Corporate update: the latest corporate law developments April 2024

Changes to financial promotion exemptions reversed

The Government has announced a reversal of its changes to the high net worth (HNW) individual and sophisticated investor financial promotion exemptions made in January and which were highlighted in a previous legal update.

The January changes were intended to tighten the protections afforded to potential investors and prevent high-risk investments from being promoted to ordinary consumers. But, following “significant” concerns raised by stakeholders about the “unintended impacts” of those changes, the Government has now confirmed they are reversed with effect from 27 March 2024. In particular, the technology, angel investing, and theatre sectors raised concerns that the January changes could affect the ability of start-up businesses to obtain investment, and the ability to finance theatre productions through small-scale investors.

The reversal will effectively reinstate the previous thresholds and criteria in force before the January changes so that:

• the income and net assets thresholds to be eligible for the HNW individual exemption are reduced back to £100,000 and £250,000 respectively; and
• the criteria to be eligible for the sophisticated investor exemption once again include having made two or more investments in an unlisted company in the previous two years. The level of company turnover required to satisfy the ‘company director’ criterion is reduced back to £1m.

The January changes also introduced a new format for the investor statements associated with the HNW individual and sophisticated investor exemptions. The Government has confirmed that the updated format of those statements will be retained, albeit with the above reinstated thresholds.

Comment

The exemption thresholds had not changed since they were introduced in 2005 so an update was probably overdue. Although the Government did consult on the January changes, the concerns of the technology, angel investing, and theatre sectors were not raised as part of that consultation and only came to light after the changes had come into effect. The Government has said that it intends to carry out further work to review the scope of the exemptions.

Helpfully, transitional measures mean that any investor statements that complied with the January changes will continue to be effective until 30 January 2025.

Unfair prejudice claims: the clock is ticking

In the landmark decision of THG Plc & others v Zedra Trust Company (Jersey) Limited [2024] EWCA Civ 158, the Court of Appeal has overturned 40 years of received wisdom by holding that unfair prejudice petitions are subject to statutory limitation periods. The length of the limitation period will depend upon the type of remedy being claimed.

Unfair prejudice claims and limitation periods

An unfair prejudice claim is a statutory remedy available to shareholders of a company under section 994 of the Companies Act 2006 (CA 2006). It is the main procedural route for a minority shareholder to petition the court when they believe that the company’s affairs are being conducted in a manner that is unfairly prejudicial to their interests. The courts are given a wide discretion under the CA 2006 to make any order they think fit to give relief in respect of any successful petition.

The Limitation Act 1980 (Limitation Act) sets out limitation periods for different types of claim. When the Limitation Act applies, an action must be started within the relevant limitation period or the action will be time-barred and the defendant will have a complete defence to the claim.

Courts have long assumed that the Limitation Act does not apply to unfair prejudice petitions and, therefore, the usual limitation periods for bringing claims do not apply. This has meant that, in theory, an unfair prejudice petition could be brought many years after the alleged unfair conduct occurred. In practice, however, the courts have often used their wide discretion under the CA 2006 to refuse relief where the delay in bringing a petition would make it unfair or inappropriate to grant it.

The Court of Appeal was asked in the THG Plc v Zedra Trust Company case to decide whether, as a matter of principle, any limitation period applies to an unfair prejudice petition brought under section 994 CA 2006.

Court of Appeal decision

In a unanimous decision, the court held that the Limitation Act does apply to statutory unfair prejudice claims. It critically examined the historic assumption that limitation periods were not relevant for unfair prejudice petitions and could not find any justification for that assumption.

The court found that the Limitation Act imposed limitation periods in respect of different types of “action”, and an “action” included “any proceedings in a court of law”. An unfair prejudice petition initiated proceedings in court and could, therefore, fall within the scope of the Limitation Act.

When considering the applicable limitation period, the court stated that a shareholder’s right to petition for relief for unfair prejudice was derived from statute only (i.e. under the CA 2006 and not under common law or equity). As such, it would fall under section 8(1) of the Limitation Act, which imposes a 12-year limitation period on claims deriving from statute or under a deed.

However, the court also acknowledged that the 12-year limitation period could be displaced by a shorter period set out in another provision of the Limitation Act. It held that where the remedy sought by the petitioner involved monetary compensation (as was the position in this case) the claim would fall under section 9 of the Limitation Act. Section 9 imposes a shorter, six-year limitation period for monetary claims and meant that, on the facts, the petitioner’s claim was time-barred. If the relief sought had been non-monetary, for example, a claim for specific performance, then the relevant limitation period would have remained at 12 years.

Comment

Although a somewhat surprising decision, the Court of Appeal has now definitively ruled that unfair prejudice petitions are subject to limitation periods. As such, shareholders and directors alike should consider any timing constraints when either asserting or defending unfair prejudice claims.

Questions remain to be answered, however, including whether a court could still summarily dismiss a petition on the grounds of delay (effectively exercising its wide discretion under the CA 2006) even if the petition were to be brought within the applicable statutory limitation period.

