Introduction
A minority shareholder who feels aggrieved by virtue of unfairly prejudicial conduct on the part of the majority has a powerful avenue for redress in the form of a petition brought under s. 175 AIFC Companies Regulations. However, what are the crucial elements of this provision? What amounts to 'unfair prejudice'?
Answers can be found in various case law in England and Wales. This is enabled by Art. 13(6) of the Constitutional Statute on the AIFC, which provides 'in adjudicating disputes, the AIFC Court is bound by the Acting Law of the AIFC and may also take into account final judgments of the AIFC Court in related matters and final judgments of the courts of other common law jurisdictions'.
As a recap, s. 175 AIFC Companies Regulations provides:
If a Company's affairs are being or have been conducted in a way that is unfairly prejudicial to the interests of its Shareholders generally…, the Court may on application of a Shareholder, make one or more of the following orders:
The elements
(i) Company's Affairs
The unfairly prejudicial conduct must arise from some corporate act or omission, including any act or omission on the company's behalf. In Re Legal Costs Negotiators Ltd (1999), the Court of Appeal stressed that the conduct complained of must be acts done by the company, in particular by those authorized to act as its organs. In other words, conduct of an individual shareholder acting in his or her private capacity does not amount to company's affairs. As such, the Court rejected the shareholders' petition in which they complained the minority shareholder refused to sell his shares to the majority. It was held that simply remaining as a shareholder was not conduct relating to the company's affairs.
(ii) Interests qua member
'The interests of its Shareholders' arguably means that the shareholder's interests as a member have been unfairly prejudiced as a result of conduct on the part of the company. In the landmark decision Re a Company (1986) , Hoffmann J (as he then was) commented 'In principle I accept [the] proposition [that the section must be limited to conduct which is unfairly prejudicial to the interest of the members as members ... It cannot extend to conduct which is prejudicial to other interests of persons who happen to be members]'.
Importantly, Hoffmann J also noted that this does not necessarily mean the qua member requirement should be 'limited to his strict legal rights under the constitution of the company'. Instead, considering Ebrahimi (1973) in which Lord Wilberforce observed that behind the corporate veil there are individuals with 'rights, expectations and obligations inter se which are not necessarily submerged in the company structure', Hoffmann J commented that a member's interests could encompass not only the rights of members under the constitution of the company but also the 'legitimate expectations' of the individual shareholders inter se. Subsequent cases confirmed this approach, although noting that it is perhaps more appropriate to use the term 'equitable restraints' instead ( O'Neill v Phillips(1999) ) .
(iii) Unfair Prejudice
Again, in Re a Company (1989) Peter Gibson J noted that the conduct complained of must be 'both prejudicial (in the sense of causing prejudice or harm) to the relevant interests and also unfairly so: conduct may be unfair without being prejudicial or prejudicial without being unfair and in neither case would the section be satisfied '.
Further, Re Saul D Harrison & Sons plc (1995) suggests that the court favored a more open-textured assessment of unfair prejudice. In this case, Hoffmann LJ noted that the notion of fairness in this context must be viewed in light of the commercial relationship as a whole and the 'the starting point in any case [for unfair prejudice claims] will be to ask whether the conduct of which the shareholder complains was in accordance with the articles of association '.
As a result, also taking into account of the preceding subheading, it is argued that in s. 175 AIFC Companies Regulations petitions the court will begin by examining whether or not there is a breach of contract (ie articles of association or shareholders' agreements). If there is not, the court will then consider whether or not there is a breach of mutual understandings between the parties in which case equity will intervene to preclude the shareholders from repudiating such an obligation despite the fact that it lacks contractual force (ie the 'equitable restraints').
Case law has identified several categories of conduct that may be regarded as unfairly prejudicial conduct:
The remedies
As can be seen from the recap, the court has a wide discretion as to whether relief should be granted and, if so, what type of relief. In England and Wales, the most common form of relief granted by the court is an order for the purchase of the petitioner's shares by the company or another shareholder. In fact, the Court of Appeal in Grace v Biagioli (2006) noted that there is a presumption in favor of a buy-out order for successful unfair prejudice petitions. Arguably, the same approach should be expected in the AIFC as well.
Conclusion
Based on common law, it is believed s. 175 AIFC Companies Regulations contains three crucial elements, namely (a) company's affairs, (b) interests qua member and (c) unfair prejudice. Importantly, the notion of unfair prejudice in England and Wales goes beyond strict legal rules but also encompasses fundamental understandings between the parties. One could imagine seeing these cases being relied on in the AIFC.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of the AIFC Academy of Law, any other AIFC body or entity, or any other agency, organization, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the authors and these views are always subject to change, revision, and rethinking at any time.
