Unfair prejudice and the entitlement to buy-out: Macom v Bozeat
Where the Court makes a finding of unfair prejudice against a shareholder, and that unfair prejudice relates principally to the governance and management of a company, in certain circumstances the Court may decline to make the 'usual order' requiring the party at fault to purchase the petitioner's shares (a "Buy-Out Order").
In Macom GmbH v Bozeat & Ors  EWHC 1661 (Ch), a somewhat unusual unfair prejudice claim in that the petitioner was the majority shareholder, HHJ Hodge QC (sitting as a High Court Judge) found that the minority shareholder had acted in a manner unfairly prejudicial to the interests of the majority shareholder in the conduct of the company's affairs by acting in a unilateral manner in breach of the express provisions of the company's articles of association and a shareholders' agreement, thereby undermining its corporate governance.
Notwithstanding the finding, HHJ Hodge QC did not make a Buy-Out Order, and instead made an order regulating the future conduct of the company’s affairs, which he considered was the appropriate remedy to grant in all the circumstances of the case.
Macom GmbH (the "Petitioner"), a German company specialising in the provision of digital consulting and audio-visual technology services, transferred its UK-based projects to a company incorporated by Mr Bozeat1 (the "Respondent") in exchange for a majority share (60%) in the acquiring company, Macom GmbH (UK) Limited (the "Company"). Pursuant to the terms of a shareholders' agreement relating thereto, the Petitioner was entitled to appoint a director to the board of directors, although the Respondent – the Company's Chair and Managing Director – had a casting vote in the event that the board (comprising two directors) was deadlocked. Such an arrangement gave the Respondent effective control of the Company, notwithstanding that he was the minority shareholder.
Subsequently, differences in opinion between the shareholders (and in particular between the Respondent and the Petitioner's appointed board representative) arose as to the direction and management of the business. These differences were exacerbated by the Respondent's misunderstanding of the Petitioner's rights pursuant to the shareholders' agreement and the articles of association, in particular as to decision making, the calling of board meetings, and the Petitioner's entitlement to appoint a director. Matters were further aggravated when individuals introduced by each party to assist with mediating the differences of opinion served only to raise the temperature and entrench the parties' respective positions.
The Petitioner ultimately pursued an unfair prejudice petition alleging that the Respondent had: (1) taken payments and dividends which had not been authorised; (2) acted (and caused the Company to act) in breach of the shareholders' agreement by taking unilateral action with respect to reserved matters without the Petitioner's consent; (3) undermined the Company's corporate governance; (4) failed to provide information to the Petitioner to which it was entitled; and (5) disclosed confidential information in breach of the shareholders' agreement. It sought an order that the Respondent acquire its shares in the Company. The Respondent denied all the allegations made against him and argued that the Petitioner had in any event suffered no financial prejudice.
Was the Respondent's conduct unfairly prejudicial?
As a preliminary point, HHJ Hodge QC accepted the Petitioner's submission that nothing in section 994 of the Companies Act 2006 (the "Act") prevents the presentation of a petition by a majority shareholder.
Moreover, HHJ Hodge QC acknowledged that: "prejudice is not limited to cases where there is an actual, or potential, diminution in the value of the petitioner's shareholding… [and] may extend to a breakdown of the relationship of trust and confidence amongst the shareholders as a result of the respondent's conduct of the company's affairs and failures of good administration… Where a petitioner has a right to be consulted and involved in the management of the company as a condition of his investment, he may not suffer any financial loss if he is excluded from such consultation and involvement; but he may nevertheless suffer unfair prejudice because he is being denied the full benefit of his investment in the company" (at paragraph 47).
When it turned to the consider the particulars of alleged unfair prejudice, with respect to each of the Petitioner's five complaints HHJ Hodge QC found that the Respondent's actions were unfairly prejudicial. While certain of these (in particular with respect to reserved matters and information failures) might have been less egregious when taken alone, HHJ Hodge QC found that in the context of the other complaints, they tended to undermine the contractual relationship between the parties and compromise the good and proper administration of the Company.
The appropriate remedy
The Petitioner submitted that the purpose of granting relief is to remedy the unfair prejudice and that a Buy-Out Order will be the usual order where to order otherwise would be to perpetuate "a dysfunctional relationship and an impossible relationship of joint management" and was appropriate on the facts.
By contrast, the Respondent submitted that the Court's discretion is wide in relation to remedy and that notwithstanding the Respondent's failure to advance his own Points of Claim, the appropriate remedy would be for the Petitioner to buy-out the Respondent. In the alternative, the Respondent submitted that given HHJ Hodge QC's findings in relation to the governance of the Company, the Court should make an order regulating the conduct of the Company’s affairs for the future, and that absent any financial prejudice suffered by the Petitioner, any buy-out order would be overly punitive.
HHJ Hodge QC accepted the Respondent's submissions that it would be wholly disproportionate (and itself unfair) to order the Respondent to buy-out the Petitioner’s shares, particularly since his unfairly prejudicial conduct had caused no financial loss. Where relief is to be given, the over-arching requirement of section 996 of the Act is that the Court should “make such order as it thinks fit for giving relief in respect of the matters complained of”. Moreover, any relief must be proportionate and must respond to the particular unfair prejudice established.
Accordingly, where unfair prejudice relates to the governance and management of the company, an order regulating the future conduct of the company’s affairs may be the most appropriate remedy to grant in all the circumstances of the case (see paragraph 97) and such an order was made2.
At first blush, HHJ Hodge QC's decision might appear somewhat unfair to Petitioner. He found in its favour on each of the five allegations of unfair prejudice and yet the Petitioner was unable to extricate itself from its dealings with the Respondent and ordered the Petitioner to adhere to the provisions of the shareholders' agreement and articles of association by way of an injunction.
However, HHJ Hodge QC took care to set out the rationale for departing from the "ordinary and usual" rule and why that step was appropriate in all the circumstances of the case. The rationale was developed in an addendum to the judgment (paragraphs 101 following), which addressed various grounds of appeal raised by the Petitioner prior to handing down.
Ultimately, the Court is not restricted in the scope of relief which it can award by either the wishes or preference of a successful petitioner or by the ability of an impecunious respondent to meet a Buy-Out Order. The purpose of granting relief is to remedy specific acts of unfair prejudice and in determining what relief is appropriate, the Court's discretion is very broad.
The case serves to highlight the risk inherent in the pursuit of relief of a discretionary nature, namely that what a successful party is granted may not ultimately be what it wants, notwithstanding the considerable time and costs which will necessarily be committed in pursuing an unfair prejudice petition to trial.
1 Mr Bozeat's wife was also a nominal respondent to the petition in light of her having a 20% shareholding (which she had sought to transfer to Mr Bozeat prior to judgment) in the Company.
2 Which, amongst other things, obliged the parties to conduct the Company's business in line with its constitutional documents, as supplemented by certain additional requirements (e.g. a requirement that board meetings be held with greater frequency).