James Potts QC and Chantelle Staynings of Erskine Chambers comment on the High Court’s decision in Cool Seas (Seafoods) Ltd v Interfish Ltd
Cool Seas (Seafoods) Ltd v Interfish Ltd [2018] EWHC 2038 (Ch) is a relatively rare example of a case in which a majority shareholder succeeded in an unfair prejudice petition under s 994 CA 2006.
Although there is no restriction in the wording of s 994 to limit the petitioner to a minority shareholder, a majority shareholder will normally have the power to remedy any unfairly prejudicial conduct of the company’s affairs by other means. In particular, it will usually be able to use its voting rights to change the composition of the company’s board to remove a wrongdoer and to cause the company to bring proceedings. Such a fact pattern would usually lead the court to strike out petitions brought by majority shareholders: see for example Re Legal Costs Negotiators Ltd [1999] BCC 547.
The situation is different, however, if the majority shareholder is not in a position to remedy the unfair prejudice. This may be the case where, for example, the voting rights do not accord with the shareholding (as in Re HR Harmer Ltd [1959] 1 WLR 62).
In Cool Seas (Seafoods) Ltd v Interfish Ltd, the majority shareholder (Interfish) was not in a position to remedy the unfair prejudice because the ‘reserved matters’ clause in a shareholders’ agreement provided that the consent of the minority shareholder (Cool Seas) was required for the commencement of proceedings by the company. The unfair prejudice included breaches of duty by former directors who had been appointed to the company’s board by Cool Seas. Cool Seas refused to consent to the company bringing proceedings against those directors (or companies controlled by them). Despite Interfish having control of the board, it was therefore not in a position to remedy the harm caused by the directors’ breaches of duty.
Rose J also took into account that there were a substantial number of other reserved matters which required the consent of the minority shareholder. It was not difficult to see how the future management of the company could be seriously disrupted by Cool Seas’s refusal to consent to reasonable proposals. In the circumstances Interfish was not precluded from bringing a petition under s 994 even though it held the majority of voting rights.
Attribution of director’s wrongdoing to shareholder
The case also raised the issue (on which there are relatively few reported cases) about when the conduct of a nominee director will be attributed to its appointing shareholder for the purposes of a s 994 petition. Cool Seas contended that its nominee director’s breaches of duty did not entitle Interfish to a remedy against Cool Seas itself.
Rose J rejected that argument. She held, following F&C Alternative Investments (Holdings) Ltd v Barthelemy (No 2) [2011] EWHC 1731 (Ch), that it was clearly just to attribute the director’s conduct to its appointing shareholder in the circumstances. These circumstances included that:
- Cool Seas was purely a vehicle through which the director held his interest in the company. To rule out attribution would enable him to hide behind his corporate vehicle in order to protect himself from a s 994 petition by that mechanism;
- Cool Seas chose to appoint him as one of its nominee directors. It should therefore be treated as being fully aware of his chequered history;
- Cool Seas was a party to transaction documents under which it had given warranties which formed the basis for some of the complaints of unfair prejudice (including breaches of duty by the director in failing to disclose breaches of those warranties); and
- It was Cool Seas (and not the director) which had the power to give or withhold consent to reserved matters. It had consistently exercised that right to frustrate the ability of the company to bring proceedings against its former director.
The question of whether it is just to attribute a director’s wrongdoing to his or her appointing shareholder will depend on all the circumstances. Rose J held that it was not necessary to show that the respondent shareholder benefited from the wrongdoing by its nominee director before such wrongdoing could be attributed to it. While that may be one factor to take into account, it is not a precondition for attribution.
Conclusion
The case is a reminder to consider carefully the intended scope of ‘reserved matters’ clauses in shareholders’ agreements or articles of association when they are being drafted. Despite its majority voting rights and control of the company’s board, Interfish was not in a position to cause the company to bring proceedings directly against its former director (for breach of duty) or against any of the companies which he controlled. On the other hand, Cool Seas’s refusal to consent to such proceedings opened the door to an unfair prejudice petition by the majority shareholder.
The case also confirms the wide discretion given to the Court under s 996 CA 2006 to grant relief to remedy unfairly prejudicial conduct. Interfish obtained relief on its own behalf (in the form of a compulsory sell-out order against Cool Seas), together with accounts and inquiries and orders for payment in order to remedy the breaches of duty suffered by the company. Rose J held that it was clear on the authorities (including Gamlestaden Fastigheter AB v Baltic Partners Ltd [2007] UKPC 26) that such allegations could be pursued by a petitioner in the context of s 994 proceedings.
On the particular facts of this case, it is relatively clear that it was just to attribute the nominee director’s wrongdoing to his appointing shareholder (and to grant relief against both). However, it is a reminder that a shareholder may be held responsible in s 994 proceedings for wrongs done by its nominee director(s), and that a remedy may be granted against it even if it has not personally benefited from its nominee director’s wrongdoing.
