ParrisWhittaker

Can Exercising Strict Legal Rights Amount To Unfair Prejudice?

Director and shareholder disputes are not unusual but can usually be resolved satisfactorily with expert advice. The more challenging disputes can arise when an aggrieved party feels hard done because of another party’s actions and relies on an allegation of unfair prejudice. The award-winning commercial litigators at ParrisWhittaker in Jamaica and across the Caribbean, are experienced advisers to directors, shareholders and company officers.

In a recent case, the shareholders argued that a private equity investor engineered an insolvency event in order to take further steps and secure majority control of the business. The decision is from the UK’s High Court and has persuasive authority on the courts in Jamaica and other common law jurisdictions.

The claim was essentially an ‘unfair prejudice’ claim – where it is alleged that the majority shareholders have abused their powers to further their own interests to the detriment of the other shareholders.

What’s the background?

A company was in the business of marketing, selling and exploiting the potential of a new wireless gas safety product for domestic boilers. It also created a related smartphone app for gas engineers to access the data. Under an investors’ agreement executed in 2017, a private equity investor had ‘swamping’ (enhanced voting) rights in certain circumstances.

Unfortunately, the product was not as successful as hoped. Sales were slow and the company struggled to stay afloat, despite additional injections of cash. The private equity investor refused to give consent to raise funds by a further share issue on the basis that it would not raise enough cash.

In August 2019, the private equity investor served a voting adjustment notice on the basis that there had been an “insolvency event” as defined in the investment agreement; and invoked the “swamping” mechanism – making it the majority shareholder.

The company was eventually dissolved in January 2022.

The shareholders claimed unfair prejudice, arguing that the insolvent event was engineered by the private equity investor – allowing it to trigger enhanced voting rights; then issue to itself a large number of shares –  giving it an overwhelming majority and, therefore, effective control of the company. At issue was whether there  had been unfairly prejudicial conduct by the private equity investor

The court did not find that there had been unfair prejudice. The private equity investor had acted properly and in accordance with the terms agreed. The shareholders were not able to argue that they had been treated unfairly.

As a general rule, the court said conduct “within the rules” should not be considered unfairly prejudicial. The court should then look at any equitable consideration giving rise to a “legitimate expectation” which the court would uphold and the strict rights would not be insisted upon.

Here, the parties had a purely commercial relationship, governed and “tightly regulated by a full suite of professionally drawn contracts and documents”. The private equity investor had always complied with these. Furthermore, the petitioners were well aware the business endeavour was not risk-free. The insolvency event arose when the company was unable to pay its debts in August 2019 when they fell due. There were several reasons for the failure of the company – and the insolvency was not caused by anything the private equity investor had or had not done.

Key takeaway

The parties to commercial contracts should ensure all the terms are clear and their implications fully understood. This includes not just contracts for the sale and supply of goods and service but investment agreements and related contracts and documents.

An aggrieved party may be unlikely to claim unfairness where the other party/ies have properly exercised their strict contractual rights, in the absence of overriding equitable considerations. The fact the consequences are potentially serious and financially disastrous does not mean unfair prejudice has been caused.

How can we help?

We advise and represent directors and shareholders on a range of commercial disputes including unfair prejudice and breach of duty. For specialist and robust advice from expert commercial lawyers at ParrisWhittaker contact us on [email protected] or +12423526110

¹Durose & Ors v Tagco BV & Ors [2022] EWHC 3000 (Ch))

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