Earlier this year, in Saxon Woods Investments Ltd v Costa & Oths [2024] EWHC 387 (Ch), a minority shareholder (P) brought a Petition under section 994 of the Companies Act 2006 asking the High Court to decide on whether a company had breached terms in the Shareholders’ Agreement requiring the company and its shareholders to work together in good faith towards a sale of the company.
Background to the case
A Shareholders Agreement (“SHA”) was entered into between the Eighth Respondent, Spring Media Investments Limited (“the Company”) and its shareholders (including P and investment entities for the First Respondent) to the effect that:
- They would work together in good faith towards a sale of the Company (“Exit”) by 31st December 2019.
- Good faith consideration would be given to any opportunities for a sale before that date.
- In the event that no Exit was achieved by 31st December 2019, the Company’s Board should instruct an investment bank to “cause” an Exit.
All efforts to sell the company failed and the company remained unsold at the time of trial.
P argued that the Company, and in particular, the First Respondent, breached the SHA by not acting in good faith towards the Exit. When the 2019 deadline passed, they should have engaged an investment bank to cause the sale of the company.
The First Respondent, a director and indirect investor in the Company, argued that on true construction of the SHA, no breach occurred. He also stated that even if this was not the case, the Board did not consider that selling the company by the end of 2019 would maximise the value for shareholders and therefore, the decision did not constitute a breach.
This meant that P did not suffer any unfair prejudice under section 994(1) of the Companies Act 2006.
Section 994(1) of the Act provides as follows:
“A member of a company may apply to the court by petition for an order under this Part on the ground-
(a) that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or
(b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.”
The High Court’s Decision
The Court ruled that the First Respondent had breached the SHA concerning the Exit. Having examined the disputed clauses of the SHA, Mr Simon Gleeson (sitting as a Deputy High Court Judge) concluded that:
- The SHA imposed a timetable for selling the company.
- The directors would not have been in breach of their fiduciary duties if they had pursued a sale in 2019, as they were obligated to under the terms of the SHA.
- A director’s conclusion that it would be commercially reasonable to defer the sale beyond the end of 2019 was not be permitted by the terms of the SHA.
Mr Gleeson went on to say that Clause 6.2 of the SHA demands two things:
- to work in good faith towards an Exit, and
- to give good faith consideration to offers for an Exit received during the investment period.
The First Defendant argued that the Company was not ready for sale by 31st December 2019 and it would have been sold for a low price if the sale was realised on that date. Mr Gleeson determined that this point was irrelevant. The issue was whether the Company and the directors, and in particular the First Defendant, did in fact work towards an Exit on that date, and give good faith consideration to any opportunities for Exit which arose at that time.
Mr Gleeson concluded that the directors did not give good faith consideration to all Exit offers. In particular, the First Defendant rigidly controlled access to the financial advisor overseeing the sale process. He would not let others communicate with the financial adviser and intentionally excluded one minority shareholder from the process by withholding information. The First Defendant also did not properly engage with a potential sale opportunity proposed by the minority shareholder.
The Court concluded that the First Defendant’s actions amounted to a breach of the SHA, and he did not act in good faith with regard to working towards an Exit at the time agreed upon and did not pursue other investment opportunities that were presented to him. Therefore, P had suffered unfair prejudice as it could not sell its shares as it intended under the SHA. The Court consequently ordered the shares to be purchased.
Comment
It is rare for these types of cases to reach court; typically, an early settlement is reached. It is essential to note the lesson from the case is that although directors must be commercially astute and put the interests of the company first, if a Shareholders’ Agreement exists, the obligations under it must be seriously considered. If tension develops between commercial reality and contractual obligations, directors should seek expert legal advice straight away.
To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.
Note: The points in this article reflect sanctions in place at the time of writing, 30th October 2024. This article does not constitute legal advice. For further information, please contact our London office.
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