Home Text messaging High Court says shareholders suffered unfair prejudice after they were barred from company’s unique scheme – Shareholders

High Court says shareholders suffered unfair prejudice after they were barred from company’s unique scheme – Shareholders

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In the case of Dodsonand othersv Shieldand others [2022] EWHC 1751 (Ch)the High Court recently found that the shareholders of a company suffered unfair prejudice when they were excluded from a project which was the raison d’être of the company.

Facts. Two shareholders, Mr. Kevin Dodson and Mr. Murry Dodson (the “Applicants”), brought a claim for unjust prejudice under section 994(1) of the Companies Act 2006 (the “CA 2006”). The business of the company, International Automotive Engineering Projects Ltd (“IAEP”), has been defined in a shareholders’ agreement as “the design, sale and realization of turnkey automotive engineering projects on an international scale(the “Shareholders’ Agreement”). The initial project (and the only project ever pursued) concerned the six manufacturing lines used by BMW to manufacture its NG4 engine used in the premises of BMW 3 Series, 1 Series and Mini. The “turnkey” of the project was that the IAEP would ensure that the buyer could start manufacturing car engines immediately after installation.

The petitioners’ case was that in the latter part of 2013, they were kicked out of the project. In particular, the applicants alleged that the respondents had caused unfair hardship by:

  • divert the project to a third party, namely CGI Automotive Consulting Ltd (“CGI”) in which they had no involvement;

  • cause the technical library acquired by IAEP for the purposes of the project to be transferred from IAEP to CGI and/or other companies without payment to IAEP; and

  • fail and/or refuse to enter into good faith negotiations to sell the Product to IAEP or a third party purchaser, in breach of their obligation to do so as set forth in the Option Agreement.

Decision. The Court held that (i) the diversion of the project to CGI and (ii) the transfer of the technical library to CGI and/or other companies at no cost caused unfair prejudice to the claimants and also constituted breaches of fiduciary duty. from the first to the seventh responders (i.e. excluding the IAEP, the eighth responder). However, no unfair prejudice was caused by (iii) the failure to negotiate in accordance with the option agreement or the shareholders’ agreement.

A key issue in the case regarding the unfair hardship findings was whether the IAEP was a quasi-partnership. The Court held that the company was indeed a quasi-corporation even though clause 21 of the shareholders’ agreement provided that “the parties have expressly agreed that there is no partnership.The Court explained that a company cannot, in law, be a shareholder company. However, this does not prevent the company from being a “quasi-corporation”, within the meaning of
Ebrahimi v Westbourne Galleries Ltd [1973] AC 360. The Court clarified that “the expression quasi-partnership is more of a metaphor: the company is not a company but the relations between those interested in the company are more akin to those of associates.The Court identified the following key facts about the facts that supported the conclusion that the company was a quasi-corporation, namely:

  • all shareholders had the right to be directors;

  • there was no way of forced redemption, so if a “member [was] removed from management, he [could not] withdraw his stake and go elsewhere“;

  • all shareholders had duties of good faith to each other under the shareholders’ agreement, so there was a relationship of “mutual trust”;

  • the company’s business (as set out in the shareholders’ agreement) was the acquisition of six NG4 lines from BMW and the sale of a turnkey installation to a buyer; and

  • ·none of the shareholders could compete with the IAEP on turnkey projects; each shareholder was entitled to “participate in the conduct of business“. In addition, the shareholders were required to make reasonable efforts to promote and develop the project, in accordance with the shareholders’ agreement.

The finding that the IAEP was a quasi-corporation was not in itself sufficient to ground a claim under s. 994 of CA 2006, however. The applicants therefore relied on the judge’s conclusion, as above, that the diversion of the project in violation of the non-competition and commercial promotion provisions of the shareholders’ agreement and the transfer of the technical history out of company for no consideration amounted to unfairly prejudicial behavior towards the applicant. These also constituted a breach of the directors’ fiduciary duty given the conflict of interest that the non-conflicting directors had not waived.

Delay in presenting petition. The Defendants also argued that the Plaintiffs’ claims for breach of duty to negotiate under the option agreement, as well as breaches of fiduciary duty, were statute-barred, given the delay in bringing them. With regard to the first, the Court considered that this point was not material on the facts since any breach of the obligation to negotiate would have attracted at most nominal damages, in the light of the factual finding of the Court that, in the second half of 2013, there was no prospect of successful negotiations. As for the latter, the Court explained that breaches of fiduciary duties continued. They were therefore not prescribed. Moreover, there was nothing that would amount to an acquiescence in the shortcomings on the part of the applicants, on the facts.

Comment. The case is a useful reminder that the assessment of whether unjust prejudice has been caused to claimants is fact-sensitive. In circumstances where, the company is a quasi-partnership, claimants have been excluded from a project which is the very reason for the company’s existence and management is found to be in breach of its fiduciary duties, it is very likely that damage will be found on the facts. The case also sheds welcome light on the fact that a corporation can be a quasi-corporation even though the agreements in question expressly provide that there is no “corporation” and even though, in law, a corporation cannot be a shareholder corporation. It is clear that the “quasi-partnership” is “rather a metaphor” to designate circumstances where the shareholders maintain, among other things, a personal relationship of mutual trust.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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