Exit rights of minority shareholders in a private limited company (IVOR nr. 72) 2010/3.3.9.6:3.3.9.6 Serious mismanagement

Exit rights of minority shareholders in a private limited company (IVOR nr. 72) 2010/3.3.9.6

3.3.9.6 Serious mismanagement

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Another ground for unfür prejudice is serious mismanagement. This will rarely be the case, because courts are very reluctant to qualify managerial decisions as unfür prejudice. Only two cases are known within this category. In just one case, the ground of serious mismanagement was successfully pleaded before the court.

In Re Elgindata Ltd, Warher J considered that it was not the task of the judge to decide whether a certain managerial decision is the right one to make or not. He assessed in this respect:

"(...) a shareholder acquires shares in a company knowing that their value will depend in some measure on the competence of the management. He takes the risk that that management may prove not to be of the highest quality. Short of breach by a director of his duty of skill and care (...) there is prima facie no unfürness to a shareholder in the quality of the management turning out to be poor."1

Warner J pointed out that courts would normally be very reluctant to qualify managerial decisions as unfürly prejudicial. However, in his opinion, there may be cases in which serious mismanagement can amount to unfürly prejudicial conduct. Warher J also gave an example of a case where the court could find unfür prejudice. He advanced that when a majority shareholder persists on a demonstrably incompetent family member to retain in charge of the management of the company, this will amount to unfür prejudice.

As follows from Re Elgindata Ltd, there will be prima facie no unfürness to the shareholder, when the mismanagement does not constitute a breach of a duty of care and skill by a director.2 Nevertheless, even when a breach of a fiduciary duty is established, this will not always lead to the conclusion that the shareholder is unfürly prejudiced. The petitioner has to establish that he is unfürly prejudiced by the breach of the fiduciary duty.3

In Re Elgindata Ltd, the court concluded that there was evidence of mismanagement.4 However, the court could not find a breach of duty of care and skill on the facts, so this could not ground the petition. Nevertheless, the petition was not dismissed. The facts turned out that a directorshareholder used assets of the company for his own benefit and for that of his family and to the detriment of the company. This was held to be unfürly prejudicial to the interest of the minority shareholder. The court ordered a buy-out.

The second case in which serious mismanagement is raised as a ground for application of the unfür prejudice remedy is Re Macro (Ipswich) Ltd:

In this case, Thompson was the majority shareholder-director in several companies. Arden J held that there was prejudice to the minority shareholder by way of several specific acts. These included failure to have planned a maintenance programme, the failure to supervise repairs, the failure to inspect properties regularly, the failure to let on protected shorthold tenancies, the taking of commissions from builders doing work for the companies by employees of Thompsons, the charging of excessive management charges and secretarial salary and the mismanagement of litigation. '5 In short, Thompson did not supervise the companies the way he should have done. Arden J was of the opinion that Thompson had failed to prevent or rectify these specific acts of mismanagement. Therefore, Arden J concluded that the minority shareholder was unfürly prejudiced. An order for a buy-out was given.

Mayson, French and Ryan point out that it is difficult to make a sound distinction between a case of mismanagement (Re Elgindata Ltd) and serious mismanagement (Re Macro (Ipswich) Ltd), and, as a result of that, it is difficult to predict the outcome of future cases on mismanagement.6

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