Shareholder / Partner Disputes

The perils of pushing too hard

Improper pressure when negotiating settlement

Most disputes end up with some form of negotiation taking place, under the protective cloak of “without prejudice” privilege. The without prejudice cloak encourages parties  to talk openly and freely, pushing pressure points and weaknesses in your opponent’s position and making concessions and giving ground on your own position, enabling the parties to edge closer to settlement. But unrepresented parties need to remember that there are limits in what can be said during these negotiations, and if you step outside them then the cloak can be removed exposing your behaviour for the court and everyone else to see. Given the risks involved, it is always best to engage a lawyer even at this late stage to ensure that costly mistakes aren’t made.

Where a communication or meeting forms part of a genuine attempt to resolve a dispute it will be considered to be “without prejudice”.  That is important because it stops the communication from being put before the court as evidence of an admission should the negotiations fail to result in settlement.

There can be a fine line between proper and improper leverage in negotiations

The recent case of Ferster v Ferster & Ors [2016] EWCA Civ 717 has highlighted that there can be a fine line between proper and improper leverage in negotiations.   Where the line is overstepped the “without prejudice” protection of the communication can be lost leaving the maker of the statement vulnerable to the communication being used as evidence in front of the court.

Ferster involved a dispute between brothers who were equal shareholders in a company. Jonathan had been sued for breach of fiduciary duty and that led him to begin his own proceedings for unfair prejudice.   Jonathan wanted to refer in court to a “without prejudice” email which had been sent by a mediator, on behalf of his brothers, after a failed mediation.   The email revised an earlier offer increasing the price by which the brothers were willing to sell their shares in the company to Jonathan.

The email explained that the reason for the increased price was that the brothers had become aware of “further wrongdoings” by Jonathan.  The letter referred to “very serious trouble” and that the wrongdoings had ‘serious implications’ for Jonathan’s partner.  It said the most likely result of the wrongdoing would be committal proceedings which would involve imprisonment.   The email went on to make a thinly-veiled threat that, if the offer was not accepted within 48 hours, the allegations being made would be made public.

The Court of Appeal agreed with the lower court and held that the email could be referred to by Jonathan in connection with his unfair prejudice petition because its contents fell within the “unambiguous impropriety” exception to the without prejudice rule.  That exception applies where the exclusion of the evidence would act as a cloak for perjury, blackmail (as in this case) or other “unambiguous impropriety”.

The unambiguous impropriety exception requires the privilege itself to have been abused.   It was remarked by the court that it may be easier to show that there is unambiguous impropriety where there is an improper threat rather than where there is simply an unambiguous admission of the truth.  What was involved was an evaluation of whether the threats unambiguously exceeded what was “permissible in settlement of hard fought commercial litigation”.

Here the threats did unambiguously exceed what was proper.  This was not a case where there was a need to pick through many hours of recorded negotiations in order to make out a case of impropriety. The impropriety was apparent from the email itself, a single and carefully formulated document.

The brothers had gone far beyond what was reasonable in pursuit of civil proceedings, by making the threat of criminal action. Secondly, the threats were said to have serious implications for Jonathan’s family because of Jonathan’s wrongdoings. Thirdly, the threats were of immediate publicity being given to the allegations. The threat to publicise allegations of extreme severity against Jonathan and his partner, and within such a short timescale, placed improper pressure on Jonathan.   It did not matter that the brothers may have believed the allegations to be true.  They had made it clear that, if the offer was not accepted, they would use their control of the company to take the steps set out in the email. Whilst those steps might be steps which it might be proper for the company to take, if it had a genuine belief in some basis for them, it was wrong for them to be used as a lever to enable the brothers to get more for their shares.  Finally, there was no attempt to make any connection between the alleged wrong and the increased demand.

It would have been entirely possible for the brothers to have made an increased offer for the sale of their shares by reference to what they regarded as their increased value or because of what they perceived as the consequences for them personally as a result of increased prospects of the company succeeding in the company’s action. That was, however, not the offer which they chose to make.

Jonathan was therefore able to freely refer to the threatening email in connection with his unfair prejudice petition and the brothers lost the “without prejudice” protection that would normally apply.

Important points to consider when negotiating

When negotiating it is important to remember that the without prejudice rule does not apply to every negotiation situation.  It will only be engaged if there is an existing dispute and a genuine intention to settle it.  Even then it does not give a blanket protection.  This case shows the fine line between using leverage in negotiations and making improper threats.  In some situations threats may amount to blackmail.   The brothers, in this case, sent their offer via the mediator – illustrating the importance of consulting a lawyer when negotiating a settlement.

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