Are the courts expanding or contracting the ambit of shareholder disputes?

In this article we look at three key shareholder disputes cases from recent years and consider how they are impacting the shareholder disputes landscape.

Both directors and shareholders alike need to be aware of shareholder rights and how they may be used by a disgruntled shareholder. Section 994 of the Companies Act 2006 is a powerful tool when used carefully, and it confers a wide discretion upon the court to remedy unfairly prejudicial conduct.

Case 1: Aabar Holdings SARL v Glencore Plc [2024] EWHC 3046 (Comm) 

This case addressed critical issues regarding the application of privilege in the context of shareholder rights. The High Court’s judgment, delivered on 27 November 2024, examined the “Shareholder Rule” and its implications for legal advice, litigation, and without prejudice privilege.

Until this case it had been understood by practitioners for over 135 years that a company cannot assert privilege against its own shareholder, save in relation to documents that come into existence for the purpose of hostile litigation against the shareholder. The original rationale for the “Shareholder Rule”, was based on shareholders having a proprietary interest in the company assets in a similar manner to trust beneficiaries and partners.

Here the court was considering a claim by Aabar Holdings under section 90 of the Financial Services and Markets Act 2000 (“FSMA”) in relation to the contents of the prospectus issued by Glencore on 4 May 2011 in relation to its IPO. Aabar Holdings alleged various losses arose due to misstatements and omissions linked to misconduct by Glencore’s subsidiaries. A key issue was whether Glencore was entitled to assert privilege against Aabar Holdings or whether the Shareholder Rule applied (meaning that Aabar Holdings was entitled to see the company’s legal advice).

Unexpectedly, the High Court concluded that:

• The Shareholder Rule does not exist in English law. The rationale for the Shareholder Rule was undermined by the decision in Salomon v A Salomon & Co Ltd [1897] AC 22 which held that a company has a separate legal personality.
• Aabar Holdings could not benefit from joint interest privilege as the court held that this was not a separate species of privilege and joint interest privilege did not support the existence of the Shareholder Rule either.
• Even if the rule existed, it would not apply to without prejudice privilege, as this involves third-party interests and an implied agreement to negotiate openly. The court emphasised that extending the rule to without prejudice privilege would deter settlement negotiations, which is against public policy.

The judgment has significant implications for shareholder activism, as it strengthens companies’ ability to protect confidential legal advice from being disclosed to shareholders. This may have a stifling effect on shareholder activism by constraining the ability of shareholders to scrutinise a company’s actions and hold management accountable. It will prove harder for shareholders to expose mismanagement or misconduct and potentially reduces transparency. Going forwards, shareholders will likely need to rely more on public information and non-privileged sources to hold management accountable.

Given this significant departure from well-established shareholder rights, the decision is ripe for appeal. Indeed, the High Court recognised the importance of the points raised and granted a “leapfrog” certificate under section 12 of the Administration of Justice Act 1969 thereby allowing Aabar Holdings to seek permission from the Supreme Court to appeal directly to the Supreme Court (effectively bypassing the Count of Appeal). Regrettably for Aabar Holdings, on 7 February 2025 the Supreme Court declined permission to appeal directly to it, so the case will now need to be appealed to the Court of Appeal in the first instance. It may therefore be some time before final clarification is received.

Accordingly, for now, the Shareholder Rule will remain a “hot topic” as appeals from related cases reach the Supreme Court, and parties generally challenge and explore the boundaries of the decision.

Looking to the future it remains to be seen whether the expected stifling effect of the Aabar Holdings decision will come to fruition. Practitioners are expecting, in the short term at least, to see less disputes focussed on obtaining access to company documents. Assuming the decision in Aabar Holdings is upheld on appeal, it will firmly discourage satellite litigation over the disclosure of privileged company documents and company management will be able to successfully keep their files containing legal advice away from prying shareholders.

For a more general overview of privilege you may wish to listen to the S&B ReDRess Podcast - Privilege here in which Catherine Penny and Katie Philipson discuss the different types of privilege.

Case 2: Onea v Wilkhu, Re Contingent and Future Technologies Ltd [2023] EWHC 2451 (Ch)

Another area in which shareholder disputes have seen significant change is in relation to rectification proceedings as a precursor to an unfair prejudice petition.

It had long been understood that a claim for unfair prejudice is only available to current members of a company in accordance with section 994(1) of the Companies Act 2006 (CA2006).

For many years this requirement (along with its statutory predecessor) created an additional obstacle for former shareholders who had had their shareholding forcibly removed (perhaps as they had been designated as a “Bad Leaver”) to overcome. Traditionally a former shareholder needed to first litigate to restore their shareholding to the register (using section 125 CA2006, the statutory power of the court to rectify the register). This then provided the shareholder with sufficient standing to petition the court in fresh proceedings in relation to the unfairly prejudicial conduct suffered.

Inevitably, this additional hurdle has added cost, time, and complexity to what have historically been long, hard fought and expensive shareholder disputes. It may well have deterred many former shareholders from seeking to enforce their statutory rights.

In an unexpected development in the case of Re Contingent and Future Technologies Ltd, the High Court adopted a different approach to this issue. The respondent had applied to strike out the petition on the grounds that the petitioner was not a member at the time of presenting the petition. In a judgment delivered in October 2023, the High Court was persuaded to be mindful of the overriding objective within the Civil Procedure Rules (which requires it to deal with cases justly and at proportionate cost). The court used its inherent case management powers to order a split trial:

• The first trial was to determine whether: (a) the register of members should be rectified; and (b) the petition was well founded. 
• The second trial would consider quantum, if needed.

