As disputes lawyers, we start with the fundamentals and build cases from there.
However, in unfair prejudice petitions, it is surprising how often the fundamental question of standing is overlooked.
This article considers the principal considerations worth bearing in mind when reviewing a potential unfair prejudice claim in relation to a UK limited company.
Standing sounds like it should be straightforward. However, it is imperative that it is checked, particularly when dealing with family companies, fast-scaling start-ups (where governance may not have kept up with the growth of the business), and companies run by individuals with limited knowledge of UK company law.
We see instances where, to all intents and purposes, an individual has been treated as a shareholder. They may have received dividends and appear on the confirmation statements filed at Companies House, yet they are not on the register of members. In other cases, what someone understands to be a share transfer may not meet the formalities required under English law.
For the purported shareholder, this is often a rude awakening. The problem usually comes to light only once a dispute has arisen with the majority (who may be in de facto control of the company), and this can complicate bringing an unfair prejudice petition.
The petitioner may be required to prove standing. If it later transpires that they did not have standing, there will be adverse costs consequences as well as potential professional negligence implications.
What do you need to have standing?
To bring an unfair prejudice claim, the petitioner must either (i) be a member of the relevant company (section 994(1) Companies Act 2006 (CA 2006)) or (ii) have a legal entitlement to shares in the company (section 994(2) CA 2006).
Company member
The starting point for establishing membership is section 112 CA 2006. Apart from the original subscribers to the memorandum, a person becomes a member only if they have agreed to become one and their name has been entered in the company's register of members.
The first step is to obtain a copy of the company’s register of members. This is often best done non-contentiously by the would-be petitioner rather than by their lawyers.
The register of members is evidence of someone’s shareholding. However, it is not uncommon for would-be shareholders to rely on a company’s confirmation statements only to find that although the company’s filings at Companies House have been updated, it has not updated its own register of members. A confirmation statement is not sufficient evidence of standing (although it may support a later application to rectify the register).
It is also worth noting that beneficial owners of shares cannot bring claims in their own name. Such claims must be brought by their nominee or trustee, although if the relevant nominee or trustee declines, the beneficial owner may be able to bring a derivative or trust claim instead.
Transfer by law
In the best-case scenario, the would-be petitioner appears on the register of members.
If they do not, further investigation is needed to establish why not. The next step should be to investigate why they consider themselves a member.
The second limb of section 994 CA 2006 provides that someone with a legal entitlement to shares may bring an unfair prejudice petition. That limb is partly designed to address circumstances where the company refuses, without good reason, to register the potential petitioner as a shareholder.
To fall within that limb, a petitioner must be in a position where section 770 CA 2006 applies. This states that either (i) they benefit from a “proper instrument of transfer” in their favour, ie a properly executed stock transfer form that has been delivered to the company, or (ii) the shares have otherwise been transferred to them by operation of law, for example, as a result of death or bankruptcy.
In informally run companies, stock transfer forms are often signed incorrectly or not signed at all. The parties rely instead on an agreement between them to transfer the shares. That agreement alone does not require the company to enter the buyer in the register of members.
It is also worth noting that whether or not section 994(2) applies can be a question of fact: the company may, for example, deny that the relevant stock transfer form had been lodged. If arguments around that or similar points are anticipated, it is preferable to plead this point out in detail to avoid it becoming an insurmountable obstacle to any interim relief that is later sought within the petition.
Being a member (or otherwise falling within section 994(2) CA 2006) is a legal requirement for the unfair prejudice jurisdiction to operate and not one that can be done away with by agreement (or admission) between the parties.
How and when do you achieve standing?
If the potential petitioner does not immediately have standing under section 994 CA 2006, the next step is to work out why and assess what needs to happen so that they do.
This issue should be addressed before matters become overtly contentious. It may be possible for the potential petitioner to take steps to obtain standing relatively easily. However, if the parties’ positions become entrenched, what may have been an easily corrected issue can turn into a satellite battle.
If it is not possible to achieve standing peacefully, the court is sometimes willing to assist depending on whether doing so would best advance the overriding objective of dealing with the case justly and at proportionate cost.
A common scenario is that an application to rectify the company’s register of members under section 125 CA 2006 is made before issuing the petition. In some cases, the court will permit a stay of a petition that has already been issued and direct that standing must be resolved within a limited time period.
Standing may take some time to resolve (for example, if a restoration application is required). It is important to be alive to the interests of other parties that may be affected. This may mean that individuals or entities ostensibly unconnected to the claim need to be joined to any rectification application if they remain (incorrectly) on the register of members.
This is especially likely where questions of standing stem from prolonged poor governance of the company. The transfer of shares to the petitioner may fail because an earlier transfer also failed, which means the transferor had no shares to pass on. Alternatively, whether the petitioner has standing may be bound up with the allegations in the petition itself.
Such situations may raise difficult questions of fact that may have to be resolved in separate proceedings before a rectification application can proceed. The regularly cited English case on this point (Re Hoicrest) takes a different view, treating such questions as capable of being decided within an application under section 125 CA 2006. However, that approach has attracted significant criticism (including from the Privy Council) in circumstances where section 125 CA 2006 may be argued to provide a summary jurisdiction limited to correcting the register rather than enabling the court to decide wider-ranging questions regarding ownership of shares. It remains to be seen how long it will remain good law, although recent decisions suggest that the courts remain willing to take a pragmatic approach when it comes to how questions of standing may be established, rather than immediately striking out a petition.
Standing needs to be addressed at the outset, and any defect is likely to be easier to fix then than in the teeth of heavily contested litigation. If the petitioner turns out to lack standing and the court is unsympathetic to arguments that they should be provided time to rectify that issue, then the respondents will be able to defeat the petition on that point alone.
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