Joint venture agreements: Your nearest exit may be behind you (England & Wales)

Speed read

Business structures come under stress in challenging economic times and a party may consider its role within a joint venture. Governing contracts may not always provide a pre-negotiated route to exit and parties with a business structure incorporated in England or Wales are increasingly looking to the remedy of an unfair prejudice petition to seek support to exit a joint venture. In disputes charged with emotion and acrimony, resolution professionals need to work hard to support positive outcomes for clients. This article examines that trend and the steps businesses can take to mitigate the risks.

Why should I read this?

There are many reasons for business partners to enter into joint ownership business structures. However, compared with an arms-length trading relationship, a joint venture relationship can increase complexities if a party wants to make an early exit (or if a party wants to exit another party).

Typically, the joint venture agreement, shareholders’ agreement or articles of association will include provisions governing exit arrangements. Exit provisions may include rights to force a minority to sell in certain circumstances (for example, drag-along rights), an option for the minority to sell if the majority sells (for example, tag-along rights) and mandatory transfer provisions (for example, upon insolvency).

The general position is that there will usually be restrictions on shareholders transferring their interests to third parties, thus narrowing the exit door. How then does a shareholder force an exit when the contractual provisions do not provide a route?

This article considers the increasing trend for threatening or issuing an unfair prejudice petition (section 994 of the Companies Act 2006) to support an exit strategy, and considers practical steps to mitigate the risks.

What is Unfair Prejudice?

Under section 994 of the Companies Act 2006, any shareholder can seek relief from the court when they believe the company's affairs are being conducted in a manner that is unfairly prejudicial to its interests.

Examples of conduct that could be prejudicial to a minority shareholder include (but are not limited to):

• the passing of resolutions which might be detrimental to minority shareholders;
• the payment of excessive remuneration to certain management (who may also be shareholders);
• the diversion of business to majority shareholders; or
• exclusion from management (where there is a legitimate expectation of involvement).

Whilst the court has broad powers to grant relief, the most common relief is an order that the petitioning shareholder’s shares be purchased at fair value, usually (though not always) by the majority shareholder – or in other words, an exit from the venture.

Strategically, because of the nature of the relief sought by the petitioning shareholder, a respondent to a credible petition is likely to consider if there are ways to rectify any alleged prejudice at an early stage, including by making an early offer to purchase the petitioning shareholder’s shares (though there may well be a dispute as to value).

Even the threat of an unfair prejudice petition could conceivably provide a shareholder with a valuable route towards securing an exit.

An increasing trend?

Macro-economic shifts provide fertile ground for joint venture disputes. They may prevent a joint venture partner delivering its contracted obligations, and even call into question the fundamental viability of the entire business structure.

We have acted for joint venture partners as the potential recipient of unfair prejudice petitions in circumstances where the minority shareholder has trawled the history of the relationship to gather evidence to support a threat of a petition. In a disputes context, a new light may be cast on past events; administrative missteps may be re-cast as "exclusion from management" to try to support a claim. Electronic filing data for the High Court in England and Wales suggests that as at August 2024, nearly double the number of unfair prejudice petitions had been issued in the year to date than were issued in total in 2023 and three times as many as in total in 2022. It appears therefore that the trend may be gaining pace.

Recent decisions

Two decisions reported on in 2024 which support the trend of minority shareholders leveraging unfair prejudice petitions to support an exit are outlined below:

• Saxon Woods Investments Ltd v Costa and others EWHC 850 (Ch). In an interim decision, a judge has found that a breach of an obligation in the shareholders agreement to "work together in good faith towards an exit" could provide the basis for a successful unfair prejudice petition (if prejudice can be shown). It is notable here that if the minority shareholder is ultimately successful in relying on the provision to support the petition, it will in practical terms transform a relatively light touch provision in the shareholders agreement, which does not include a right to exit, into a tangible exit.
  
  
• Wells v Hornshaw and others [2024] EWHC 330 (Ch). In this case the minority shareholder had a contractual exit right, which he exercised. The minority shareholder then challenged the basis of the valuation that was carried out by an accountant of his shareholding. The challenge was successful, as the accountant had used outdated financial information from which to calculate the value. That was found to be conduct that was unfairly prejudicial and the court ordered that the valuation exercise be carried out again with an exit secured at the correct value.

What should I do?

Joint ventures often involve a web of contracts; with joint venture parties assuming contractual obligations to the joint venture entity itself, in addition to the contracts governing the relationships between shareholders.

As a party with a majority shareholder or control over a joint venture, keep the following in mind:

• Implement practical governance structures that are consistent with the obligations of the governing contracts. By way of example: board meetings should be held in accordance with those obligations with all necessary parties being invited (and provided with documents); reserved matters should be considered at shareholder level with the relevant thresholds being satisfied, or as may otherwise be required.
  
  
• Keep financing structures of the joint venture under review, including the management of shareholder and other commercial loans.
  
  
• Manage trading contracts with joint venture parties carefully and understand the risks they pose.
  
  
• If you are considering an exit (or exiting a co-shareholder) ensure that the contractual mechanisms for doing so are fully understand and that all procedural requirements are followed closely.
  
  
• Ensure written records are kept of decision making and the commercial rationale for the same, paying particular attention to the voting thresholds, notice requirements, conflicts and related requirements. Section 177 declarations of interest should be made and filed to ensure the directors appointed by the shareholders have the necessary protection.

If you are a minority shareholder and feel that the company's affairs are being conducted in a manner that is unfairly prejudicial to your interests, there may be grounds for an unfair prejudice petition which may provide a route to exit that has not previously been considered. The test for unfairness is objective, and the conduct must be both unfair and prejudicial in the sense of causing harm to the relevant interest of the members.

How to resolve disputes in this area?

Disputes in this area are often highly charged with emotion and acrimony. Whilst sometimes a robust offensive or defensive position will be justified, disputes resolution practitioners need to work hard to help clients manage their most difficult disputes to an early resolution.

We have had particular success in this area in utilising alternative dispute resolution tools to help support resolution, including facilitated negotiation and mediation.