Watchstone Group Plc v Quob Park Estate Ltd & Ors

Under Companies Act 2006, unfair prejudice requires prejudice causally connected with conduct contrary to the terms governing the company’s affairs. Where no quasi-partnership or other equitable arrangement is established, the court ordinarily examines the articles, statute, agreements and directors’ duties. A director’s power must be exercised for a proper purpose, but directors may take steps to secure funding and preserve the company where they genuinely consider those steps to promote the company’s success for members as a whole. A breach without causative prejudice does not justify relief. Statutory pre-emption rights do not apply to securities wholly or partly paid otherwise than in cash, and the allotment of shares pursuant to a right is excluded from the statutory definition of an allotment of equity securities.

Watchstone Group plc, formerly Quindell plc, petitioned under section 994 of the Companies Act 2006 concerning the affairs of OS3 Distribution Ltd. It alleged that the company’s directors improperly procured a special resolution disapplying pre-emption rights, failed to notify Watchstone before the resolution was passed, and subsequently used share issues and warrants to dilute Watchstone’s 33% interest to about 5.3% while making Quob Park Estate Ltd the majority shareholder.

The petition raised issues concerning pleading, directors’ proper-purpose and good-faith duties, statutory pre-emption rights, causation, prejudice, unfairness and remedy.

1. Pleading. The petition adequately pleaded a complaint concerning the June 2015 special resolution. In section 994 proceedings, particularly given the breadth of the jurisdiction, parties must be confined to the case identified in their statements of case and put to the witnesses.
2. Special resolution. The directors’ predominant purposes were to enable the issue of shares due to Watchstone and to preserve flexibility to raise finance. They genuinely believed that the resolution promoted the company’s interests for members as a whole. The resolution was not therefore invalid merely because it was passed before Watchstone became a 33% shareholder.
3. However, the directors deliberately failed to notify Watchstone of the proposed resolution before securing the votes. That was an improper use of their powers, analogous to arranging a meeting so that an opposing shareholder could not participate, and breached section 171.
4. Subsequent transactions. The September and December transactions raised funding, improved the balance sheet, enabled further lending and contributed to repayment of Watchstone’s loan note. The pleaded case did not establish that the directors lacked a genuine belief that those transactions promoted the company’s success. No breach of section 172 or fiduciary duty was shown in relation to them.
5. Prejudice and causation. The failure to notify Watchstone caused no prejudice. The resolution would have passed even if notice had been given, and Watchstone could not have prevented the later dilution. The company’s shares had not been shown to possess value at the relevant time. In any event, no unfair prejudice was established. A breach of duty in the abstract, without causative harm, is insufficient.
6. Pre-emption. Shares and warrants issued for non-cash consideration fell within section 565. The later allotment of shares pursuant to the warrants was excluded by section 560(2)(b), and the statutory pre-emption regime did not provide the relief sought.
7. The petition was dismissed. The court stated obiter that it would not have ordered a purchase of Watchstone’s shares.