In depth

Corporate update: the latest corporate law developments November 2021

Gateley Legal

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In this month’s update for directors, secretaries and general counsels we:

  • Look at a case where the High Court held that an unfair prejudice petition could be pursued by a person who had ceased to be a shareholder in the relevant company after the proceedings had begun; and
  • review a case where a buyer's unjust enrichment claim for undelivered assets failed; and
  • consider a decision which found that a seller had breached the relevant warranties in a sale agreement. 
Listen to this update via our 'Talking Business' podcast series

Buyer's unjust enrichment claim for undelivered assets failed

The Court of Appeal has held that a buyer was unable to recover the consideration allocated to certain assets under a sale agreement despite those assets not being transferred by the seller.

The facts

Dargamo Holdings Ltd v Avonwick Holdings Ltd [2021] EWCA Civ 1149 arose out of a bitter dispute between three wealthy Ukrainians over the division of their business interests.

The key relevant facts were that, under a share purchase agreement, a seller agreed to sell certain shares to two buyers. The consideration for those shares set out in the agreement was $950,000,000. But it was common ground between the parties that this not only represented the consideration for the target shares, but also included an advance payment of $200,000,000 for certain other assets held by the seller, principally shares in two other companies. 

The share purchase agreement was completed, the shares in the target company were transferred to the buyers and the consideration was paid in full. However, the additional assets were never transferred to one of the buyers. So that buyer brought a number of claims against the seller, including one for unjust enrichment. Such a claim can be made against a defendant who is unjustly enriched at the claimant's expense with the purpose of that claim being to correct a defective transfer of value by restoring the parties to their pre-transfer positions. In this case, the buyer argued that the seller had been "unjustly enriched" as it had received value for something (the additional assets) that it had not transferred and still retained.

The decisions

Although the High Court dismissed the buyer's claim, the buyer appealed to the Court of Appeal. But the Court of Appeal agreed with the High Court and dismissed the buyer's appeal.

The court noted that the parties had deliberately omitted the additional assets from the share purchase agreement. The agreement they had chosen to document was one which provided that the only thing the seller was obliged to transfer in return for the payment of US$950,000,000 was the shares in the target company. As the judge said, the parties then stuck to their contractual obligations: the buyers paid the consideration and the seller transferred the target shares. There was no obligation to transfer any other assets and no such transfer ever took place. The buyer could not overthrow the express terms of the agreement by a claim for unjust enrichment.

Comment

At first sight this may seem an unfair decision: the buyer paid for something it thought it was getting but which it never actually received. However, the flaw in the buyer's argument was the express contractual terms which it had negotiated and agreed. Those terms did not refer to the additional assets at all and the courts will not readily step in to rewrite clear, express terms that have been freely negotiated between well advised commercial parties.

Former shareholder could pursue unfair prejudice petition

The High Court has held that an unfair prejudice petition could be pursued by a person who had ceased to be a shareholder in the relevant company after the proceedings had begun.

Unfair prejudice

The Companies Act allows a shareholder of a company to petition the court for an order on the grounds that the company's affairs are being, or have been, conducted in a manner that is unfairly prejudicial to the interests of all or some of its members.

An unfair prejudice petition is often used by a minority shareholder to complain about the conduct of the majority where that conduct, whilst perhaps not strictly prohibited by the company's constitution, prejudices the interests of the minority. So it has been used, for example, to challenge an allotment of shares, where the directors had authority to make the allotment but where it was made for the improper purpose of diluting a minority's shareholding. It can also be used to challenge the directors' failure to follow the company's articles or to comply with the requirements of the Companies Act.

The court has discretion to impose a wide variety of remedies where an unfair prejudice petition is successful, including ordering that the company be wound up. The most common order, however, is for the petitioner's shares to be bought out at a fair value.

It is clear from the language used in the relevant provisions that an unfair prejudice petition can only be brought by a member (or shareholder) of the relevant company. But what happens if, after the proceedings have begun, the member ceases to be a member of the company? This was the question that the court had to answer in Re Motion Picture Capital Limited [2021] EWHC 2504 (Ch).

