Widening the Goalposts of the Unfair Prejudice Rule
Onside Law associate, Marc Rimmer, writes on the unfair prejudice rule in the context of a minority shareholder in a football club.
Unfair prejudice of a minority shareholder in a football club
The recent case involving Blackpool Football Club serves as a useful reminder of what sorts of behaviour can constitute unfair prejudicial conduct and the actions that the courts can take in the event of such conduct.
What is unfair prejudice?
Unfair prejudice in the United Kingdom is a statutory form of action that may be brought by aggrieved shareholders against their companyif they believe their company’s affairs have been conducted in a manner that is unfair and causes them prejudice or harm.
Section 994 of the Companies Act 2006 provides that: “A member of a company may apply to the Court by petition for an order…… 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.”
What happened in the Blackpool FC case?
It was found by Justice Marcus Smith that Owen Oyston and his son Karl, the owners of Blackpool football club, had paid £26.77m out of the club to companies they owned without the consent of other shareholders in the club, during and after the single season that Blackpool FC competed in the Premier League in 2010-11. Part of the total sum paid out of the club included £11m to a company owned by Owen Oyston, described in Blackpool’s accounts as a director’s salary, which was found by the court to be an “essentially gratuitous” payment to Owen Oyston. During this period of “illegitimate stripping” of the club, Valeri Belokon, a 20% minority shareholder, argued that he had been frozen out of the management of the club and he challenged the legitimacy of the millions the Oystons paid out to their own companies without his consent.
The Court ruled that the Oystons had “abused their majority powers to the detriment” of both Mr Belokon and Blackpool FC and that their behaviour had caused “fundamental breaches” of their duties as directors. It was found that improper payments had been made to the majority shareholders which could have been paid out as dividends and this had been done to bypass the need to seek consent from the other shareholders in the club, most notably Mr Belokon. It was held further that Mr Belokon had been entitled to be treated as an equal partner in the governance of the club by virtue of an unwritten ‘gentleman’s agreement’, something that had been completely disregarded by the Oystons. As a result, the petition for unfair prejudice brought by Mr Belokon was upheld and the Oystons were ordered to pay £31m to Mr Belokon for the compulsory purchase of his shares in the club. In finding in favour of Mr Belokon, the court was prepared to ignore the fact that Mr Belokon had been disqualified by the Football League from being a director following a conviction in his native Kyrgyzstan for money laundering. Since the ruling earlier this month,Blackpool FC have been put up for sale by the Oyston family, who have instructed their counsel to appeal certain aspects of the ruling.
What does this case mean for the future of the unfair prejudice rule?
The Blackpool FC case is a useful case study of the rights of minority shareholders and the remedies that are available to them where those rights are infringed. The court was keen in this case to highlight the importance of corporate responsibility and indicated that they will continue to exercise wide discretion to level the playing field in circumstances where majority shareholders are shown to be abusing their power by breaching their fiduciary duties and mismanaging company affairs.
The case is also a prime example of oral contracts (this one being concluded in a pub) being upheld by the courts where the circumstances are appropriate – an interesting contrast to the recent case involving Mike Ashley and the £15m deal that was also concluded in a pub with a former associate. In that case, it was found that no valid oral contract existed as the alleged deal had been made “during a heavy night of drinking” and the court ruled that no one would have reasonably thought that what Mr Ashley said in the pub was indeed “serious”. By contrast, the court found in the Blackpool case that Mr Belokon typically “transacted orally” and “did not tend to author documents” and the Oystons had also historically entered into arrangements on the basis of “gentleman’s agreements”. As a result, it was held that the necessary intention to create legal relations was present in the Blackpool case (aided by a lack of intoxication compared with the Ashley saga!) that was needed to constitute the existence of an oral contract.