The Court of Appeal has allowed an investment company's appeal against the striking out of an unfair prejudice petition, finding that the claim should proceed to trial.

The investment company, which held investments on behalf of a South African group, had invested nearly £1 million in a start-up company that sold home-brewing kits. It was agreed that the investment company would be entitled to nominate someone to the home-brewing company's board. A few months later, however, the man it had nominated decided that he was not in a position to be a director, and a dispute arose as to whether it was entitled to nominate a further director.

The home-brewing company subsequently received an approach from an international brewer. Shortly afterwards, however, it had to make a product recall. It then proposed a share issue which would lead to the shareholdings of investors who chose not to participate being diluted by 50 per cent. The investment company objected to the proposal and did not participate in the share issue.

The investment company presented a petition under Section 994 of the Companies Act 2006, alleging that the home-brewing company's affairs had been conducted in a manner that was unfairly prejudicial to the interests of shareholders. It sought an order requiring the home-brewing company's CEO to buy its shares. However, the CEO successfully applied for the petition to be struck out. After the investment company's appeal against that decision was dismissed by the High Court, it made a further appeal to the Court of Appeal.

The Court found that the investment company's agreement with the home-brewing company gave it the right to have a person of its choosing placed on the home-brewing company's board. The right merely to suggest an appointment would have given it nothing of real value, being a right it would have had in any event. The investment company needed to have a seat on the board to satisfy South African exchange control regulations. The Court also considered that the entitlement was a continuing one, and that denial of it was capable of amounting to unfair prejudice.

Turning to whether the share issue had been at an undervalue, the Court noted that the CEO had stated in an update to shareholders that he was not saying that the proposed valuation was what the company was worth, referencing the much higher valuation contained in the heads of terms with the international brewer. In the Court's view, the possibility that the share issue involved unfair prejudice could not be dismissed. There was evidence suggesting that the shares might knowingly have been issued at a discount to what was perceived to be, and actually was, their market value. The fact that the favourable terms for the acquisition of the shares had been offered to all shareholders and the investment company had not taken up the offer was not fatal to its case.

The CEO had made an offer to buy the investment company's shares. However, he had not offered to bear its costs, despite the offer being made nearly eight months after the petition was presented. The Court could not see how the offer could justify striking out the petition.