Zedra Trust Company (Jersey) Ltd v The Hut Group Ltd & Others
| Jurisdiction | England & Wales |
| Judge | Lord Justice David Richards,Lord Justice Coulson |
| Judgment Date | 15 June 2021 |
| Neutral Citation | [2021] EWCA Civ 904 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2020/00437 |
| Date | 15 June 2021 |
In the Matter of the Hut Group Limited
And in the Matter of the Companies Act 2006
[2021] EWCA Civ 904
Sir Geoffrey Vos, MASTER OF THE ROLLS
Lord Justice David Richards
and
Lord Justice Coulson
Case No: A3/2020/00437
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS IN MANCHESTER
INSOLVENCY AND COMPANIES LIST (ChD)
His Honour Judge Eyre QC
Royal Courts of Justice
Strand, London, WC2A 2LL
Lance Ashworth QC and Dan McCourt Fritz (instructed by Gowling WLG (UK) LLP) for the Appellants
Paul Chaisty QC and George McPherson (instructed by DWF LLP) for the Respondent
Hearing dates: 18–19 May 2021
Approved Judgment
Introduction
This is an appeal against an order dismissing an application to strike out a petition presented under section 994 of the Companies Act 2006.
The petition was presented on 7 January 2019 and alleges that the affairs of The Hut Group Limited (the company) have been conducted in a manner which is unfairly prejudicial to the interests of the petitioner, Zedra Trust Company (Jersey) Limited (Zedra). Zedra, as the trustee of a discretionary settlement (the trust), holds shares in the company which, at the date of presentation of the petition, represented some 8.34% of the issued share capital of the company and 9.63% of the voting rights exercisable at general meetings.
The respondents to the petition are the company and 14 individuals who held office as directors of the company for the whole or part of the period between May 2011 and November 2018. It was within that period that the conduct which Zedra alleges to have been unfairly prejudicial occurred. For convenience, I will refer to them as the respondents, although they are appellants on this appeal.
The central and, by some distance, the most important complaint made in the petition is that, as a result of issues of shares by the company between 19 February 2016 and 30 May 2018 (the share issues), the relative size of Zedra's shareholding was reduced from 13.12% of the company's issued share capital and 13.28% of the voting rights to 8.34% and 9.63% respectively. Complaints are also made about an alleged failure to comply with an obligation to provide information to Zedra and about alterations to “co-sale” rights in the company's articles of association which adversely affected shares held by Zedra. Events since the presentation of the petition, and indeed since the order under appeal, mean that these alterations to the co-sale rights have ceased to have any impact on Zedra but the allegations are relied on as corroborative of the alleged motives of the respondents in authorising the share issues.
By an application notice dated 14 June 2019, the respondents applied under CPR 3.4 to strike out the petition as an abuse of the court's process, or to strike out parts of it, on the grounds that they were improperly pleaded, unsustainable or abusive.
The application was heard by His Honour Judge Eyre QC, sitting in the Business and Property Courts in Manchester, on 23 September 2019. He gave judgment on 17 January 2020, dismissing the application. The respondents appeal, with permission granted by Asplin LJ on 7 July 2020.
Sections 994 to 999 of the Companies Act 2006
Part 30 of the Companies Act 2006 (the Act), headed “Protection of members against unfair prejudice”, confers jurisdiction on the court to give relief where a member of a company establishes “(a) that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or (b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial”: section 994(1).
Although expressed in very broad terms, the approach to be adopted in assessing whether conduct is unfairly prejudicial, in the light of the commercial context in which most companies operate and the underlying principles of company law, has been considered and settled by the courts. The leading cases are Re Saul D Harrison & Sons plc [1995] 1 BCLC 14 in this court and O'Neill v Phillips [1999] UKHL 24, [1999] 1 WLR 1092 in the House of Lords. In the second of those cases, Lord Hoffmann, repeating in substance what he had said in the first, said at pp. 1098–1099:
“…a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted…there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers. Thus unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith.”
As was made clear in those cases, the terms on which a member agreed that the affairs of a company should be conducted will usually be found in the articles of association, any shareholders' agreements, the fiduciary (now statutory) duties of directors and the principles of law which limit the power of a majority of members to bind the minority by resolutions in general meeting. There may be cases, such as those discussed by Lord Wilberforce in Re Westbourne Galleries Ltd [1973] AC 360 at p.379, where the particular circumstances of the case, normally involving the personal relations between the members of a small company, may subject the exercise of legal powers to equitable restrictions going beyond the articles, agreements and rules of law. However, such cases are not the norm. As Lord Wilberforce said, the company structure “is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small.”
As will be seen, the circumstances of the present case do not call for the application of the equitable considerations discussed by Lord Wilberforce. The relationship between all the parties has at all times been entirely commercial, as evidenced by the detailed and complex provisions, including those for the protection of members' interests, contained in the company's articles and in the shareholders' agreement to which Zedra acceded when it became a shareholder.
The range of relief available to the court where unfair prejudice is established is very broadly stated in section 996, as confirmed by the authorities which, as Vos J (as he then was) said in Apex Global Management ltd v FI Call Ltd [2013] EWHC 1652 (Ch), [2014] BCC 286, “all speak with one voice. They show that ss.994–996 provide a wide and flexible remedy…”. Section 996(1) provides that the court “may make such order as it thinks fit for giving relief in respect of the matters complained of and, expressly without prejudice to the generality of that power, section 996(2) specifies in five paragraphs orders that the court may make, including regulating the conduct of the company's affairs in the future, requiring the company to alter its articles, requiring the company to do particular acts or to refrain from doing such acts, and providing for the purchase of any member's shares by other members or by the company. Whether any order should be made, and if so what order, is left to the discretion of the court.
The facts
As the application to strike out the petition was made under CPR 3.4, including on grounds that pleaded allegations of bad faith and improper purpose against the directors were unsustainable on their own terms, the court proceeds on the basis that the allegations of primary fact made in the petition are taken, for the purposes of the application and this appeal only, to be true. Further pleadings and some evidence filed on the application have amplified or clarified those allegations in some respects and we have been informed of some uncontentious facts which have a bearing on the appeal.
The business of the company is described in the petition as that of an international technology company focusing on digital retail in the beauty and wellbeing sectors. It was incorporated as a private company in 2008, although the business was started a few years earlier, and has grown rapidly, in part through the acquisition of brands and other businesses. Significant amounts of new capital were raised through the issue of shares to institutional investors. In September 2020 the company's shares were listed on the London Stock Exchange and we were told that its market capitalisation is now some £6 billion.
During the period relevant to the petition, from 2011 to 2018, the company had a complex share capital structure. From 31 May 2011, it comprised four classes of ordinary shares (A, B, C and D), various classes of shares with limited capital rights (A, A1, A2 and so on) (collectively ‘the A Shares’) and Deferred Shares. Subsequently further classes of A Shares were created and issued. Many of these classes were created for the purpose of the acquisition of businesses or new injections of capital. We were told that, as part of the listing of the company's shares, the capital structure was considerably simplified, with a single class of ordinary shares replacing the A Shares and the A and B Ordinary Shares.
In brief, the rights which were attached to the different classes of shares, so far as relevant, may be summarised as follows. The A Ordinary and B Ordinary Shares and the A Shares ranked pari passu for dividends. On a return of capital, there was a waterfall, with the holders of each...
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