A recent High Court decision has highlighted how shareholder disputes can arise where investor control, board observer rights and founder management roles overlap.
In James Isilay v AVP Capital A FCPI & Ors, the court considered procedural applications in an unfair prejudice petition brought by a former CEO and shareholder of Cognism Limited. The petition alleged, among other things, that there had been a boardroom coup which resulted in his removal as CEO. Those allegations have not been determined at trial.
The decision is useful because it shows how disputes involving venture capital investors, board observers and shareholder rights may be tested at an early stage. It also shows why companies should be careful about the practical role given to board observers, even where the formal documents say they are not directors.
What is an unfair prejudice petition?
An unfair prejudice petition is a legal remedy available to a shareholder where the company’s affairs have been conducted in a way that is unfairly prejudicial to their interests as a member.
These claims are often brought where a shareholder says they have been excluded from management, treated unfairly by majority shareholders, diluted, denied information, or affected by conduct that departs from the basis on which the company was intended to operate.
In Isilay v AVP Capital, the petition was brought by a former CEO and shareholder of Cognism Limited, a sales intelligence platform founded in 2015. The petitioner was a co-founder and held just over 9 percent of the shares. The respondent investors together held a little under 60 percent of the shares. One investor, Blue Cloud Ventures IV LP, held a little over 4 percent.
The petition alleged that there had been a boardroom coup which resulted in the petitioner’s removal as CEO, followed by further conduct which he said was unfairly prejudicial. At this stage, those are allegations only. The court was not deciding whether the alleged conduct had occurred or whether it amounted to unfair prejudice.
Can investors unfairly prejudice a minority shareholder?
Investors can become involved in unfair prejudice disputes where their control rights, board influence or voting power are alleged to have been used in a way that unfairly harms a minority shareholder’s interests.
- In founder and investor disputes, allegations may involve control of the board, changes in management, dilution, investor influence, exclusion from decision-making or conduct said to depart from the parties’ agreed governance arrangements.
- In this case, the petition focused in part on the role of venture capital investors and their representatives. The company’s shareholder documents gave certain investors rights to appoint directors or board observers. Those types of rights are common in investment-backed companies, but they can become contentious if the practical influence of investors is said to go beyond the agreed governance structure.
The court did not decide that the investors had unfairly prejudiced the petitioner. The decision was procedural. However, the case shows how investor conduct, boardroom strategy and shareholder rights can become closely connected where a founder or minority shareholder says they have been pushed out of meaningful participation.
What rights do board observers have?
A board observer is usually someone who has the right to attend board meetings and receive information, but who is not formally appointed as a director.
The exact rights of a board observer will depend on the company’s articles, investment agreement, shareholders’ agreement or other governance documents. In Isilay v AVP Capital, the shareholder documents gave observers rights to receive notice of board and committee meetings, attend meetings, speak at meetings and place items on the agenda. They were not entitled to vote and were not to be treated as directors.
Those limits are important. A board observer may have access to sensitive commercial information and may participate in discussion, but should not usually be making board decisions. The formal documents should make clear whether the observer can attend all meetings, whether they can receive all board papers, whether privilege or confidentiality issues apply, and whether they must withdraw from certain discussions.
For companies and investors, the practical operation of observer rights matters as much as the written wording. If an observer regularly influences decisions, directs management or behaves as though they have authority equivalent to a director, that may create legal and governance risk.
Can a board observer be treated as a de facto director?
A board observer is not automatically a de facto director. Many investment agreements expressly state that observers may attend board meetings, receive information and speak, but may not vote and are not to be treated as directors.
However, the practical reality of the observer’s role can still matter. A de facto director is someone who, although not formally appointed as a director, is alleged to have assumed the role of a director in practice.
- The court did not decide that the board observers in this case were de facto directors. That issue has not been determined. The question at this stage was whether the allegations should be removed before trial.
- The court refused summary judgment on the de facto director allegations. That means the allegations were allowed to continue at this procedural stage. It does not mean they have been proved.
For companies and investors, the distinction is important. Board observer rights should be clearly documented, but the way those rights are exercised may still be scrutinised. If an observer acts in a way that appears to involve decision-making or management control, that may create arguments about their legal status and responsibilities.
What can shareholders do if they are excluded from company decisions?
A shareholder who believes they have been excluded from company decisions should first look carefully at the company’s constitutional and governance documents. These may include the articles of association, shareholders’ agreement, investment agreement, board minutes, side letters and any documents dealing with director or observer appointment rights.
The key question is not only whether the shareholder disagrees with the commercial direction of the company. The question is whether the company’s affairs have been conducted in a way that is unfairly prejudicial to that shareholder’s interests as a member.
Evidence will often be important. Emails, board minutes, shareholder communications, investor correspondence and records of decisions may all help establish what happened, who was involved and whether the process followed the agreed governance structure.
For investors, the case highlights the importance of maintaining clear boundaries around board observer rights. Observers may be given access to information and board discussions, but they should avoid conduct that could be characterised as assuming the role of management.
For companies, the practical lesson is to keep board processes clear. Minutes should accurately record who attends, in what capacity, who votes and who makes decisions. Informal influence can become a live issue if the relationship between founders and investors breaks down.
The wider point is that shareholder disputes are rarely about documents alone. They often turn on how governance rights are used in practice. Isilay v AVP Capital shows that, where a dispute reaches court, the practical operation of investor control, observer rights and boardroom conduct may be closely examined.
