In the matter of Neath Rugby Ltd v Neath-Swansea Ospreys Ltd & Ors (2009)
The fact that a director of a company had been nominated to that office by a shareholder did not, of itself, impose any duty on the director owed to his shareholder.
The appellant (H) appealed against a decision ((2007) EWHC 2999 (Ch) (2008) BCC 390) determining his petition under the Companies Act 2006 s.994. H and the respondent (C) were both successful Welsh businessmen with a strong interest in rugby. The Welsh Rugby Union had announced that it wanted to establish five regional professional teams which would be owned and supported by existing local clubs. C wished to acquire Neath Rugby Football Club (Neath RFC) as a vehicle to enable him to participate in the formation and management of one of the new regional sides. As a result C and H set up a company (Neath) that owned the assets of Neath RFC. Neath had two issued shares one each owned by C and H. Agreement was reached between C and H whereby H would concentrate on the management of Neath RFC. Neath was one of two equal shareholders of a company (O) set up to own and manage the new regional side, Neath-Swansea Ospreys. The other shareholder was Swansea Rugby Football Club Ltd (Swansea). It was further agreed between C and H that C would concentrate on the management of the new regional side and for that purpose he was nominated by Neath to act as one of the two directors of O. The other director of O (B) was nominated by Swansea. Neath and Swansea signed a shareholders agreement formalising their relationship as shareholders of O. Relations subsequently broke down between C and H resulting in H bringing a petition against C under the Companies Act 2006 s.994(1) alleging that the affairs of Neath had been conducted in a manner that was unfairly prejudicial to H as a member of that company. H's main complaint was that, in performing his duties as a director of O, C had failed to represent the interests of Neath. C cross-petitioned. At the hearing the judge found that both petitions were to a limited extent well founded, however he held that C had not been conducting the affairs of Neath in several of H's allegations and further that only some of H's allegations of unfair prejudice were established. The issues to be determined on appeal were what duties were owed by C, to H or to Neath, when acting as a director of O; and to what extent, if at all, was C's performance of his functions as a director of O, the conduct of the affairs of Neath.
(1) It was common ground that C, as a director of O, was under a duty to act in O's best interests as he saw them. The fact that C had been nominated by Neath to be a director of O did not, of itself, impose any duty on C to Neath. Such a duty did not arise out of nomination but out of a separate agreement or office. There was no evidence to suggest that there was an agreement between C and H that C was under a duty owed to H to promote the interests of Neath when acting as a director of O. Whilst C could properly take account of the interests of Neath, his duty was, as the judge had held, to act in the best interests of O. Under the shareholders agreement, C and B had been appointed to act as directors of O without any general authority to act on behalf of Neath or Swansea respectively as shareholders when dealing with the affairs of O. (2) It was accepted that the affairs of a company for the purposes of s.994 were to be liberally determined. However on the facts it could not be said that the affairs of Neath and of O were so intermingled that all the affairs of the latter were the affairs of the former. (3) The question whether decisions of O affecting Neath should be regarded as part of the affairs of Neath might be academic since it was only unfair conduct that could found a petition under s.994 and the fiduciary duty of the directors of O was relevant to the question whether conduct was unfair or fair. It could not be that a decision of C, as a director of O, in what he genuinely considered to have been in the best interests of that company could be said to be unfairly prejudicial to H and Neath. The judge's rejection on the facts of certain of H's allegations of unfair prejudice was unassailable. The assessment of the seriousness or otherwise of unfairly prejudicial conduct and the decision as to the appropriate remedy when it was established were matters of judgment and a matter for the discretion of the trial judge. The court would be slow to interfere with the judge's decisions on those matters unless it could be shown that the decision was based on legal error. That was not established in this case. H had failed to establish sufficiently serious unfairly prejudicial conduct on the part of C to justify C being deprived of his share in Neath or in C losing his position in O. A perfect solution to the problems caused by the hostility between H and C could not be devised. The judge's order, represented a, and probably, the, least bad solution.