Debt-to-equity transactions can raise thorny shareholder issues in private limited companies, which is exactly what happened at Cardiff City Football Club between 2016 and 2018. Laura Jenkins, Alexander Lerner and Mary Read consider the recent decision in Re Cardiff City Football Club (Holdings) Limited  EWHC 2023 (Ch).
The claim failed on almost every point, but the judgment provides a helpful guide to the (sometimes counter-intuitive) nuances of unfair prejudice petitions and illustrates the court’s pragmatic approach to disposing of such proceedings.
What is unfair prejudice?
Section 994(1) Companies Act 2006 provides that a member of a company may apply to the court for an order on the grounds that:
(a) a company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or
(b) an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.
What does that involve? At the risk of over-simplification, one of the easiest ways to think about unfair prejudice is that it is essentially a corporate form of divorce. Claims (referred to as petitions) arise where the relationships between shareholders (generally, but not always, in a private limited company) break down. More often than not, a minority shareholder will then seek an order from the court for their shares to be bought out by the majority shareholder(s).
Mr Isaac (the Petitioner) is a minority shareholder in Cardiff City Football Club (Holdings) Limited (the Company), which is the holding company of Cardiff City Football Club Limited (the Club). Mr Tan (the First Respondent) is a Malaysian businessman and the majority shareholder in the Company (the Second Respondent).
The Company and Club were funded by substantial loans advanced by Mr Tan. The level of indebtedness was a matter of concern to supporters because of its effect on the Club’s operations (in the context of UEFA’s Financial Fair Play Regulations). By early 2016, the Club had been embargoed from acquiring new players. Accordingly, in February 2016, Mr Tan made a public commitment to reduce the Company’s and Club’s indebtedness (the Pledge).
Mr Isaac’s allegations
Mr Isaac’s complaint centred on an open offer of shares made by the Company following a resolution of the board of directors dated 18 May 2018 (the 5:2 Offer), which was taken up by Mr Tan only. The result of Mr Tan taking up the 5:2 Offer and no one else doing so was that his shareholding in the Company increased from 94.22% to 98.3%, while Mr Isaac’s reduced from 3.97% to 1.18%.
Mr Isaac alleged that:
- The dilution of his percentage shareholding was prejudicial to him and unfairly so: prejudicial because it left him worse off in terms of his shareholding interest, and unfair because the whole exercise was orchestrated by Mr Tan, who was motivated not by any proper business purpose but by personal animosity towards him following a falling out between them.
- Although the proposal for the 5:2 Offer was approved by the Company’s board of directors, the board essentially rubber-stamped a decision Mr Tan had already made. Accordingly, the directors did not exercise their own independent judgment as they were required to (s173 Companies Act 2006) and/or failed to exercise their power to allot new shares only for a proper purpose (s171 Companies Act 2006). Instead, the directors exercised their allotment power to further Mr Tan’s personal vendetta against Mr Isaac and not to improve the Company’s financial position.
The respondents denied the allegations. Mr Tan’s position was that his motivations were proper and there were good commercial reasons for the 5:2 Offer, which represented the culmination of the Pledge. That was because he paid for the new shares issued to him under the 5:2 Offer by agreeing to write off a large sum (approximately £67m), which at the time was owed to him by the Company.
For essentially the same reason, the Company argued that its board of directors had acted properly. There was a sound commercial purpose for the 5:2 Offer, which improved the Company’s balance sheet, and the Company’s directors were independently satisfied with that. Accordingly, they exercised their allotment power for an entirely proper purpose.
Mr Isaac sought an order for Mr Tan to buy his shareholding at fair value.
Did Mr Tan’s actions constitute conduct of the affairs of the Company?
No. It was alleged that Mr Tan had used his position as majority shareholder and major lender to the Company and the Club to put pressure on the board to accede to his demands and get his own way. However, those were matters personal and private to Mr Tan himself. He was entitled as a shareholder and creditor to seek to exercise commercial pressure at his disposal in his own interests. He was, therefore, acting on his own account. This could not be characterised as the conduct of the Company’s affairs, unlike the acts of the board of directors, which Mr Isaac also complained of (as to which, see below).
