The recent Re Valorem Holdings Ltd [2024] EWHC 1737 (ChD) decision addresses the importance of corporate responsibility to comply with sanctions of trade with Russia. Additionally, it represents a development in courts’ willingness to grant injunctive reliefs to protect the rights of minority shareholders in unfair prejudice petitions.
Facts of the Case:
In the case, the respondent was alleged to trade with Russia knowing that such trade was in breach of international sanctions of trade. In addition, as the CEO of the company, he breached both his fiduciary duties and statutory obligations, resulting in the minority shareholder (the applicant) to file an unfair prejudice petition under s.994 of the Companies Act 2006. Prior to the main trial, the petitioner sought a wide range of injunctive reliefs, including an order to restructure the board by removing the respondent from the company.
The court granted the interim relief to remove the CEO from the board and install the petitioner’s management team as directors. Importantly, this order was granted on a without notice basis, meaning the respondent was removed from office without having the opportunity to address the court. This extraordinary intervention was justified due to the respondent’s conscious violation of trade sanctions with Russia.
The decision highlights the critical importance of complying with legislative prohibitions on trade that the judge concluded there is an "exceptionally strong prima facie case" of deliberate illegality for granting interim relief. Additionally, it demonstrates the courts preparedness to adopt a flexible approach to protect minority shareholders from the unlawful conducts of majority shareholders.
UK Law on Sanctions of trade with Russia:
Following Russia's invasion of Ukraine, the UK government imposed a comprehensive package of sanctions on trade with Russia, coordinated with its global allies. These sanctions target key sectors, including finance, aviation, shipping, defence, and energy, individuals close to the Putin regime and those facilitating Russia’s invasion of Ukraine, including actors in third countries. The legal framework is set out in the Russia (Sanctions) (EU Exit) Regulations 2019, which is expanded by multiple amendments.
The regulations impose prohibitions and requirements on all UK-based companies, branches of UK companies operating overseas, and all UK individuals. Breaching these regulations constitutes an offence or a penalty, which has a custodial sentence of up to 10 years and/or a fine.
In the case, the primary allegation was the respondent’s violation of UK sanctions by illegally exporting luxury goods (specifically perfumes) to Russia, without the knowledge or consent of other shareholders. As s. 46B of the Regulation explicitly prohibits the export of luxury goods to Russia, the respondent is alleged of engaging in a criminal offence.
Granting without notice injunctive relief to protect minority shareholders
The decision highlights the courts willingness to grant injunctive reliefs to protect minority shareholders from unfair prejudice under s.994 petitions of Companies Act 2006. These petitions allow company members to seek relief when they believe they have been subject to unfair prejudice due to actions of other members. For example, minority shareholders may file a petition if they believe decisions made by the majority shareholders have unfairly harmed their interests, such as financial mismanagement or exclusion from decision-making.
In the case, the petitioner who is a minority shareholder sought an order to buy out the respondents shares rather than selling his shares, which is the opposite of the usual scenario. Recently, courts have demonstrated a more flexible approach by tailoring relief to answer the specific needs of minority shareholders. For instance, instead of requiring the minority to exit the company, the court may consider a reverse share buy-out, allowing the minority shareholder to gain more control by purchasing the majority’s shares.
As regards the injunction, the petitioner could be protected by a variety of injunctions designed to preserve the pre-existing status prior to the main trial. By granting such injunctive relief, the courts ensure minority shareholders' rights are upheld and prevent further harm during the legal proceedings.
In this particular case, the court went beyond standard measures by restructuring the board through interim relief. Without notice application, the respondent was removed from the board and the petitioner’s management team was appointed in his place. Notably, this is the first time such relief has been granted at an interim stage without prior notice to the respondent. The court justified this extraordinary intervention by pointing to a strong “prima facie case of unfair conduct” due to the respondent’s trade with Russia in violation of sanctions. Consequently, the minority shareholder prevailed over the majority shareholder.
Conclusion
Due to the importance of enforcing sanctions prohibiting trade with Russia, the court viewed this extraordinary intervention as the only viable means to prevent further harm to the company's reputation and ensure compliance with international obligations. The case highlights the court's commitment to protecting both minority shareholders and the company's integrity when confronted with serious breaches of law, setting a precedent for similar future cases involving corporate governance and sanctions violations.
