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If you read our last blog “Founder’s feuds – is litigation avoidable?” and the answer was no, and if you find yourself in a dispute with your co-founder or investor – and are unable to use mediation or dispute resolution mechanisms to protect or assert your interests and maintain the value in your shareholding – you will most likely need to commence legal proceedings.

 

Whilst litigation should not be the first port of call when disputes arise between co-founders and or investors, it may be necessary for a marginalised and unfairly treated shareholder to assert their position and obtain fair value for their contribution and shareholding in the company, had the unfair treatment not occurred.

Unfair prejudice claims

The UK Section 994 of the Companies Act provides that: “A member of a company may apply to the Court by petition for an order…… on the ground (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.”

There are two elements to the requirement of unfair prejudice, and both must be present to succeed in a claim:
  1. the conduct must be prejudicial in the sense of causing prejudice or harm to the relevant interest of the members or some part of the members of the company (i.e. shareholders), and
  2. it must be unfair: The test as to what amounts to unfair prejudice is objective. It is not necessary for the petitioning shareholder to show that anybody acted in bad faith or with the intention of causing prejudice. The courts will regard the prejudice as unfair if a hypothetical reasonable bystander would believe it to be unfair.

The difficulty in unfair prejudice claims arises because the date at which an affected founder’s shareholding should be valued and the valuation methodology is not a straightforward exercise and requires reports from expert business valuers. The court will generally make the valuation order at a date before the unfairly prejudicial conduct had taken place and thus ensure the aggrieved shareholder retains his/her share of the company at a fair valuation. The upside is that the court will generally order a remedy that best ensures the aggrieved shareholder is able to continue in the business without the unfair treatment continuing, or if this is untenable, for one shareholder to buy out the other in order that the company can continue with the aggrieved shareholder being compensated for their efforts in building the company.

Other remedies under unfair prejudice claims include that the Court can:
  1. regulate the conduct of the Company’s affairs in the future;
  2. require the Company to refrain from doing or continuing an act complained of, or to do an act which the aggrieved Petitioner has complained that it has omitted to do;
  3. authorise civil proceedings to be brought in the name and on behalf of the Company by such person/s and on such terms as the Court may direct;
  4. require the Company not to make any, or any specified, alterations in its articles without the leave of the court; and

Other potential causes of actions for founders to consider include petitioning for “just and equitable winding-up” of the company under s.122(1)(g) of the Insolvency Act and a derivative action (an action by the shareholder in the name of the company) under sections 260-264 of Companies Act. A petition to wind up the company is a very serious step but may be the best (or only viable) option in some circumstances.

How litigation funding can help affected shareholders/founders

Unfair prejudice claims are one such route to protecting your rights and ensuring appropriate orders are made or compensation ordered.

Founders should not deny themselves the right to compensation on the basis that the litigation may be too costly as litigation funders can assess the claim and if viable, fund your legal costs to take the cost pressure and adverse cost risk from a loss off you in return for a share of the damages recovered on success. Remember, litigation funders only get paid if the claim is successful and as such they bear all the risk of losing. Funders will generally fund an insurance policy (ATE insurance) that covers the adverse cost risk of a loss (paying the defendant/s legal costs as ordered by the court).

Funding also allows you to free up cash for business operations so you can both litigate your claim and continue to grow your business, you do not have to decide between the two.

Litigation funding due diligence involves analysis of the claim proposed in great detail and by a number of experienced lawyers. To put it bluntly, funders only invest in cases that are expected to win and as such you can have confidence that your case is likely a good one.

In our experience, a defendant facing litigation by a funded claimant is likely to appreciate that the funder considers the claimant has a strong case purely by reason of its funding and as such the defendant will feel pressure to settle the case before trial to avoid losing.

If you are interested in finding out more about litigation funding, and how you can apply, please contact Chris Martin or a member of our team of litigation funding experts.

Interested in learning more about the topics raised in this blog?

Check out the first blog in this series – “Founder feuds – Is litigation unavoidable?”

Can we support your case? Contact us. No obligations.
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