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Ignoring shareholder protection is a risky game

24th Apr 2024
Brought to you by
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For nearly two decades, Davenport Thomas’s highly experienced team has worked closely with numerous accountancy practices to support their clients with a wide range of financial planning needs.

Save content
Have you found this content useful? Use the button above to save it to your profile.

Accountants – do you discuss shareholder protection annually with your clients?

Shareholders have rights – and they also have responsibilities. When one party does not live up to these responsibilities, the end result can be a shareholder dispute.

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It is important that accountants tackle shareholder protection face on. A case brought by a minority shareholder at Blackpool FC illustrates how large the stakes can become if left unaddressed – and how a claim for unfair prejudice can restore justice.

What is unfair prejudice for shareholders?

Instances of unfair prejudice generally involve minority shareholders who believe that the majority shareholder is acting against their best interests. A claim for unfair prejudice can be brought under section 994 of the Companies Act 2006.

There are a number of ways that unfair prejudice can arise. These range from the exclusion of a shareholder from management decisions and meetings to a refusal to pay due dividends.

One situation that can lead to unfair prejudice is in the aftermath of the death of one shareholder. If another shareholder tries to change arrangements for their own benefit without taking into account the deceased shareholder’s beneficiaries, this could result in unfair prejudice.

Unfair prejudice at Blackpool FC

To understand how unfair prejudice process works – and how costly it can be – consider the case of Valeri Belokon and Blackpool FC.

Mr Belokon became a minority shareholder in the Lancashire-based football club in 2006, after acquiring a 20% stake. Around that time, an unwritten ‘gentleman’s agreement’ had led Mr Belokon to believe that he would, in time, receive a shareholding on par with the Oyston family until such a time as the joint management could be formalised.

The situation changed in 2010 when Blackpool were promoted to the Premier League. This on-pitch success led to the club receiving a major financial boost. Before long, the Oystons extracted tens of millions of pounds from the club through director’s remuneration and intra-group loans. In total, the majority shareholder made payments to the value of £26m – without consulting the minority shareholder.

Why Mr Belokon won the case for unfair prejudice

The Judge ruled that Mr Belokon suffered unfair prejudice at the hands of the majority owners, the Oyston family, who acted against the best interests of the minority shareholder. The money received by the Oystons were disguised dividends, the Judge concluded.

In making these payments, the Oystons excluded Mr Belokon and his representatives from management. Significantly, the Judge cited the ‘gentleman’s agreement’ between Mr Belokon and Mr Oyston that the club would be run on the basis of parity; because of this, Mr Belokon had a legitimate expectation to be treated as an equal partner.

When a claim of unfair prejudice is successful, the court may be able to order the company or its directors to take specific actions to remedy the situation. In the case of Blackpool FC, the Judge ruled that the Oystons should pay Mr Belokon a buyout order of more than £31m. This included Mr Belokon’s original investment in the club (£4.5m) plus the value of the disguised dividends.

What lessons does the case hold?

Not everyone will be fighting over sums as large as the Oystons took from Blackpool as disguised dividends.

However, the case (and its ultimate verdict) hold several lessons.

  1. It shows that minority stakeholders can have a strong claim against majority shareholders who exclude them from decision making.
     
  2. The ‘gentleman’s agreement’, which played a significant role in the final verdict, is a reminder that unfair prejudice can be found even in the absence of written documentation.
     
  3. The outcome of an unfair prejudice case can surprise both parties. For example, the Oystons and Mr Belokon provided wildly different valuations for Blackpool FC: the former cited £5.5m and the latter £59.7m. In the end, the Judge deemed neither of the valuations appropriate and came to his own conclusion somewhere in the middle. This shows to what extent the courts have discretion in awarding the final settlements in cases of unfair prejudice.

Are you speaking to your clients about shareholder protection?

Protecting shareholder rights doesn’t have to be complicated. Like any type of assurance it’s easier and cheaper to get cover at younger ages.

It’s important for accountants to speak to any appropriate clients annually about shareholder protection and to get cover in place as early as possible as premiums are likely to increase with age.

Roebuck is a Trading Name of Roebuck Mortgages and Protection Limited who are appointed representatives of RJM and Associates (Hampton) Ltd who also trade as Davenport Thomas. Roebuck was set up to help provide accountants with a solution to their mortgage and protection advice requirements. For a discussion about how we can help, you can book directly into our diary here, email us or call us.

Calendly - David Fear
David’s tel number: 0208 8192407
David’s email:  [email protected]

 

Financial protection policies typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.