When a director/shareholder’s exclusion from management is NOT unfair prejudice: Recent High Court Judgment in Cool Seas (Seafoods) Limited v Interfish Limited & Ors  EWHC 2038 (Ch).
Not all corporate acquisitions result in successful joint ventures and we are often approached by clients seeking redress against their business partners, whether claims for breach of warranty, claims for breach of directors’ duties, or claims for wrongful exclusion from management.
A claim by a shareholder for wrongful exclusion from management is often made as a claim for “unfair prejudice” pursuant to s.994 of the Companies Act 2006. If successful this can be a lucrative claim because the most common remedy is an order for buy-out of the prejudiced shareholder at fair value, and may even involve a valuation without a minority discount.
Facts of the case
The recent High Court judgment in the case of Cool Seas v Interfish is a cautionary tale of how a claim for unfair prejudice by reason of exclusion from management can fail.
The case concerned Northbay Pelagic Limited, a fish processing business based in Aberdeenshire. Northbay is owned 40% by Cool Seas, which is controlled by the original owners of the business, the Anderson family. 60% of Northbay is owned by Interfish which invested in the business in January 2014 pursuant to a suite of negotiated transaction documents including a Shareholders Agreement.
In 2016 the two Anderson directors were dismissed for gross misconduct and removed from their positions as directors. The Andersons, through Cool Seas, petitioned the court for Unfair Prejudice on the basis that their exclusion from management was unjustified and contrary to their legitimate expectations of remaining involved in management.
The matter went all the way to trial and the court decided that Cool Seas’ unfair prejudice claim failed in its entirety.
Why Cool Seas’ claim failed
In some circumstances the personal relationship between the shareholders may entitle a shareholder to say that the exercise of certain, otherwise legitimate, powers of the board, such as excluding management, would be unfair. This is the case where a “quasi-partnership” exists – i.e. where the relationship is more akin to a partnership, there is an understanding that all or some of the shareholders will participate in the conduct of the business and there are restrictions on the transfer of shares.
The court decided that the starting point was to consider whether the allegedly unfairly prejudicial conduct was in accordance with the articles of association. Northbay’s articles clearly provided that if a director ceases to be an employee, he automatically ceases to be a member of the company’s board.
Whilst there may be cases where the articles do not reflect the understandings on which the members were associated, the relationship between the parties was set out in the January 2014 bespoke and carefully drafted contractual documentation and there were no overlying equitable considerations such as a partnership or family connection.
As a result there was no “quasi-partnership” or legitimate expectation that the Andersons would continue as directors once they ceased to be employed by the company. Accordingly any prejudice caused by the Andersons’ exclusion from management was not unfair for the purposes of s.994 of the Companies Act. The petition by Cool Seas therefore failed.
This case shows that anyone wishing to bring a claim for unfair prejudice by reason of exclusion from management should seek early advice about the necessary elements of the claim before pursuing the claim and risking failure as well as costs exposure.