Unfair prejudice – the parameters of an Article 402(1) action

The First Hall Civil Court presided by Mr Justice Joseph Zammit McKeon on 12 July 2018, in the case ‘Joyce Soler vs Jagem Limited’ held among other things that mere disagreement over a proposed plan of action does not give rise to the right of the minority shareholder to claim ‘unfair prejudice’ under Article 402(1) of the Companies Act.

The facts in this case were as follows:

Jagem Limited had five shareholders, with 400 ordinary shares held by each. The shareholders were also the designated directors of the company, each having the right to attend and vote in person at the board meetings. The company was run strictly according to its Memorandum and Articles of Association, despite the fact that the shareholders (also directors) were all siblings with a mutual interest in the business of the company.

The main business of the defendant company was the renting of immovable property – Jagem had also briefly engaged in the sale of property, but discontinued this part of the business following the decease of the shareholders’ father. Furthermore, Clause 4(d) of the Memorandum and Articles of Association also allowed Jagem, ‘to invest the money of the company in any manner that the company may deem and in particular to acquire any interest in any other company’.

The conduct complained of was a motion brought before the defendant’s board of directors for a sum of money to be loaned to or invested in the company JM Vassallo Vibro Blocks Ltd, on the basis that the defendant had no need for the said sum in the near future. The plaintiff argued that such an act would have been unfairly prejudicial to its rights. However, despite having been informed of the meeting of 16 September 2015, during which the motion was discussed, the plaintiff did not attend. On 25 September, notice of a follow-up board meeting was also sent out to the directors of the company. The purpose of the meeting, according to the notice, was to continue discussing the proposal to reinvest part of the company’s capital in Vibro Blocks, in order to profit from better interest rates.

However, the plaintiff challenged the proposal, and requested the Court to issue a warrant of prohibitory injunction to prevent the investment from taking place. However, the Court turned down this request, following which the plaintiff instituted proceedings based on Article 402(1) of the Companies Act, Chapter 386 of the Laws of Malta. The provision in question states the following:

Any member of a company who complains that the affairs of the company have been or are being or are likely to be conducted in a manner that is, or that any act or omission of the company have been or are or are likely to be, oppressive, unfairly discriminatory against, or unfairly prejudicial, to a member or members or in a manner that is contrary to the interests of the members as a whole, may make an application to the court for an order under this article.

Although Article 402(1) of the Maltese Companies Act was based on its New Zealand counterpart, the latter followed legislative developments in the United Kingdom. The Court quoted Andrew Muscat in ‘Principles of Maltese Company Law’ in establishing the identity of the legitimate defendant against whom an Article 402(1) action may be brought. Muscat opined that the law does not cater exhaustively for the identity of the legitimate defendant, reason being that the latter may vary according to the facts of the case and the relief sought.

The Court remarked that it was sufficient for the conduct complained of to have been ‘oppressive’ or ‘unfairly discriminatory’ or ‘unfairly prejudicial’. The definition and breadth of ‘unfair prejudice’, together with the relevant academic literature and jurisprudence, was extensively covered by the Court. Reference was made to Brenda Hannigan in ‘Company Law’, who stated that ‘unfair prejudice’ was an objective, rather than subjective, state of affairs. Moreover, ‘the conduct complained of must be prejudicial in the sense of causing prejudice or harm to the relevant interest of the member (usually, but not limited to financial damage) and also unfairly so […] and it is not sufficient if the conduct satisfies only one of these tests’.

In setting out the parameters to the ‘unfair prejudice’ criterion, the Court made ample reference to British academic literature and jurisprudence, as well as a number of Maltese judgments. In ‘Vella et vs Vella Brothers Ltd et’ of 2007, the Court noted that the British counterpart of Article 402(1) was based on the doctrine of equity, rather than strict legal rights. Moreover, it stated that the prejudice can be either detrimental to a single shareholder, or to the common interests of all shareholders. Moreover, the standard of proof required was only that of ‘reasonable possibility’. The Court also made reference to the 2016 judgment of ‘Av. Dr. Pio M. Valletta noe vs Jeno Torocsik et’ where a number of principles regarding ‘unfair prejudice’ were laid down, namely: • The ‘unfair prejudice’ test is an

objective one; • There is no need for the plaintiff to prove bad faith on the part of the defendant; • There is no need for the plaintiff to prove intent on the part of the defendant to cause prejudice; • The term ‘unfair’ does not refer exclusively to conduct of an illegal nature; and • The conduct must have a negative effect on the plaintiff as a shareholder. The objective nature of the test had already been established in the 1983 British judgment of ‘In Re Bovey Hotel Ventures Ltd’, wherein it was held that, ‘the test, [...] is whether a reasonable bystander observing the consequences of their conduct, would regard it as having unfairly prejudiced the petitioner`s interests’. Interestingly, the Court quoted ‘Farrar’s Company Law’, which explains how the concept of unfair prejudice protects not merely the rights of the shareholder as contained in the Companies Act and the Memorandum and Articles of Association, but also covers its ‘legitimate expectations […] arising from the nature of the company and the agreements and understandings between the parties’.

In this case, the Court concluded that the mere fact that Soler’s opinion had been rejected by the rest of the shareholders does not give rise to a situation of ‘unfair prejudice’ as envisaged in Article 402(1). Disagreement over a proposal does not bring about the right of the minority to prevent or hinder the majority from taking legitimate decisions. Moreover, the investment would have procured benefits both for the defendant investor as well as the investee company. The Court also noted that there was nothing preventing the plaintiff from putting forward alternative investment plans – the mere fact that such plans were not produced does not of itself trigger the applicability of Article 402(1).

Furthermore, a request for the issuing of a warrant of prohibitory injunction, as well as the initiation of proceedings, were of an exceptional and extraordinary nature. The Court declared that the plaintiff should have resorted to the remedies available to her through the organs of the company, rather than to judicial measures.

For these reasons, on 12 July 2018, the First Hall Civil Court gave judgment by declaring that Soler did not suffer, and was not likely to suffer, unfair prejudice as a result of the conduct complained of by the defendant company. The Court declared that not only was the proposed motion in line with the Memorandum and Articles of Association of the company, but also with the doctrine of equity. Moreover, the principles of corporate governance essential to the functioning of a commercial entity were also adhered to. Based on the above, the court upheld all of the defendant’s pleas, ordering the plaintiff to pay for all the judicial expenses incurred as a result of the bringing of proceedings.