Kicking off at CCFC: Unfair prejudice judgment released

Cardiff City FC:  A case study in unfair prejudice petition shareholder disputes

Mr Isaac, a minority shareholder (originally c.3.9%) in Cardiff City Football Club (Holdings) Limited (the Company), brought the unfair prejudice petition under s994 Companies Act 2006. The majority shareholder, Mr Tan, originally had 94% of the shares, and there was already a breakdown in relations between the two.

The unfair prejudice complaint

In summary, Isaac complained about an open offer of shares made by the Company which only Tan chose to take.  That increased Tan’s shareholding to over 98% and diluted Isaac’s to just over 1%. Isaac complained that this dilution was unfair and prejudicial, not just because it made him worse off, but because he alleged the process was orchestrated by Tan out of personal animosity, rather than a true business interest.  Isaac also argued that the directors had failed to exercise their power to allot new shares only for a proper purpose [2].

Despite the wide range of remedies available, Isaac sought a court order forcing Tan to buy his shareholding for fair value.  (That course of action is often the ‘default’ in unfair prejudice petitions.)

Response and commercial context

Tan was the main Respondent and denied the allegations.  As was well reported in the sports press and noted by the judge, Tan had made a ‘pledge’ to reduce the amount of the Company’s (and therefore Cardiff FC’s) indebtedness. This was a matter of concern to Cardiff FC supporters because of its effect on the operations of the Club, having regard to UEFA’s Financial Fair Play Regulations. In fact, in early 2016 Cardiff FC had been embargoed from acquiring new players during the January transfer window as a result of restrictions under those Regulations.  As part of the pledge, Tan paid for the new shares issued to him by agreeing to write off around £67m which was owed to him from the Company.

Timing of shareholding valuation

A key point arising was around the date on which Isaac said his shareholding should be valued. He said the court should turn back the clock to 2018, just before the share offer was made.  Not only would he have had the larger 3.9% shareholding at that date, but also it was common ground that if the ‘present day’ valuation was used, the shares would be worth nothing [3].

Outcome

The judge concluded that, for various reasons, there had been no unfairly prejudicial conduct.  Isaac’s claim failed.  However the judge went on to offer some helpful legal and practical insights.

Unfair prejudice and shareholder valuation disputes: Legal/practical advice

Of interest to all those concerned with unfair prejudice claims, shareholder disputes, share valuation, and corporate governance generally, the judge’s commentary ultimately confirmed:

• The relevant date for valuing the shares would have been 2018, before the dilution of Mr Isaac’s shareholding. (A hollow victory.)
• A minority discount would have been applied. (That was predictable.)
• Unlike ‘quasi-partnerships’, where a minority discount is less common, the judge concluded that a 45% discount would have been appropriate, to reflect the fact that such a small shareholding would have relatively little influence over the company.
• As to value, with assistance from the experts, the judge considered comparable values from other clubs and concluded a 1.3 x revenue multiplier was appropriate. Interestingly, the risk of relegation was factored in as a key component of the overall share valuation, especially since the relevant date was 2018, shortly after the club was promoted to the Premiership. Other valuation methods were rejected.
• Whilst not specifically covered by this case/judgment, a practical point to bear in mind is that remedies and court orders other than the ‘default’ order forcing a share purchase may be available. Depending on the circumstances, it may also be sensible to consider other options for reaching a tailored resolution to any unfair prejudice petition/shareholder dispute.

How we can help

Walker Morris’ Commercial Dispute Resolution team is highly experienced in helping both shareholders and companies alike to navigate their business disputes.  Working in close conjunction with our sports team, we also regularly advise football clubs in connection with what are often complex and, at times, emotive business relationships.

For further advice or assistance in relation to any of the issues covered by the Cardiff FC case, or unfair prejudice/shareholder disputes generally, please contact Gwendoline, Lynsey or Louise all of whom will be very happy to help.

[1] Isaac v (1) Tan (2) Cardiff City Football Club (Holdings) Ltd [2022] EWHC 2023 (Ch)

[2] Isaac argued that the directors exercised their allotment power in order to further Tan’s personal vendetta rather than to improve the Company’s financial position. Isaac also alleged breaches of duties by the directors who approved the share offer

[3] Cf the 2018 ‘present day’ valuation of nearly £3m (or around £1.6m with a minority discount applied)