Most commercial disputes lawyers will have at least a passing familiarity with the unfair prejudice remedy, or the “oppression remedy”, to which it is often referred.
In the UK, section 994 of the Companies Act 2006 grants courts extremely broad powers to remedy a shareholders’ unfair use of its powers to prejudice one or more of its fellow shareholders; typically, the majority shareholder mistreating the minority.
The most common, or at least most discussed, remedy for unfair prejudice is an order that the majority buy out the minority, typically at a “fair” price, being one that excludes any effect of the complained of prejudice. However, section 994 enables the court to make any order appropriate to remedy the prejudice, including orders:
- Regulating the conduct of the company’s affairs.
- Requiring the company to take or not take any act.
- Authorising the bringing of a derivative claim.
- Prohibiting changes to the articles without the court’s permission.
- Even winding up the company.
Provisions similar to section 994 can be found in nearly all common law jurisdictions: see, for example, section 231 of the Canada Business Corporations Act 1985, section 232 of the Corporations Act 2001 of Australia, section 163 of the Companies Act 2008 of South Africa, and section 216 of the Companies Act 1967 of Singapore. The situation in the United States (with its 50 interlocking legal systems) is more complicated, but there is similar relief in many states, most importantly Delaware.
With section 994 petitions a frequent cause célèbre in the pages of the Financial Times and other newspapers, there are good reasons why parties may prefer the privacy of arbitration to resolve such disputes, in addition to the obvious other benefits that come with arbitration.
The legal position: unfair prejudice is arbitrable
Only a decade ago, the prevailing view was that unfair prejudice was not arbitrable under English law, although the position was somewhat murky. This was resolved by the Court of Appeal in Fulham Football Club (1987) Ltd v Richards, which, overturning previous authority to the contrary, held that section 994 petitions can be arbitrated.
The court concluded that, although an arbitral tribunal would not have the power to grant all of the available relief under section 994, most obviously the winding up of a company, the determination of whether there had been unfair prejudice and, if so, the appropriate remedy, were capable of being decided by an arbitral tribunal. Insofar as that remedy was one that an arbitral tribunal was not empowered to give, it could authorise the bringing of court proceedings.
A relevant arbitration agreement therefore binds the parties to arbitration, including where the remedy sought (that is, a winding up) is beyond the power of the arbitral tribunal and where that remedy would affect the other members of the company who are not parties to the arbitration. In the latter circumstances, the court held that there is no reason why the views of the non-party members could not be sought by the arbitrators making an award. Precisely how this would work in practice was not specified. However, the court appears to have effectively added an additional requirement for a claimant in circumstances where the remedy would affect some or all of the other shareholders, to show that it has sought to canvass the other affected members and that they are not opposed to the relief sought, at least insofar as they have taken a position.
The Fulham Football Club approach has been followed in a number of other jurisdictions, including Singapore (Tomolugen Holdings Ltd v Silica Investors Ltd), the British Virgin Islands (Ennio Zanotti v Interlog Finance Corp et al BVIHCV 2009/0394) and Hong Kong (Quiksilver Glorious Sun JV Ltd  4 HKLRD 759), among others.
A separate question arises as to whether an English seated arbitral tribunal has jurisdiction to order a buy-out order in respect of a foreign company, something that the English court is not empowered to do. This was considered in the context of a section 68 challenge in Filatona Trading Ltd and another v Navigator Equities Ltd and others. Teare J concluded that the question was one of construction. Where the agreement to arbitrate is broad enough to capture unfair prejudice under the relevant law, bearing in mind the preference for “one stop” dispute resolution, an English seated arbitral tribunal has the power to make such an order, even though an English court would not.
The all-important question: does the arbitration agreement include claims of unfair prejudice?
As with most issues of jurisdiction, the operative question is to what disputes does the arbitration agreement apply? In the case of a claim for unfair prejudice, the relevant agreement will most likely be found in the company’s shareholders’ agreement (or equivalent).
In Fulham Football Club, the arbitration clause was phrased to apply variously to “all disputes” and “any dispute or difference”. Unsurprisingly, the court found that these words meant precisely what they said; therefore, they must be taken to include the disputes that had arisen, including under section 994.
Fulham Football Club can be contrasted to the recent Hong Kong decision in Dickson Holdings Enterprise Co Ltd v Moravia CV, which concerned an application by one shareholder to stay unfair prejudice proceedings brought by another shareholder in favour of arbitration, pursuant to the shareholders’ agreement, which included an arbitration clause which applied to “[a]ny dispute, controversy or claim arising out of or relating to this Agreement, or the breach, termination or invalidity thereof”.
Despite the broad wording of the arbitration clause, the Hong Kong court concluded that it did not apply to the claim. Although the parties’ could have easily devised an arbitration clause that expressly applied to any dispute between them relating to the affairs of the company, they did not. The parties’ relationship was not only governed by the shareholders’ agreement, which made limited provision for the affairs of the company, but also by the articles of association and Hong Kong company law. In this case, the court found that the claim was founded on company law and not the shareholders’ agreement, which was not relied on in the claim or defence. This conclusion was reinforced by reference to Australian and Singaporean authorities, which took a similar approach in considering the words of the arbitration agreement and the nature of the claim.
Dickson Holdings is a salutary lesson on the importance of careful and fulsome drafting of arbitration agreements which pays full heed to the range of disputes that may arise, particularly in the context of shareholders’ agreements. Where arbitration is the preferred method of dispute resolution, wide words like those used in Fulham Football Club, and suggested in Dickson Holdings, should be used. Failure to do so creates a risk that the clause may be found not to capture claims of unfair prejudice, and therefore lead to an intra-company dispute being suddenly and unexpectedly much more public than any of the parties had intended or desired.