Tuesday 2 July 2019

UK: England and Wales: directors' duties and the unfair prejudice remedy

Judgment was delivered several days ago by Adam Johnson QC (sitting as a Deputy High Court Judge) in Dinglis v Dinglis [2019] EWHC 1664 (Ch). This first instance authority, which concerned a petition for relief in respect of unfairly prejudicial conduct under sections 994 to 996 of the Companies Act 2006, is noteworthy for the following reasons.

With regard to directors' duties, it adds to the growing list of cases in which a director has been held in breach of section 172 ("Duty to promote the success of the company") of the 2006 Act. It also contains discussion of the scope of the statutory duty to avoid conflicts of interests and, in particular, the scope of section 175(3) which provides that the duty does not apply to conflicts arising in relation to transactions or arrangements with the company. Judge Johnson QC held, in this regard, that section 175(3) applied not only to cases where the director was himself a party to the transaction but also to those transactions or arrangements in which he was interested regardless of who had entered into the transaction.

The judgment also considers two issues relating to the scope of the unfair prejudice remedy. The first is whether understandings can exist, of the kind indicative of a quasi-partnership, where there are shareholders not party to those understandings. Judge Johnson QC did not rule out this possibility, although the facts before him required further investigation. He nevertheless asserted that it was "obviously undesirable for a situation to exist in which equitable constraints impact on the rights and obligations of some shareholders but not others, in particular where such others have acquired their shareholdings on the assumption that the company's constitution was contained within its published constitutional documents only" (para. [191]). The second issue concerns the valuation method to use where an order to purchase the petitioner's shares is made under section 996. Noting the broad discretion provided by section 996, and conflicting authority, Judge Johnson QC stated that outside of quasi-partnership scenarios, it would be a very unusual case where no discount was applied to reflect the petitioner's minority position.

Update (8 July 2019) - the ICLR's short case summary is available here.

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