Pre-action disclosure of documents in unfair prejudice proceedings

Ordinarily, shareholders who are not directors have no general rights to inspect a company’s books and records. This can often present a barrier to a shareholder understanding whether a company’s affairs have been conducted in an unfairly prejudicial manner. However, in appropriate circumstances, a shareholder can force disclosure of relevant documents before commencing unfair prejudice proceedings.

Unfair prejudice petitions

A shareholder may petition the court for relief under section 994 of the Companies Act 2006 on the basis that the affairs of a company are being, or have been, conducted in a manner that is unfairly prejudicial to the interests of its members. The conduct complained of must be both “unfair” and “prejudicial” and commonly encountered grounds emanate from breaches of the agreements between shareholders, or of a company’s articles of association, or of the directors’ fiduciary duties. Typical examples are the improper dilution of a minority’s shareholding, a failure to pay dividends to shareholders often coupled with excessive remuneration of directors, and mismanagement.

If the court finds there has been unfairly prejudicial conduct, it has a wide discretion to make any order to fix the relationship between shareholders, but it will most commonly order the purchase of the petitioner’s shares at a fair value (purchase order).

Asymmetry of information

Shareholders who are not directors might suspect that something is amiss from the annual accounts and/or that the directors have acted in breach of their duties. They often encounter difficulties in getting to the bottom of their concerns. Absent an express agreement, the default position is that a shareholder who is not a director is entitled only to copies of the annual accounts (and limited other documents) and has no general right to access and inspect the company’s books and records.

A shareholder’s concerns can be addressed in a pre-action letter before claim. In response, the court expects the parties to exchange sufficient information to understand the other party’s position, including the exchange of “key documents”, and to try to settle the issues without proceedings. That sounds helpful in principle, but in practice, reasonable requests for documents and information are not always answered reasonably.

The court also recognises that there are cases where a request for documentation is justified at an earlier stage and before the pre-action process is undertaken, specifically “where a claimant knows that something has gone wrong very badly, but has little idea as to why, and needs documents in order to formulate a letter of claim”.

If a shareholder’s reasonable requests for documents in either of the instances above have been rebuffed, in the right circumstances the court may provide relief by making a pre-action disclosure order.

High Court judgment

In the case of Dennis and Ors v Queenwood Golf Club Limited [2024] EWHC 3191 (Ch), the High Court made an order that Queenwood Golf Club Limited (the “Golf Club”) provide pre-action disclosure of identified documents to the applicant shareholders (“applicants”). It made the order before the applicants had issued a letter of claim.

The applicants had for some months without success personally sought to obtain information and documentation from the Golf Club, most notably about a series of unexplained payments of several million pounds to individuals on the board of directors with a controlling share in the Golf Club. When the applicants instructed solicitors, the Golf Club commissioned a report by Deloitte to address the concerns of the applicants (“Deloitte report”). The applicants were not satisfied with the Deloitte report and considered that it raised more questions than it answered.

The Judge agreed that the Deloitte Report contained gaps and inconsistencies and ordered that the company should disclose to the applicants copies of any document provided to Deloitte for the purposes of producing the Deloitte Report, and all covering communications and instructions. In the Judge’s view there were “unusually powerful grounds on the facts of this case for thinking that the provision of the documents will assist the parties in resolving their differences otherwise than through proceedings.”

Not all of the applicants’ requests for disclosure were granted. The Judge was keen to limit the disclosure to what he considered were the “key documents” in respect of which, compliance by the company would not be burdensome.

Conclusion

This case had unusual facts which in the Judge’s view were “sufficiently outside the norm” to justify the order made. The Court also understood it was dealing with the first occasion where documents had been sought from a company by its shareholders by way of pre-action disclosure in anticipation of an unfair prejudice claim under s. 994.

The case highlights that shareholders can be successful in obtaining relevant documents to support their case (or even suspicions) of unfair prejudice by making carefully considered and reasonable requests in correspondence, and by way of an application to the court if necessary. The case adds to the armoury of a shareholder whose rights may have been unfairly prejudiced because companies and those who control them should be aware that the court can and will intervene and order pre-action disclosure in the right circumstances.

How we can help

We can assist shareholders to seek and obtain pre-action disclosure of documents. If you have a question or need advice about your rights as a shareholder, please contact our expert shareholder disputes team.