a diverse range of respondents, even where they have little to do with the complaint against the company. The decision in Primekings is therefore a welcome reminder that despite high tensions, s.944 Petitions should remain within their proper scope.

To shareholders, the Court of Appeal's decision is a warning against including allegations in their statements of case that lack a causal connection to the conduct of the company's affairs or the acts or omissions of the company. Quite apart from the risk of a strike out application, including unnecessary allegations runs the risk of complicating and obscuring what may otherwise be a good claim. 

For directors and other shareholders meanwhile, the Court of Appeal's decision will come as some relief to those facing minority shareholders seeking to cast a wide net of allegations against them. Such allegations are often costly and time-consuming to deal with, involving extensive disclosure and potentially uncomfortable and irrelevant cross-examination. The Court of Appeal's clear guidance that such personal allegations must be causally connected to the conduct of the company's affairs means that the scope for making them is more limited. Nevertheless, such respondents should be aware that if a causal connection can be established, they may not be able to avoid a s.94

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