The facts

The case involved a company that provided services for film and television series development and production. Mr Clarance had been the CEO of the company until his employment was terminated. He was removed as a director but retained his shareholding. He issued an unfair prejudice petition against the company, its shareholders and its director (the respondents) making various allegations of unfair prejudice including that business and funds had been diverted away from the company to the benefit of the director and other companies in which the director was interested. Mr Clarance said this had led to a breakdown of trust and confidence between the parties and a substantial reduction in the value of Mr Clarance's shares in the company.

Over a year earlier, a dispute between the parties over monies paid by the company to an LLP in which the only members were Mr Clarance and his wife, had led to the parties entering into a settlement deed. Under that deed, the LLP was to repay certain monies to the company with the LLP's obligations being guaranteed by Mr Clarance. As additional security, Mr Clarance had granted a charge over his shares in the company.

When the LLP and Mr Clarance failed to pay sums due to the company under the settlement deed, the company exercised its security over Mr Clarance's shares, causing those shares to be transferred to two nominees. Mr Clarance was then removed as the holder of the shares in the company's register of members.

This led the respondents to argue that, as Mr Clarance was no longer a shareholder, he did not have standing to continue with the unfair prejudice petition. They also argued that, as he no longer held any shares in the company, he was no longer able to pursue a remedy of seeking a buy-out of his shares.

The decision

The court confirmed that, as Mr Clarance was no longer on the register of members and his shares were now registered in the names of the respondents, he was no longer a member of the company. 

However the judge went on to confirm that this did not mean he had ceased to have standing to continue with the unfair prejudice petition. The judge said that the relevant provisions in the Companies Act were directed at the commencement of proceedings and that only those who are members, or to whom shares have been transferred or transmitted, can apply. But there was no requirement that the shares must continue to be held by a petitioner up until the hearing of the petition. 

The court went on to consider whether Mr Clarance still had an interest in pursuing a remedy of seeking a buy-out for his shares, given that he no longer actually held those shares. Noting that the shares had not been voluntarily transferred by Mr Clarance, the court found that he had a real chance of establishing at trial that the respondents had exercised their powers as directors for an improper purpose, and had not acted in good faith in the best interests of the company by effecting the transfer. In fact, the court said there was no obvious benefit to the company having possession of the shares through its nominees. According to the court, the only obvious benefit was to the respondents who clearly believed that their actions would give them a good chance of having the petition dismissed on the grounds of standing and thereby avoid having the court determine the allegations of wrongdoing against them. 

Comment

The case is a warning to those on the receiving end of an unfair prejudice petition that they should not take any steps (such as appropriating the petitioner's shares as in this case) with a view to obstructing the petition. Such action is unlikely to be viewed favourably by a court and could result in adverse findings against the respondents.     

High Court considers duty to mitigate in seller limitations

The High Court has considered a contractual duty to mitigate loss in seller limitations, holding that, while the relevant clause imported a duty to mitigate, it did not impose a standard of conduct any higher than the threshold under the common law rules on mitigation.

The facts

In Equitix EEEF Biomass 2 Ltd v Fox [2021] EWHC 2531 (TCC) a buyer had acquired an energy company which supplied heat energy from steam generated by two biomass boilers. The heat energy was supplied by the energy company to a single customer. 

After completion, the boilers experienced various problems which, ultimately, led to the customer terminating its contract with the energy company.

Subsequently, the buyer brought a claim against the seller for breach of various warranties in the sale agreement including that the energy company was in breach of its environmental permit, that the boilers were not in good repair and condition, and that the projections and forecasts in the financial model were wrong.

In their defence, the sellers made various claims including that the buyer had failed to mitigate its loss. The sale agreement contained a standard limitation requiring the buyer to take, and to ensure that the energy company also took, all reasonable action to mitigate any loss which could result in a claim against the sellers. The sellers argued that the buyer had failed to comply with this clause by not carrying out appropriate repairs to the boilers and also by not enforcing its rights against the customer in connection with the termination of its contract with the energy company.

Would you like more information? 

For more information regarding these developments, please contact our expert listed below or visit our Corporate page for more information on the services that we offer. 

Gateley Plc is authorised and regulated by the SRA (Solicitors' Regulation Authority). Please visit the SRA website for details of the professional conduct rules which Gateley Legal must comply with.

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