By merging (a) and (b) together the court removed the need for entirely separate rectification proceedings and allowed the petitioner to address those points simultaneously. This worked well in this case as the petitioner’s disputed right to membership had been advanced in the petition and itself was a key strand of the unfairly prejudicial conduct complained of.

This is a dramatic change of approach – giving former shareholders an easier (and less expensive) route to enforce their rights. Going forwards it is to be expected that practitioners will become comfortable with pleading a petitioner’s disputed right to membership alongside the elements of the unfairly prejudicial conduct and asking the court to use its inherent case management powers and order a split trial.

Potential respondents to petitions need to be mindful that tactics designed to strip a shareholder of their shares (and hence their standing to petition) will no longer be creating an additional hurdle for a disgruntled petitioner to overcome.

This new approach could be adopted not only where the disputed right to membership forms a key strand of the unfairly prejudicial conduct complained of, but also where it does not. In those latter petitions, one can see a court using its case management powers to order a preliminary issue on the question of standing to petition, and allowing them to address the question of standing and unfair prejudice within just one set of proceedings.

Case 3: Wells v Hornshaw, Re Transwaste Recycling and Aggregates Ltd [2024] EWHC 330 (Ch)

While the above cases show the courts firstly hampering claims by shareholders, but also assisting in the bringing of them, this last case serves as a reminder of the role the court is looking to fulfil and how it will use its wide-ranging discretion to resolve any injustice.

In Wells v Hornshaw the court’s judgment addressed several key issues relevant to company law, including the meaning of unfair prejudice, the interaction between section 994 jurisdiction and shareholders’ agreements, and the appropriate relief for a minority shareholder. One of the central points of contention was the appropriate valuation date for Mr Wells’ shares. The court noted that valuation dates are often disputed in unfair prejudice petitions because the value of shares can fluctuate over time, affecting the interests of both the seller and the buyer.

The case involved Transwaste Recycling and Aggregates Limited (TRAL), a waste management business owned by Stuart Wells and the Hornshaw brothers, Paul and Mark. The company and its shareholders entered into a shareholders’ agreement, which contained a specific procedure to value the shares of a shareholder who wished to exit the company. The dispute arose after Mr Wells, holding 14.3% of TRAL's shares, decided to exit the company following a raid by HMRC and the police.

Mr Wells sent an email stating his decision to leave TRAL. This email was interpreted as a desire for a “clean break”, including the sale of his shareholding. This ultimately led to a disagreement over the valuation of his shares, with Mr Wells taking issue with the application of a minority discount and with the Hornshaw brothers’ conduct both before and after the email.

Mr Wells brought an unfair prejudice claim. The High Court found that while the actions of the Hornshaw brothers before Mr Wells’ email were prejudicial, they were not unfair. This was because Mr Wells had the benefit of the sale mechanism in the shareholders’ agreement which provided a route for him to obtain fair value for his shares. The court also determined that as Mr Wells’ position had crystallised on the date of the email, the actions of the Hornshaw brothers after the email were not relevant to the unfair prejudice claim.

The judgment emphasised the importance of clear and comprehensive shareholder agreements that anticipate potential disputes and provide clear procedures for share transfers and valuations. It highlighted the need for transparency and fairness in corporate affairs, urging directors and controlling shareholders to conduct business in a manner that is legally compliant and perceived as fair by all stakeholders. The case also underscored the importance of avoiding conflicts of interest and taking proactive steps to address potential issues before they escalate.

One of the critical aspects of the case was the court’s interpretation of what constitutes the “company’s affairs” for the purposes of an unfair prejudice petition. The court held that the valuation conducted by the company’s auditor, even though an independent third party, could be considered part of the company’s affairs. This broad interpretation is significant because it means that actions taken by third parties, such as auditors, can be scrutinised under section 994 if they impact the interests of shareholders.

The court found that the valuation of Mr Wells’ shares was unfairly prejudicial because the auditor used outdated financial information, failing to follow instructions to ascertain the company’s fair market value at the time of valuation. This failure to use up-to-date financial information likely had an unfair impact on the valuation, and the court held that the valuation was not binding on Mr Wells.

To remedy this, the court ordered a revaluation of Mr Wells’ shares using the most recent financial information and awarded interest to Mr Wells for the delay in completing the valuation process.

Overall, the case highlights the complexities of shareholder disputes and the importance of clear agreements, transparency, and fairness in corporate governance. It serves as a reminder that courts will closely scrutinise the conduct of both company officers and third parties involved in valuation processes to ensure that minority shareholders are not unfairly prejudiced.

This case sets a precedent for how courts may handle similar disputes in the future, emphasising the need for adherence to contractual processes and the use of accurate and up-to-date information in share valuations.

Conclusion

All of these cases serve as a reminder of the complexities of shareholder disputes and how the court’s approach can lead to a perceived expansion and contraction of shareholder rights over time. These cases also highlight the need for parties to proceed with care in their dealings with one another and ensure they are well-prepared to handle any challenges that may arise. Understanding how the court may address different factual scenarios is key as is appreciating that the court can scrutinise the conduct of both company officers and third parties, such as auditors, if their actions impact shareholders' interests.

We at Stevens & Bolton are able to advise on all matters related to corporate governance and corporate disputes. We can assist with the preparation of founder or shareholder agreements, and bespoke articles. We regularly advise on the pros and cons of proposed actions and help clients navigate difficult corporate issues and corporate litigation. We also offer clients a dedicated company secretarial service - so do get in touch if you are seeking support with company issues.