Andrew Chee © 2023

Company Law (UOL) BAC

2022 ZB Q7 (Minority Protection – SDA, s994)

Andrew, Brian, Claire and Delila are equal shareholders and directors of Watchers Ltd. Andrew, Brian
and Claire were friends at university, and formed the company in 2010, shortly after graduating. Delila
first met the others in 2020 and joined the company in 2021.

In January 2022, Andrew made a negligent business decision that lost Watchers over £200,000. In
February 2022, a board meeting of Watchers was held, from which Andrew was absent. At the meeting,
Delila, who had never got on well with Andrew, argued that proceedings should be taken against Andrew
by Watchers. Brian and Claire rejected this. They noted that Andrew’s performance had otherwise been
excellent, and that Andrew would likely leave the company if he were sued, taking with him many
important business contacts of considerable value to Watchers.

Delia has now sought the advice of a lawyer as to the steps she might take in response to Andrew’s
behaviour. The lawyer gave her two pieces of advice. First, the lawyer advised her not to bring a
derivative claim against Andrew, telling her that she would be very unlikely to be given permission by
the court to continue such a claim. Second, the lawyer also advised her not to bring proceedings under
section 994 Companies Act 2006, telling her that she would be unlikely to be able to show that the
affairs of the company have been conducted in a manner that was unfairly prejudicial to her interests.

To what extent do you agree with these two pieces of advice by the lawyer?

Note: The question specifically asks for a discussion of the lawyer’s advice which relates to SDA and
s994 only. You cannot discuss s122(1)(g) because you will earn no marks for it.

ANSWER POINTS:

Part (a): SDA

• Intro – The lawyer advised that SDA would be unsuccessful – (briefly explain structure/overview of
SDA):
(a) SDA replaces common law derivative action – does not require proving “fraud on the minority”
or “wrongdoer control”.
(b) Instead, SDA is a 2-stage process: (1) establishing a prima facie case (s261(2)), and, if
established, then (2) a full permission (s261(4)) – if successful, the court will grant Delia
permission to bring a claim against Andrew on behalf of the company.
(c) Unlike CLDA, SDA can be brought for a director’s breach of duty (s260(3)).

• OTF: Andrew was negligent – breach of s174 – SDA can be brought in respect of Andrew’s
negligence.

• First stage (prima facie case) – only requires documentary evidence – purpose is to filter out cases
with little to no chance of success (Iesini) – OTF: there is a clear breach of s174 – no problem
establishing prima facie case.

• Second stage (permission hearing) – further divided into 2 stages – firstly, we must examine the
mandatory bars in s263(2) – if any are present then the case must fail, but if not then we must
examine the discretionary factors in s263(3).

• Mandatory bars – OTF: at a board meeting, Andrew’s negligence was discussed and 2 out 3
directors defended him and argued against bringing a case against him – is this a ratification? No
– we are not told that there was any ratification actually passed – furthermore this is breach of s174
– can only be ratified by shareholders (s239) (*unlike 175/177 which can be authorised (but not
ratified) by other directors) – OTF: even if there was a ratification, it was a board meeting not a
 Andrew Chee © 2023
Company Law (UOL) BAC

members meeting – the bar/factor in s263(2)(c) (i.e. whether the act/omission has been ratified) will
not apply.

• The only other relevant mandatory factor is s263(2)(a): whether a director acting in accordance with
s172 would not want to continue the claim – test is whether no reasonable director would continue
the claim (Iesini) –to determine this we need to consider various factors: (a) size of the claim, (b)
strength of the claim, (c) cost of the claim, (d) any negative effects to the company of pursuing this
claim, etc.

• OTF: claim is not small (£200,000), chances of success are high, but negative effects are that
Andrew would likely resign taking a lot of contacts with him – can it be said no reasonable would
continue this claim? No this is a high threshold – usually requires something very disastrous
(Zavahir) or that the case clearly has very little benefit. No mandatory factors a likely to apply.

