UK: England and Wales: unfair prejudice and pre-emption provisions

The Court of Appeal gave judgment yesterday in Graham v Every [2014] EWCA Civ 191. In a case concerning a petition under section 994 of the Companies Act 2006 (the unfair prejudice remedy), the court held that while the trial judge had been right not to strike out the whole of the petition, he should have allowed certain allegations to stand including one relating to non-compliance with a pre-emption provision in an agreement between the shareholders. Lady Justice Arden stated that non-compliance with a pre-emption provision would not, ordinarily, amount to the conduct of the company's affairs (as required by section 994). The current case was, however, an exception because of an agreement that the directors were to be rewarded through dividends and not salary and, in Her Ladyship's view, the remuneration of directors and distribution policy fell within the company's affairs.

The two other judges hearing the case, Lord Justice Vos and Lord Justice McCombe, also commented on the pre-emption point. Lord Justice Vos stated that diluting the shareholding of a shareholder may unfairly prejudice his interests. Lord Justice McCombe held that the failure to observe the requirements of the pre-emption provision was an essential feature of the overall picture of unfairly prejudicial conduct alleged in the petition and it would be artificial to strike it out on the basis that, looked at in isolation, it might not be an act of the company.