The Court of Appeal did usefully confirm that a buy-out order – where the petitioner asks the court to order the other shareholders to buy the petitioner’s shares – is not a monetary claim. Lewison LJ stated that such an order is analogous to an order for specific performance and, therefore, the longer 12-year limitation period would apply to petitions claiming that form of relief.

Breach of obligation to seek an exit in shareholders’ agreement

In another case involving an unfair prejudice petition, Saxon Woods Investments Ltd v Costa [2024] EWHC 387 (Ch), the High Court considered the meaning of an obligation in a shareholders’ agreement to seek an “exit” by a particular date, whether that obligation had been breached and, if so, the consequences of that breach.

Facts

Spring Media Investments Limited (the Company) was a holding company of a group that provided creative services to brands in the fashion, beauty and luxury brand sectors. In 2016, following a refinancing, the Company and its shareholders entered into an agreement setting out certain governance arrangements.

The agreement included an obligation on the Company and its shareholders “to work together in good faith towards an Exit [defined as a sale of all the Company’s issued share capital] no later than 31 December 2019”. The parties also agreed that they would “give good faith consideration to any opportunities for an Exit” before that date and that, if no exit had been achieved by that date, an investment bank would be engaged to “cause an Exit”.

In fact, no exit occurred before 31 December and, at the time of the court case in October 2023, an exit had still not taken place.

The court case involved a claim by one of the Company’s minority shareholders (the Investor). Rather than claiming for breach of the obligation in the shareholders’ agreement, the remedy for which would have been damages, the Investor brought an unfair prejudice claim, arguing that the failure to perform the obligation in the shareholders’ agreement constituted conduct which was unfairly prejudicial to the Investor and that that failure was caused by the Company’s chair who was also a shareholder (indirectly, via his investment company). An unfair prejudice claim meant that the Investor was able to seek a buyout of its shares as a remedy, potentially giving it the desired exit.

Decision

In reaching its decision, the court considered the following points in relation to the exit obligation in the shareholders’ agreement:

• whether the obligation should be read as including a carve out so that the directors were not obliged to comply with it if doing so would be in breach of their fiduciary duties. The Company argued that by pursuing a deal today rather than waiting for a better deal tomorrow, the directors would potentially be in breach of their fiduciary duties. Whilst the judge agreed that the directors were generally obliged to seek the best price for the shareholders, the question of whether to elect for “jam today over jam tomorrow” was a commercial one and the directors could not be in breach of their fiduciary duties by seeking an offer at a particular time;
• whether the obligation to seek an exit by 31 December 2019 was satisfied by having engaged in preparations for an exit before that date. The judge noted that it was true that the Company was pursuing an exit. But the obligation was not to pursue an exit at a time the directors considered reasonable; it was to do so by a fixed date. So, a decision by the directors to defer a sale beyond the end of 2019 was not permitted by the terms of the clause (even if the directors believed this was commercially reasonable);
• whether a sale to a new company into which some of the existing shareholders “rolled over” part of their investment, becoming shareholders in the acquisition vehicle, was an exit for the purposes of the shareholders’ agreement. Here the judge said that where a purchase was made by a vehicle with a capital structure that was entirely different from the target, it was misleading to speak of shareholders “rolling over”. What they were actually doing was selling an investment with one particular set of characteristics and acquiring another investment with a very different set of characteristics. As the judge noted, it would be relatively standard practice for a private equity house to look for some of the existing shareholders to remain invested in a company it acquired. But this would still constitute an Exit under the agreement; and
• whether, if an exit was not achieved by the end of 2019, the shareholders’ agreement imposed any timetable on the process of then “causing” an exit. The judge said that time was of the essence in the agreement, and it was wrong to suggest that, once the desired deadline had passed, there was no further urgency. He said that the clause should be read as including an implied term that if an exit was not achieved by 31 December 2019, the parties should work in good faith to achieve it as soon as reasonably practicable and/ or within a reasonable time after that date.

Having interpreted the obligation in that way, the judge found that the Company was indeed in breach of the shareholders’ agreement and that this had been caused by the chair who had been entrusted with the exclusive conduct of the sale process. The chair pursued a strategy that was contrary to the Company’s obligations in the shareholders’ agreement.

The judge went on to find that the Company’s actions had resulted in the Investor suffering unfair prejudice.

Comment

The date by which the exit was to be achieved, 31 December 2019, turned out to be particularly significant. The chair gambled that the Company would significantly increase its value if a sale was deferred for 12 months. But shortly after the deadline expired, the Covid pandemic hit and the restrictions imposed on social and business activity in response meant that the chair’s gamble failed. According to the judge, if the Company had performed its contractual obligation to consider all offers, it would have had at least one or two conditional offers on the table by the end of 2019; if it had properly instructed an investment bank, it may well have had more.

Whilst the judge agreed that the Investor had suffered unfair prejudice, he ordered another hearing to be held in order to establish whether or not the Investor had actually suffered any loss as a result. This will turn on whether or not an offer for the Company above $75m (the level which the judge found was acceptable to the board) would have been received had the Company complied with its obligations under the shareholders’ agreement.