At the Championship play off final in 2010, Blackpool FC sold 37,000 tickets for their game against Cardiff. Seven years later, in the League Two final against Exeter, only around 5,000 tickets were sold.
Whilst the prize at stake was less glamourous, the differing attendance numbers was more significantly due to an off the field protest against the ownership and management of the club. Away from the pitch, a parallel protest was taking place in the High Court. This took the form of an Unfair Prejudice Petition (under Section 996 of The Companies Act 2006), a well established remedy available to minority shareholders (in this case Valeri Belokon, and one which resulted in an eye watering £31.27m award of damages in November 2017).
Remedies for major shareholders have, however, always been more difficult to execute. Notwithstanding this, the application of the major shareholder exclusion (“MSE”) was once as ubiquitous as Blackpool’s Brad Potts was versus Exeter. Once a staple of any self-respecting underwriter’s approach, and often actually embedded in market forms, the MSE has now all but disappeared. However, the logic behind the MSE was sound enough:
‘In a company where the majority of shares might be held by members of one family, family trusts or significant other shareholder, the underwriter may wish to exclude or restrict claims in order to avoid being drawn into family or other mutually destructive disputes. These people may have an influence on the company which, in the underwriters view, is undesirable.’
Despite underwriter concerns, this logic never actually translated into any meaningful claim activity, partly because the law on remedies for major shareholders had always been rigid, old fashioned and unclear. There were other obstacles too, chief amongst which was the ‘reflective loss’ principle:
“What [a shareholder] cannot do is to recover damages merely because the company in which he is interested has suffered damage. He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a “loss” is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss. His only “loss” is through the company, in the diminution in the value of the net assets of the company, in which he has (say) a 3 per cent shareholding.” [Prudential Assurance v Newman [1982] ]
In certain situations, the courts would allow members to bring common law actions on a company’s behalf (known as a ‘derivative action,’ as the action derived from a right belonging to the company). These were rare and, in the context of the MSE, the proper claimant would always be the company itself, so the MSE would not have triggered (the company did not hold shares in itself). As a response to the criticism of the complexity of derivative actions, a new statutory procedure was introduced by the Companies Act 2006, which abolished the common law derivative action, removed many of the limitations, and created a new statutory derivative claim. However, formidable obstacles still exist, with successful claims few and far between and again, the MSE would still have been ineffective.
Other remedies do exist, including misrepresentation/deceit by a director, but the claimant would ordinarily be the company/employer to whom the duty was owed, rendering the MSE impotent once again.
So, the D&O market gradually let go of the MSE and today it is something of a rare bird. Exclusions of claims from specific people or organisations are more common and can have a more surgical, and practical, effect and it is certainly the case that there have been significant claims by a company against its directors. Whatever the merits of that argument are, the contemplation and application of the MSE did not reflect the actuality. And whilst Exeter look set for a return to the play offs in 2018, the MSE seems unlikely to be making a comeback any time soon.
