The recent High Court judgment in the case of VB Football Assets v Blackpool Football Club (Properties) Limited (“BFCPL”) provides a relevant platform on which to consider the relationship that exists between majority and minority shareholders and the remedies that are available to those minority shareholders.
In the above case, Mr Justice Smith has ordered that Blackpool Football Club (Properties) Limited, wholly owned by the Oyston family, buy out the minority shareholding of Blackpool FC owned by Latvian businessman Valeri Belokon for the sum of £31.27 million.
Mr Belokon’s company, VB Football Assets, has been in dispute with BFCPL, which owns 76% of Blackpool Football Club, since 2010 when the club was promoted to the Premier League.
Mr Belokon alleges that the Oystons have acted unfairly by using their majority shareholder powers to exclude him from the board of directors and to cause funds from the club to be channelled into other Oyston-owned companies.
The relationship between majority and minority shareholders
In general, any shareholder or group of shareholders that control a total of 75% of a company’s allotted share capital can vote on and pass special resolutions and therefore do not require the consent of the minority shareholders for decisions to be made. If the majority shareholding is vested in one person or entity this imbues them with significant power over the company to impose their will.
If a company is being managed in accordance with its articles and in lawful conjunction with the relevant legislation, then minority shareholders will have little scope to challenge the decisions of the majority, simply because they do not agree. There are, however, a number of equitable remedies by which the minority shareholders may rely on to protect its interests and which can provide relief if the company is being managed in a way that is ‘unfairly prejudicial’ to some or all of its shareholders.
• Petition for Unfair Prejudice (s.994 Companies Act 2006)
• Petition for Just and Equitable Winding-up of the Company (s.125 Insolvency Act 1986)
• Derivative Claims (s.260 – 264 Companies Act 2006)
In this case, VB Football Assets petitioned the court pursuant to s.994 Companies Act 2006.
Petition for Unfair Prejudice
The basis for a claim alleging ‘unfair prejudice’ needs to demonstrate that the affairs of the company have been conducted by the majority interest in a manner that is unfairly prejudicial to the aggrieved shareholder’s rights.
The court enjoys a wide discretion as to the remedies it can order. The most commonly sought and most often granted remedy is an order that the majority shareholder be required to purchase the petitioning minority shareholders interest at a price determined by the court, often reflecting market value.
The case in relation to minority shareholder remedies
VB Football Assets petitioned for relief on a number of grounds, which the court considered:
1. Firstly, Valeri Belokon alleged that he and his nominated directors were being excluded from board decisions. Upon examining evidence which unearthed correspondence relating to club affairs strictly between the Oyston family and representatives, and Belokon’s contention that he and his people were often not invited to sit on board meetings; Mr Justice Smith summarised that although Mr Belekon and his chosen directors were not entirely excluded from club matters, they were indeed not party to decisions where the Oystons anticipated they would disagree and thus concluded that there was a valid claim for unfair prejudice.
2. Secondly, VB Football Assets contended that the Oyston family took money from the club following their promotion to the Premier League in 2010 and distributed it amongst their various other companies. It was claimed that on the night of the celebratory dinner after gaining promotion, Owen Oyston approached Mr Belekon with a plan for each to take loans from the company of “between £3 – £5m”; which Mr Belokon declined and did not give consent for the Oyston family to do so. Nevertheless, the Oyston family went ahead with the plan. It was alleged that Owen Oyston took a small personal loan from the club, and arranged for a larger payment to a dormant company owned by the Oyston family. Further payments were made in the years following.
Mr Belokon assumed a 20% shareholding of the club in 2006 and alleged that neither he nor his company received a dividend. Whilst dividends were not declared by the Oystons or their associated companies it was found apparent that the Oyston family profited enormously from the club through what Mr Justice Smith described as “secret dividends”; for if the Oyston family were to pay themselves a legitimate dividend then VB Football Assets and the other small group of individual minority shareholders would be similarly entitled. This was clearly never their intention and therefore Mr Justice Smith found a further valid ground for unfair prejudice.
3. The judge also came to a rather more contentious decision that loan agreements given on behalf of Valeri Belokon to the club gave rise to a “quasi-partnership” between Mr Belokon’s company and the Oyston family company. This meant that the two party’s interests should have been equal in regards to the affairs of the club. Mr Justice Smith applied what was described as a “gentleman’s agreement” to confer an equal shareholding between Valeri Belekon and BFCPL. He did however contend that the claims for unfair prejudice would stand regardless of the gentleman’s agreement.
What does case teach us?
Mr Justice Smith ordered that the Oyston family purchase the shareholding of VB Football Assets for the value of £31.27 million. This decision highlights the need for transparent business practices and fair dealing on behalf of the powerful majority in relation to the less powerful minority shareholders. The protections afforded to minority shareholders ensure that the majority cannot abuse their powers to pursue their own business agenda to the detriment of the minority.
Of particular importance is the need to consider whether business arrangements may lead to an investor becoming a “quasi-partner” of the company. In this case, a number of loan agreements given from Valeri Belekon to the club created the “legitimate expectation” that he (VB Football Assets) would become an equal shareholder in the club on par with the Oystons and share management responsibilities as such.
Although Justice Smith affirmed that his findings of unfair prejudice were not made in light of the quasi-partnership, in another context if the fact of a quasi-partnership was evident it would make a petition for unfair prejudice all the easier to prove.
The valuation given to Valeri Belekon’s shareholding by Justice Smith can be seen as extremely favourable. In reality, the 20% stake of a League One football club is likely a fraction of the ordered purchase price. The ruling has effectively forced the Oyston family to officially offer the club up for sale.
The Oyston family were not given leave to appeal the decision of the High Court. However, they still have the right to apply directly to the Court of Appeal. At the time of writing, there has been no indication as to whether an appeal is forthcoming.
What is clear from this ruling is that the courts have strengthened the legal position of shareholders with minority shareholdings within companies. Whilst the facts of this case are extremely unique, particularly having regard to the finances that were put into the company by the Premier League, minority shareholder disputes are not so.
Shareholders need to be aware of their rights within companies in which they are members, and if such rights are being breached then importantly they need to be clear as to their remedies.
The commercial litigation team at Harrison Drury has acted in both minority shareholder claims and in defending minority shareholder claims and have extensive experience in advising shareholders on their rights and remedies. For more information contact Nick Booth on 01772 258321.