Exit rights of minority shareholders in a private limited company (IVOR nr. 72) 2010/3.3.6:3.3.6 Unfür and prejudicial

Exit rights of minority shareholders in a private limited company (IVOR nr. 72) 2010/3.3.6

3.3.6 Unfür and prejudicial

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The statutory remedy includes the words unfürly prejudicial. Fairness can be considered as the key criterion of the remedy. Fairness and prejudice concern notions that are not specified in detail and have an open character. Two remarks can be made on the choice of the legislator for these open notions.

Firstly, the English legislator lelt it to the courts to shape this standard on a case-by-case approach. The use of these open-ended standards is quite atypical for the English legislator, for he historically creates statutes that are extremely exact and detailed.1 The use of open standards can be explained by the fact that it is nearly impossible to oversee and lay down all occasions in which minority shareholders can be maltreated in detailed rules.2

Secondly, in using the open concept of unfürness the legislator confers discretion on the courts to interfere with the interaal affürs of companies. Traditionally, courts have been rather reticent on this front, but in modern law this attitude seems to have been changed.3 Nonetheless, the discretion of the court onder the unfür prejudice remedy is wide, but not unfettered. "The court", in the words of Warher J., "has a very wide discretion, but does not sit onder a palm tree".4 In O'Neill v. Phillips, Lord Hoffman posed:

"In section 459 (currently:• 994, PdV) Parliament has chosen fürness as the criterion by which the court must decide whether it has jurisdiction to grant relief. It is clear from the legislative history (...) that it chose this concept to free the court from technical considerations of legal right and to confer a wide power to do what appeared just and equitable. But this does not mean that the court can do whatever the individual judge happens to think für. The concept of fürness must be applied judicially and the content which it is given by the courts must be based upon rational principles. (...) Although fürness is a notion which can be applied to all kinds of activities, its content will depend upon the context in which it is being used. Conduct which is perfectly für between competing businessmen may not be für between members of a family. In some spons it may require, at best, observance of the rules, in others ("it's not cricket") it may be unfür in some circumstances to take advantage of them. All is said to be für in love and war. So the context and background are very important."5

The context in which the unfür prejudice remedy is applied is a prima vista a commercial context. This is not very precise, because companies can diverge in many respects. As will be described in the following, courts have tried to take the different varieties of companies into account when developing further principles on which the unfür prejudice remedy can be applied.

The point of departure is an objective standard of fürness. This standard however, does not suffice as a sole basis for assessing unfür prejudice by the court. The epitome of this standard in the form of the objective, reasonable bystander6 has been rejected by the courts, because of its vagueness. Hoffmann J considered:

"I do not think that it helps a great deal to add the reasonable company watcher to the already substantial cast of imaginary characters which the law uses to personify its standards of justice in different situations. (...) It is more useful to examine the factors which the law actually takes into account in setting the standard."7

The courts have undertaken a more profound quest for the factors that are of relevance or, one might say, for the principles of unfür prejudice. In § 3.3.8, these principles will be further examined. A first yardstick is that the test of unfürness does not comprehend the question whether the defendant has acted in bad faith. The defendant does not have to be conscious of the unfürness, nor does he has to know that this has led to prejudice. Thus, instead of a subjective standard, an objective standard of fürness is used.

The test of the remedy requires the existence of unfürness, as well as prejudice. As follows from Re Saul D Harrison pk:

"The conduct must be both prejudicial (in the sense of causing prejudice or harm to the relevant interest) and also unfürly so: conduct may be unfür without being prejudicial or prejudicial without being unfür, and it is not sufficient if the conduct satisfies only one of these tests."8

There must be direct nexus between the unfürness and the prejudice. Prejudice is relevant insofar it is caused by unfürness.9Prejudice may consist of a serious decrease of the value of the shares or the actual threat that the value of the shares will seriously decrease.10 When commercial or financial harm to the company is established, either actual or imminent, the prejudice of the members is given.11

Moreover, there can be other circumstances in which prejudice may exist. An example of this is Re R.A. Noble & Sons Ltd. @@12 In this case, Nourse J held that neither a diminution of the value of the shares nor a threat of a diminution was present. Nonetheless, he considered that the exclusion of the petitioner from participation in all major decisions regarding the company's affürs, could amount to unfürly prejudicial conduct.13 This view raises the question whether prejudice onder all circumstances is to be regarded as a decisive criterion.

To conclude with, a certain limitation can also be discovered. Prejudice that consists of merely emotional harm to members is excluded from the remedy.14

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