Arbitral tribunals can decide shareholders' unfair prejudice disputes

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The Court of Appeal has held that there is no rule of public policy which has the effect of rendering an arbitration agreement void and/or unenforceable insofar as it purports to bind the parties to refer to arbitration the determination of issues that would arise in an unfair prejudice petition under the Companies Act.

What has happened?

The Court of Appeal has upheld the decision of the High Court in Fulham Football Club v (1) Sir David Richards (2) the FA Premier League by granting a stay of court proceedings under s.9 of the Arbitration Act 1996 on the application of the Defendants.

Fulham Football Club presented an unfair prejudice petition to the Companies Court alleging that Sir David, the long-standing chairman of the FA Premier League, had acted as an unauthorised agent for Portsmouth FC in advising Tottenham FC to pre-empt an increased bid from Fulham in the transfer from Portsmouth of English footballer Peter Crouch.  Fulham alleged that Sir David had failed to act fairly as between the members of the FA Premier League by promoting the interests of one club over another.  Fulham sought an injunction to restrain Sir David from acting as an unauthorised agent in the future and/or his removal as chairman of the FA Premier League.

The Defendants had applied for a stay of Fulham’s unfair prejudice petition on the basis that the rules of the FA Premier League (of which all clubs in the English Premier League are members) contain an arbitration clause submitting all disputes which might arise between the members to arbitration.  The stay was granted by Vos J in a decision of the High Court in December 2010.  Fulham appealed the decision on the basis that Vos J had followed the earlier, rather than later, of two inconsistent High Court judgments on the same issue.

What are the key points?

The question that the Court of Appeal had to decide was one of arbitrability; in particular, whether statute or public policy prohibits the reference to arbitration of an unfair prejudice petition.  The Court of Appeal held that:

  • Neither the Arbitration Act nor the Companies Act contain an express restriction on submitting an unfair prejudice petition to arbitration.  No such restriction could be implied into the Companies Act on public policy grounds.
  • There is nothing in the scheme of the statutory unfair prejudice provisions which makes the resolution of an underlying dispute between shareholders inherently unsuitable for determination by arbitration on grounds of public policy.
  • The only restriction placed upon the arbitrator is in respect of the kind of relief which can be granted, since he cannot make a winding-up order or some other order which affects third party rights.  Disputes between shareholders which do not involve the making of a winding-up order are therefore capable of being arbitrated.
  • It does not follow from the inability of an arbitrator to make a winding-up order affecting third parties (an order that could be made by the Court following an unfair prejudice petition) that it was not possible for the members of a company to agree to submit disputes between shareholders to arbitration.
  • A dispute between members of a company about alleged breaches of the articles of association or a shareholders’ agreement is in essence a contractual dispute which does not necessarily engage the rights of creditors or impinge on any statutory safeguards imposed for the benefit of third parties.

How will this affect me?

The courts are now likely to stay any unfair prejudice proceedings brought before them in breach of an arbitration clause in a shareholders agreement or articles of association.

In such circumstances, a petitioner may need to first resolve the underlying unfair prejudice complaint through arbitration.  If the petitioner is successful and the relief sought is of the kind that an arbitrator does not have jurisdiction to make (for example an order that a company be wound-up or that fines be imposed) the arbitrator is likely to direct the petitioner to seek such relief from the court.

Such a two-stage process is clearly inefficient and undesirable.  If your shareholders agreement or articles of association contain an arbitration clause, and your preference is to have any issues of unfair prejudice determined in court proceedings (because of the breadth of relief available, for example), it will be necessary to expressly exclude disputes relating to those issues from the scope of the arbitration agreement by reserving the right to present an unfair prejudice petition through the courts.

What are the next steps?

Although permission to appeal was refused by the Court of Appeal, Fulham’s website indicates that it intends to seek permission to appeal from the Supreme Court.

It will therefore be necessary to await the outcome of any appeal Fulham may decide to make to the Supreme Court for the final say on the arbitrability of unfair prejudice petitions.

BLP Perspective

The Court of Appeal’s judgment is a welcome decision as far as the questions of arbitrability and party autonomy are concerned.  However, there are potentially wider implications for companies and shareholders and careful consideration should be given to the implications of this judgment at the stage of drafting and agreeing shareholders agreements, articles of association, and other company constitutional documents.

 

 

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