Facts of the Case:
In the case, the respondent was alleged to trade with Russia knowing that such trade was in breach of international sanctions of trade. In addition, as the CEO of the company, he breached both his fiduciary duties and statutory obligations, resulting in the minority shareholder (the applicant) to file an unfair prejudice petition under s.994 of the Companies Act 2006. Prior to the main trial, the petitioner sought a wide range of injunctive reliefs, including an order to restructure the board by removing the respondent from the company.
The court granted the interim relief to remove the CEO from the board and install the petitioner’s management team as directors. Importantly, this order was granted on a without notice basis, meaning the respondent was removed from office without having the opportunity to address the court. This extraordinary intervention was justified due to the respondent’s conscious violation of trade sanctions with Russia.
The decision highlights the critical importance of complying with legislative prohibitions on trade that the judge concluded there is an "exceptionally strong prima facie case" of deliberate illegality for granting interim relief. Additionally, it demonstrates the courts preparedness to adopt a flexible approach to protect minority shareholders from the unlawful conducts of majority shareholders.
UK Law on Sanctions of trade with Russia:
Following Russia's invasion of Ukraine, the UK government imposed a comprehensive package of sanctions on trade with Russia, coordinated with its global allies. These sanctions target key sectors, including finance, aviation, shipping, defence, and energy, individuals close to the Putin regime and those facilitating Russia’s invasion of Ukraine, including actors in third countries. The legal framework is set out in the Russia (Sanctions) (EU Exit) Regulations 2019, which is expanded by multiple amendments.
The regulations impose prohibitions and requirements on all UK-based companies, branches of UK companies operating overseas, and all UK individuals. Breaching these regulations constitutes an offence or a penalty, which has a custodial sentence of up to 10 years and/or a fine.
In the case, the primary allegation was the respondent’s violation of UK sanctions by illegally exporting luxury goods (specifically perfumes) to Russia, without the knowledge or consent of other shareholders. As s. 46B of the Regulation explicitly prohibits the export of luxury goods to Russia, the respondent is alleged of engaging in a criminal offence.
Granting without notice injunctive relief to protect minority shareholders
The decision highlights the courts willingness to grant injunctive reliefs to protect minority shareholders from unfair prejudice under s.994 petitions of Companies Act 2006. These petitions allow company members to seek relief when they believe they have been subject to unfair prejudice due to actions of other members. For example, minority shareholders may file a petition if they believe decisions made by the majority shareholders have unfairly harmed their interests, such as financial mismanagement or exclusion from decision-making.
In the case, the petitioner who is a minority shareholder sought an order to buy out the respondents shares rather than selling his shares, which is the opposite of the usual scenario. Recently, courts have demonstrated a more flexible approach by tailoring relief to answer the specific needs of minority shareholders. For instance, instead of requiring the minority to exit the company, the court may consider a reverse share buy-out, allowing the minority shareholder to gain more control by purchasing the majority’s shares.
As regards the injunction, the petitioner could be protected by a variety of injunctions designed to preserve the pre-existing status prior to the main trial. By granting such injunctive relief, the courts ensure minority shareholders' rights are upheld and prevent further harm during the legal proceedings.
In this particular case, the court went beyond standard measures by restructuring the board through interim relief. Without notice application, the respondent was removed from the board and the petitioner’s management team was appointed in his place. Notably, this is the first time such relief has been granted at an interim stage without prior notice to the respondent. The court justified this extraordinary intervention by pointing to a strong “prima facie case of unfair conduct” due to the respondent’s trade with Russia in violation of sanctions. Consequently, the minority shareholder prevailed over the majority shareholder.
Conclusion
Due to the importance of enforcing sanctions prohibiting trade with Russia, the court viewed this extraordinary intervention as the only viable means to prevent further harm to the company's reputation and ensure compliance with international obligations. The case highlights the court's commitment to protecting both minority shareholders and the company's integrity when confronted with serious breaches of law, setting a precedent for similar future cases involving corporate governance and sanctions violations.