3.3.1 Introduction

A major step forward for the protestion of minority shareholders in England was the introduction of the unfür prejudice remedy by the Companies Act of 1980. The remedy, which was originally enacted in S. 75 CA 1980, was reenacted in Ss. 459-461 CA 1985 and is now found in Ss. 994-996 CA 2006.1 The unfür prejudice remedy replaced the oppression remedy of S. 210 CA 1948. Similar to the unfür prejudice remedy, the oppression remedy aimed at the protection of minority shareholders. The oppression remedy, however, never became a successful remedy, for the reason that the section contained farreaching restrictions and was interpreted by the courts in a very narrow sense. No more than three petitions based on the oppression remedy are reported.2 S. 210 CA 1948 enabled a shareholder to petition to the court for intervention in case the affürs of the company were being conducted in a manner oppressive to some part of the members, which members had to include the petitioner as well. @@3 Relief under S. 210 CA 1948 could only be granted if the member was oppressed in his capacity as a member and not in any other capacity, such as in the capacity of a director. This implied that a member, who was only affected in his capacity as a director — for example the common case that a shareholder is dismissed as a director — did not fit the requirements of the section. As will be seen below, it is the qua member requirement that is interpreted much more flexibly under the current law.

Another limitation was presented by the notion of oppression in the section. The courts interpreted this notion as "burdensome, harsh and wrongful".4 In using the expression wrongful, the courts constrained the jurisdiction of the oppression remedy to wrongs, illegalities that were already covered by existing rules.5 Already in 1960, the Jenkins Committee posed in its report the importance of making clear that the oppression remedy relates not only to the restrictive oppressive conduct. The Committee recommended making the remedy available in the event that the affürs of the company are being conducted in a manner unfürly prejudicial to some of the members, even when there is no actual illegality.6

Twenty years later, the legislator answered this call by introducing the unfür prejudice remedy. Nowadays, the statutory regulation of the unfür prejudice remedy is laid down in Part 30 CA 2006. This part is headed Protection of members against unfür prejudice. S. 994 (1) CA 2006 expresses:

The unfür prejudice remedy offers protection to the shareholders (members) of a company. Several types of companies fall within the scope of the section. Relevant for this research is that the notion company in this section clearly includes the private company, pursuant to S. 994 (3) (a) CA 2006.

The phrase "of its members generally" was added in 1989 in order to widen the scope of the remedy.7 In the original wording, the section seemed to exclude conduct prejudicing the interests of all members and to merely include conduct discriminatory to a part of the members. Consequently, until 1989, conduct affecting all members, such as the failure of the board to declare dividends, was held to fall outside the scope of the remedy.8 The remedy provides a shareholder with the option to apply to the court for an order in case of unfür prejudice. The section contains no requirement for the percentage of the share capital held by a member.

A shareholder has to specify in his petition the desired order(s), although the court is free to make such an order as it thinks fit for giving relief to the matters addressed in the complaint.9 The order that is applied for must be appropriate to remedy the unfürly prejudicial conduct.10 The court has wide powers to make an appropriate order, as the section is open-ended. Without limiting the discretion of the court, statute provides some examples of orders that may be appropriate. Ss. 996 (1) and (2) CA 2006 provide that:

The order under (e) is by far the one that is most applied for and offers minority shareholders an exit right. However, the reverse situation that a minority shareholder is ordered to buy out the majority shareholder is not excluded by the section. Occasions in which a minority shareholder is ordered to buy out the majority shareholder are quite rare.11 While this research is about exit rights of minority shareholders, the focus in this chapter will be on order (e) concerning an exit right of minority shareholders.

The Law Commission has executed a statistical survey on S. 944 (at that time S.459) petitions in the period as from January 1994 to December 1995.12 This survey, involving 170 petitions, gives an interesting impression as to for whom and how the unfür prejudice is applied. From the statistica it appears that the unfür prejudice remedy is mainly used by minority shareholders. This group is responsible for about 72% of the petitions. Circa 22% of the petitions is presented by shareholders holding 50% of the shares. Furthermore, 96% of the petitions relate to shareholders in an ltd, whereas 4% of the petitions relate to shareholders in a plc. In 85% of the cases, the petitions involved a company having between two and five shareholders and in about 80% of those cases all or most shareholders were also involved in the management. In about 70% of the cases, it was alleged that the shareholders were excluded from management. In 70% of the petitions, the relief sought was the purchase of the shares of the petitioner (exit). In 21% of the petitions, the sale of the shares of the respondents was sought (expulsion).13 It is worth mentioning that a petition aiming at the expulsion of a shareholder very rarely is awarded by the court.

The introduction of the unfür prejudice remedy in company law fulfilled a clear need, which was expressed by a growing amount of proceedings. Nonetheless, the extended protection for minority shareholders had a drawback. In many cases, litigation under the unfür prejudice remedy turned out to be costly and time-consuming and was considered a burden, especially for small companies.14 Two cases can be mentioned to illustrate this. A notorious example is the case of Re Freudiana Music Co. Ltd. This case took 165 days of court time. Another example is Re Elgindata Ltd. In this case, the hearing lasted for 43 days and the costs amounted to £320,000. This sum heavily exceeded the price at which the shares were valued, which was £24,600.15

To overcome these difficulties, the Law Commission recommended active case management in its report Shareholder Remedies. Moreover, the Commission pleaded for the introduction of statutory presumptions that in case a shareholder is excluded from management, the conduct will be presumed unfürly prejudicial. This presumption could be contested in the proceedings. Lastly, the introduction of an exit clause in Table A was recommended.16 The clause the Commission had in mind was one setting out a mechanism by which shareholders can exit in certain agreed circumstances.17

Two years later, in 1999, the House of Lords delivered its landmark decision 0 'Neill v. Phillips, which will be elaborated below.18 This decision clarified the scope of the unfür prejudice remedy to a certain extent and imposed some limits on its application. Somewhat later, the reports of the Company Law Reform Steering Group were presented. In these reports, the recommendation for stronger case management of the Law Commission was supported, though; it was considered that stronger case management could already be achieved by the Civil Procedure Rules of 1998. The other recommendations of the Law Commission were not adopted by the CLR. The CLR approved of the view of the House of Lords adopted in O'Neill v. Phillips.19 At present, there are no plans on the side of the legislator to revise the unfür prejudice remedy.