• Discretionary factors:
(a) 263(3)(a): whether member acting in good faith – OTF: Yes – nothing to suggest otherwise.

(b) 263(3)(b): the importance a director acting in accordance with s172 would attach to continuing
the case – similar considerations apply and benefits vs negatives need to be weighed – OTF:
claim is big but negative effects are arguably larger – if Andrew takes away important business
contacts, the company’s long term sustainability can be in serious jeopardy – arguably this is
more important than the loss of £200,000 which the company seems to be able to take.

Clearly B and C also value Andrew much more than the loss of £200,000 – in Bridge v Daley
the court denied permission in light of the fact that the majority of the shareholders did not
support the claim.

(c) 263(3)(d): whether ratification is likely – OTF: yes – B and C clearly expressed an intention not
to bring an action – reasonable to assume that if needed, they would ratify his breach as
shareholders – collectively A and B have 50% shareholding and can outvote D’s 25%
shareholding.

(d) 263(3)(f): whether member could pursue other remedies in his own right – OTF: Yes – D could
pursue s994 without involving the company – whilst having an alternative remedy in itself does
not automatically deny permission (Kiani v Cooper) but combined with other factors this will
likely lead the court to deny permission (Mission Capital - *in this case court found both that a
director acting in accordance with s172 would not attach much importance to the claim and that
the claimants could have pursued a s994 on their own)

• Conclusion – D unlikely to succeed – furthermore, she would have to bear the defendant’s cost of
litigation and based on the facts, also unlikely to be granted a Wallersteiner order. Lawyer’s advice
is correct.

Part (b): s994

• Intro – in order to bring s994, D must show (1) company’s affairs, (2) their interests as a member,
and (3) unfair prejudice.

• Company affairs
(a) complaint has to relate to the management, not private affairs (Re Legal Cost Negotiators) or
personal disputes (Re Coroin).
(b) however personal dispute may constitute ‘company affairs depending on the precise facts (Re
Charterbridge) – a physical attack between 2 brothers that made it impossible to work together
in a 2 member company qualifies as company affairs (Re Home & Office Fire Extinguishers).
(c) OTF: breach of s174 that caused loss of £200,000 – clearly amounts to company affairs.
 Andrew Chee © 2023
Company Law (UOL) BAC

• Interests as a member

(a) previously, strict traditional interpretation requires her rights qua member to be affected and,
e.g. interests as a director did not qualify (Elder v Elder).
(b) But later Hoffmann J held that court is allowed to consider wider equitable considerations and
that “interests” is wider than “rights” (Re Sam Weller & Sons).
(c) But it must affect the interests of the members generally, e.g. mismanagement (Elgindata).
(d) OTF: no question that loss of £200,000 would affect D’s interest as a member, at the least the
value of her shares would have dropped – breach of directors duty also affects members
generally.

• Unfair Prejudice

(a) The conduct has to be both prejudicial and unfair – whether something is unfair is measured
against equitable principles generally (O’Neill v Phillips) – including measuring unfairness in
a commercial context (Re Saul D Harrison) – unless the unfairness was caused by the
petitioner herself.
(b) Generally a deteriorating relationship is not sufficient (O’Neill) – OTF: D never got along with A
but this is not the only factor – loss of £200,000 and refusal by B and C to take action is clearly
unfair to D.

• Conclusion: Lawyer’s advice here seems erroneous – D stands a good chance to succeed under
s994. If successful – likely remedy is a share buyout of D’s shares (s996(e)) taking into account:
(a) a price that is fair in all the circumstances (Re Bird Precision) which OTF may involve adding
a premium to take into account the loss (Re Blue Index); and
(b) a date that remedies the unfair prejudice (Abbington Hotel) which OTF would likely be the
date that pre-dates the unfair prejudice (Re a Company).

[END OF ANSWER POINTS]