Did Mr Tan act unlawfully or unconscionably?
No. Mr Justice Adam Johnson found that Mr Tan’s behaviour “was unfair in the moral sense… it was vindictive and unpleasant behaviour… But to say something is unfair in that sense is not the same as saying it is unfair or unconscionable in the legal sense, because one can behave unpleasantly and unfairly (and people often do) without behaving unlawfully.”
This is an important distinction. A shareholder will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which they have agreed the affairs of the company should be conducted or where equitable considerations make it unfair for those conducting the affairs of the company to rely on their strict legal rights.
Mr Isaac could not point to any breach of, for instance, the articles of association or a shareholders’ agreement. Nor could he show (or had he pleaded) there was some overriding arrangement or understanding between the Company’s shareholders that restrained Mr Tan’s conduct. The best Mr Isaac could show was that Mr Tan had behaved unfairly in the general sense of the word, but that was insufficient.
In short, there was nothing unlawful or unconscionable in how Mr Tan acted, even if he had been motivated by a personal feeling of vindictiveness against Mr Isaac. Absent any legal or equitable restraints, Mr Tan was free to use his shareholding, or the leverage arising from his position as lender, however he wished.
Did the directors act independently? (s173 Companies Act 2006)
Yes. Even though there may have been ulterior motives behind the 5:2 Offer, and even though it favoured Mr Tan, there was a justifiable commercial rationale for what the directors were being asked to do. Reducing its indebtedness was very much in the Company’s interest. To the extent any of the rationale of the directors in reaching their decision had been flawed, that did not prove (without more) they had failed to act independently.
Further, Mr Justice Adam Johnson held that it was perfectly possible for a company director, acting independently, to form the view that the company’s best interests are achieved by implementing the same proposal as is favoured by the company’s majority shareholder (even where the majority shareholder had been responsible for appointing that director).
Did the directors act for a proper purpose? (s171 Companies Act 2006)
Sort of. In breach of duty, one of the directors did have Mr Tan’s improper purpose in mind, which gave rise to unfairness. However, in the judge’s view, this did not alter the ultimate conclusion: the board as a whole would still have made the decision it did. Accordingly, there was no prejudice to Mr Isaac even though there had been unfairness.
Unfair prejudice claims tend to be long-running and extremely hard-fought disputes, particularly so where a long-standing shareholder relationship has broken down irreparably. The decision in Re Cardiff City Football Club (Holdings) Limited offers not only a succinct, worked example of a number of common pitfalls for the unwary petitioner but also an important dose of commercial reality and pragmatism.
Although it is easy to see why Mr Isaac felt aggrieved and why he might have viewed Mr Tan and the board as acting to further a personal vendetta against him, it is clear why his claim failed:
- Mr Isaac’s allegations regarding Mr Tan failed because they were centred on acts that did not constitute the affairs of the company. Although unfair in the moral sense, they were not unfair in the sense of being unlawful or unconscionable such as to found a successful claim for unfair prejudice.
- Further, the judge’s decision in relation to Mr Isaac’s allegations regarding the board’s independence shows that directors can have ulterior motives so long as there is also a justifiable commercial rationale for their decisions. It also showed that a director’s independence cannot be impugned simply because that director concludes that a company’s best interests are aligned with that of the majority shareholder who appointed them. The judge’s conclusion regarding the board’s purpose emphasises that what mattered was the outcome: even if there had been unfairness, there had not been any prejudice suffered by Mr Isaac.
Majority shareholders are not required to be paragons of virtue in their dealings with minority shareholders. In appropriate circumstances, they are entitled to bring their influence and will to bear. Similarly, directors are not required to operate in a vacuum such that consideration of a majority shareholder’s will is excluded. What matters most for a director is making sure they act in a company’s best interests and do not allow improper considerations to lead them away from that.
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