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In Cool Seas (Seafoods) Ltd v Interfish Ltd [2018] EWHC 2038 (Ch) both minority and majority shareholders alleged unfair prejudice and issued petitions under s 994 CA 2006. The High Court dismissed the petition of the minority shareholder but granted the petition of the majority shareholder because, even though it held the majority shareholding, it did not have the ability to control the company’s affairs in a manner which could adequately ‘cure’ the matters it complained of.
The case involved a company, Fresh Catch Limited (Fresh Catch), that found itself in serious financial difficulties following its prosecution for illegal fishing (‘black fishing’) prior to 2005. Interfish Limited (Interfish) expressed an interest in taking over Fresh Catch’s pelagic fish producing business and set up Northbay Pelagic Ltd (Northbay) as a vehicle to acquire Fresh Catch’s assets. Under the Investment and Shareholder Agreement (ISA) setting up Northbay, Interfish purchased a 60% shareholding in Northbay and was entitled to appoint three directors to the company’s board. Cool Seas Limited (Cool Seas), the vehicle set up by the owner of the Fresh Catch business to purchase shares in Northbay, purchased the remaining 40% shareholding and was entitled to appoint two directors.
Relations between Interfish and the two directors appointed by Cool Seas (including Mr Anderson, who was joined to the proceedings as Third Party) broke down, and both directors were dismissed for gross misconduct. Cool Seas issued a petition under s 994 alleging unfairly prejudicial conduct on the primary ground that Cool Seas had a legitimate expectation that it would be represented on the board by chosen directors who would each participate in the management of Northbay. Rose J dismissed Cool Seas’ petition on the grounds that Northbay was never a quasi-partnership and therefore Cool Seas did not have any legitimate expectation that its chosen directors would be entitled to participate in its management. She also held that, in any event, the misconduct of both of the directors justified their dismissals such that any prejudice to Cool Seas was not unfair.
Interfish petitioned by way of counterclaim. The counterclaim alleged that the conduct of the directors appointed by Cool Seas, and hence Cool Seas’ conduct, in the management of Northbay’s affairs was unfairly prejudicial to Interfish’s interests as a member of the company. In particular, Interfish alleged that Mr Anderson had failed to disclose important information about Fresh Catch prior to Northbay’s acquisition of its assets. This included that its profits were falsely inflated by its continued involvement in black fishing after 2005 and by its failure to pay tax due to HMRC. Interfish alleged that this amounted to breaches of warranties given to Northbay by Fresh Catch and Cool Seas, and that Mr Anderson’s failure to disclose these breaches of warranties (and his own wrongdoing) amounted to a breach of his fiduciary duties to Northbay. The counterclaim also alleged that Mr Anderson was in breach of his duties in misusing the assets and employees of Northbay for his own benefit.
A key legal issue raised by the cross-petition was whether Interfish could obtain relief under s 994 given its position as a majority shareholder in Northbay. Rose J held that in this case a substantial number of company decisions (including the commencement of legal proceedings by the company) required the consent of Cool Seas such that the unfairly prejudicial conduct of its appointed directors could not be adequately remedied by the exercise of Interfish’s majority voting rights. Given the scope of matters where consent was needed from Cool Seas, Interfish was not precluded from obtaining relief under s 994 even though it was a majority shareholder.
Interfish succeeded in its cross-petition. At a subsequent hearing following the handing down of the judgment, Rose J ordered Cool Seas to sell its shareholding in Northbay, with a discount to be applied to reflect that it was a minority shareholding. She also ordered accounts and inquiries (and a further trial on quantum) to determine Mr Anderson’s and/or Cool Seas’s liability to Northbay as a result of the various breaches of duty and unfairly prejudicial conduct.
Cool Seas contended that the appropriate share valuation date was a date shortly after Mr Anderson’s suspension from Northbay in early 2016, before the presentation of the petition. Rose J rejected this on the basis of the principles set out by the Court of Appeal in Profinance Trust SA v Gladstone [2001] EWCA Civ 1133, including that the starting point should be the general proposition that prima facie an interest in a going concern ought to be valued at the date on which it was ordered to be purchased. Rose J ordered the valuation date to be 31 July 2018, being the date on which judgment was handed down. She also considered this valuation date appropriate in order to provide the share valuers with a reasonable period of trading following a catastrophic fire at Northbay in January 2015 and after the reestablishment of proper practices in Northbay following Mr Anderson’s exit.
Cool Seas and Mr Anderson were ordered to pay the costs of the petition and counterclaim on the indemnity basis from the date on which their Amended Defence was served. Rose J held that the case took a different turn at that point because the Amended Defence asserted a positive (but false) case that Mr Anderson had no knowledge of black fishing. Further, Mr Anderson subsequently attempted to turn the tables on Interfish by falsely alleging that any black fishing had been at its instigation. He also made entirely unwarranted and scurrilous allegations of forgery against two of Interfish’s witnesses shortly before trial.
For further information on when a majority shareholder can present an unfair prejudice petition, see Unfair Prejudice, Q&A here.