Isaac v Tan (Re Cardiff City Football Club (Holdings) Limited)

The petitioner brought a s.994 Companies Act 2006 petition alleging that the Company’s allotment of shares in May 2018 (the "5:2 Offer") amounted to conduct of the company’s affairs that was unfairly prejudicial because it diluted his holding. The Court analysed whether the allotment was driven by an improper purpose (CA s.171) or by directors failing to exercise independent judgment (CA s.173), and considered whether the majority shareholder’s conduct could itself be characterised as conduct of the company’s affairs.

The Judge found that the majority shareholder, Mr Tan, had mixed motives: a genuine commercial aim to implement an earlier public "Pledge" to convert debt into equity and reduce indebtedness, and also a vindictive desire to diminish certain minority holdings. However, the majority shareholder’s personal conduct, even if vindictive, did not in itself amount to conduct of the company’s affairs for the purposes of s.994. The Board’s decision to authorise the 5:2 Offer was within the power granted by the November 2016 shareholder resolution, and was a proper exercise of the allotment power to reduce debt.

The Court held that the directors (notably Mr Borley) had acted independently and for a legitimate corporate purpose; although it inferred that one director (Mr Dalman) likely had an improper collateral purpose, that did not make the exercise of the power unfairly prejudicial because the Board would, on the evidence, have reached the same decision for proper reasons. The petition was therefore dismissed. The judgment also addressed valuation and minority discount issues and stated that, had relief been granted, a May 2018 valuation with a minority discount would have been appropriate.

Background and nature of the claim: The petitioner, a minority shareholder (3.97% before May 2018), sought relief under Companies Act 2006, s.994, asserting that a restricted open offer made in May 2018 (the 5:2 Offer) which was taken up only by the majority shareholder, Mr Tan, unfairly diluted and prejudiced his shareholding. He sought an order requiring purchase of his shares at fair value, and argued the valuation date should be immediately before the 5:2 Offer.

Parties and procedural posture: This was a first instance Companies Court hearing before Mr Justice Adam Johnson. The respondents denied unfair prejudice and defended the validity and commercial purpose of the 5:2 Offer. Extensive factual evidence and expert valuation reports were heard.

Issues framed by the court:

• Whether Mr Tan’s motivation was vindictive and whether that made the conduct "conduct of the company's affairs" amounting to unfair prejudice under s.994;
• whether the directors breached duties to act within powers (CA s.171) or to exercise independent judgment (CA s.173) in approving the 5:2 Offer;
• if unfair prejudice were established, the appropriate remedy and valuation date and whether a minority discount should apply.

Court’s reasoning and conclusions:

• The Judge accepted that Mr Tan had mixed motives: a genuine commercial desire to implement the 2016 "Pledge" to convert and write off substantial loans and improve the balance sheet, together with a parallel aim to reduce minority shareholdings, including the petitioner’s. The planning and structuring records showed an intention to maximise the majority stake while reducing minorities.
• However, the Court held that the majority shareholder’s personal actions and motives, even if vindictive, were not automatically "conduct of the company’s affairs" under s.994; they were personal acts as shareholder/creditor and not acts of the company.
• As to the directors, the Court found that the Board had a legitimate commercial rationale to reduce indebtedness and that at least one director (Mr Borley) had exercised independent judgment in support of the 5:2 Offer. Although it was inferred that another director (Mr Dalman) probably had an improper collateral purpose, causation analysis showed the Board would have approved the allotment on proper grounds in any event. Applying the test of improper purpose and causation, the presence of an improper purpose did not render the outcome unfairly prejudicial.
• Accordingly the petition failed. The Judge added that, had unfair prejudice been established, a May 2018 valuation date would have been appropriate and a minority discount would apply; the expert evidence would have produced a pro rata equity figure reduced by a 45% minority discount.

The petition under Companies Act 2006 s.994 is dismissed. Although the majority shareholder had mixed motives (both a proper commercial purpose to convert debt under the 2016 Pledge and an improper motive to diminish minority holdings), the acts of the majority shareholder were not conduct of the company’s affairs for the purposes of s.994 and the Board’s allotment decision was within power and, on balance, taken for a proper corporate purpose; any improper collateral purpose in a director did not causally affect the outcome.