Friday, 20 July 2012

UK: England and Wales: the unfair prejudice remedy - adaptable, flexible and open-textured

The Court of Appeal gave judgment yesterday in Maidment v Attwood [2012] EWCA Civ 998. At first instance (see [2011] EWHC 2186 (Ch)) the trial judge dismissed a shareholder's petition for relief under section 994 of the Companies Act 2006 (the unfair prejudice remedy). The Court of Appeal held that the trial judge was wrong to do so. The leading and only reasoned judgment was delivered by Lady Justice Arden (Aikens and Kitchen LJJ concurring). The judgment is interesting and important for many reasons, some of which are highlighted here.

The first reason concerns the concept of unfairness and breaches of directors' duties. In O'Neill v Phillips [1999] 1 WLR 1092 Lord Hoffmann stated that a shareholder would not ordinarily be entitled to complain of unfairness unless there had been some breach of the terms on which it was agreed that company's affairs should be conducted. According to Arden LJ these terms "... include by implication an agreement that any party who is a director will perform his duties as a director. Primary among these duties are the seven duties now codified in sections 171 to 177 of the Companies Act 2006. ... Six out of seven of these duties are fiduciary duties, that is, duties imposed by law on persons who exercise powers for the benefit of others. Non-compliance with ... [these] duties will generally indicate that unfair prejudice has occurred" (para. [22]).

The second concerns the consequences of the company's insolvency. In such cases, Arden LJ observed, the court should be flexible in its approach and to do what is necessary to achieve a just and fair result. The third concerns claims of excessive remuneration: these should be considered by the court with reference to objective commercial criteria and in this regard Arden LJ stated that "... in the light of the public debate that has taken place in recent years over executive pay in large companies, much guidance can be found about the remuneration of directors in listed companies in the various guidelines that have been produced, such as the Association of British Insurer's Principles of Remuneration" (para. [36]).

Fourth, Arden LJ provided this assessment of the role performed by section 994 (at para. [28]): "The dominant characteristic of the unfair prejudice remedy, both in statute and case law, is its adaptability. This enables the courts to produce a just remedy where minority shareholders can show wrongdoing that prejudices their interests. It also makes the unfair prejudice remedy important as a means of encouraging proper corporate behaviour in the management of smaller companies and building up the confidence of investors in them. This policy aim is as important today as it has always been since the original version of what is now the unfair prejudice remedy was introduced in the Companies Act 1947."

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