Investor’s Invalid Use of a Contractual Default Procedure Held Unfairly Prejudicial to the Majority Shareholder

On 31 July 2026, Mr Justice Marcus Smith held that a minority investor’s invalid use of a contractual default procedure was unfairly prejudicial to the majority shareholder. The petition under section 994 of the Companies Act 2006 succeeded (at paragraph 1398). The decision applies settled law and does not change it. The judge described the governing principles as “largely uncontroversial between the parties” (at paragraph 1327).

The Facts

Big Motoring World is a network of second-hand car dealerships which Mr Peter Waddell “built up from nothing” (at paragraph 1). He held the majority interest through Peter Waddell HoldCo Limited, the petitioner (at paragraph 4). Freshstream, which the judgment describes as a venture capital business, took a minority stake through Bluebell Cars Holding Limited (at paragraphs 2, 3 and 6).

That minority stake carried strong protections. Freshstream held a call option over a further 35 per cent of the business and minority rights under a securityholders’ deed (at paragraphs 9 and 10). Among those rights were step-in rights which, once exercised, gave Freshstream effective control of the board. Until then, as the judge recorded at paragraph 12, “Mr Waddell had an automatic majority on the board”. The deed also allowed Freshstream to require an investigation into reputationally damaging conduct, called Material Default Events, and then to give a Material Default Event notice (at paragraphs 14 and 18).

These rights were used together. On 7 March 2024, Freshstream exercised the step-in rights and required a Material Default Event investigation, and Mr Waddell was suspended. The judge recorded at paragraph 23 that these rights “were all exercised, without prior warning to Mr Waddell, on the same date, 7 March 2024.” On 9 April 2024, Mr Nicholas Siddall KC, the independent investigator, gave an interim view, and Freshstream then gave a Material Default Event notice (at paragraph 28). On 16 April 2024, Mr Waddell was dismissed as chief executive officer (at paragraph 29).

The Proceedings

Three sets of proceedings followed (at paragraph 30). Mr Waddell’s employment tribunal claims were stayed. The petitioner presented an unfair prejudice petition, and the petitioner and Mr Waddell also brought a claim for breach of contract, including wrongful dismissal. The judgment does not record the date on which the petition was presented.

The petition, as the judge said at paragraph 36, “is based upon Mr Waddell’s exclusion” from the business on 7 March 2024. It challenged the step-in notices and the Material Default Event notices, and alleged breaches of duty by two directors, Mr Fardad and Mr Vaughan (at paragraph 36).

The Judgment

The judge began with the investor’s rights. Freshstream was entitled to exercise its step-in rights at its discretion, without regard to the interests of the company or of Mr Waddell, and the first step-in notice was valid (at paragraphs 1346 and 1348). He declined to qualify those rights by general understandings of trust between the parties. At paragraph 1343 he said that “The law should be slow to qualify the terms of a commercially negotiated and extremely detailed document by reference to vague understandings of trust and confidence.”

The default procedure was a different matter. Both the investigation notice and the Material Default Event notice failed to comply with the deed (at paragraph 1350). The matters investigated were then improperly changed (at paragraph 1351). The notice was also given before any finding by the independent investigator, which was a precondition of the right (at paragraph 1352). For those reasons the judge held that the exercise of the default rights was illegitimate and unfairly prejudicial to the petitioner (at paragraph 1357). He also held that Mr Vaughan and Mr Fardad acted in breach of their duties as directors (at paragraph 1362).

The defendants argued that the petitioner would have suffered the same loss in any event, because the step-in was valid and Mr Waddell was properly dismissed (at paragraphs 1387 and 1388). The judge rejected that argument on two probable counterfactuals. In the first, Freshstream would have exercised the call option and the petitioner would have received £72 million for its shares (at paragraphs 1390 to 1394). In the second, the company would have addressed Mr Waddell’s conduct earlier and he would not have been dismissed (at paragraphs 1395 to 1397). On either view, the prejudice was obvious. On 31 July 2026, the judge held that the petition succeeded (at paragraph 1398).

The order reflects the balance of the case. The first step-in notice is valid, both default notices are invalid, the wrongful dismissal claim fails, the two directors breached their duties and the petition succeeds (at paragraph 1404). Consequential matters are left to a further hearing (at paragraph 1403).

Key Takeaways

The judgment draws a clear line. A negotiated investor right, properly exercised, may cause prejudice without being unfair, even when it is exercised purely in the investor’s own interest (at paragraph 1331). The same right, exercised without meeting its contractual conditions, may found a petition. A majority shareholder may also be unfairly prejudiced where effective control lies elsewhere, because the court looks to the whole regime of ownership and control (at paragraph 1330).

The question of loss turns on the counterfactual. The judge did not quantify the prejudice. It was enough that the petitioner had been deprived of its chosen chief executive and that the business had been run in a state of conflict for two years (at paragraph 1386).

← All News & Insights