Franchise case law update: A warning for those wearing two hats

The facts

In the case of Davidson & Others v Pinz Bowling Ltd & Others ([2025] CSIH 6), the petitioners filed an unfair prejudice petition under S994 of the Companies Act 2006 against their joint-venture partners. 

The parties had previously established a joint venture to operate an indoor inflatable leisure business under the ‘Innoflate’ brand.  Whilst the joint venture was an initial success, disagreements soon arose over management and financial arrangements and the relationship between the parties deteriorated. 

The respondents made repeated threats to terminate the franchise agreement, close down operations and remove the signage at the premises. In addition, the respondents requested that the petitioners resign as directors and transfer their shares in the joint venture company to the franchisor for a nominal value of £1. These threats, combined with the franchisor's demand that the draft accounts were qualified as a 'going concern', resulted in the insurers refusing to renew coverage forcing the closure of the premises. 

The outcome  

Given the nature of the joint venture, the petitioners did not have sufficient shareholding or control to allow them to disregard the efforts being made to force them out, or to take remedial action on their own. The court found the threats made by the respondents resulted in uncertainty as to the joint venture company’s ability to continue trading and were found to be made without regard to the interests of the company. Applying the objective test under the Companies Act 2006, the court considered the conduct of the respondents was unfair to the company and its members. 

The court therefore concluded that the respondents were in breach of their fiduciary duties as directors of the company by advancing the interests of the franchisor over those of the joint venture company.

The court found the claim in the petitioners' favour and, considering the breakdown of trust and confidence in the parties, required the franchisor to purchase the petitioners’ shares in the joint venture company at a fair value. 

Key takeaways

The case confirms that franchisors must be cautious when their directors hold positions in both the franchisor and franchisee companies. Clear boundaries and regards to fiduciary duties must be maintained to steer clear of conflicts of interest.

To avoid having to pursue an action for breach of directors' duties, it is preferable to include a clause in the shareholders' agreement that deals with this issue. Parties should also consider whether to prescribe certain matters as being reserved matters in the joint venture company which require unanimous approval of the shareholders.  

Regardless of whether the shareholders' agreement prescribes a process for conflicts of interest, directors must acknowledge that they have a statutory duty to avoid actual and potential conflicts of interest and therefore must ensure their conduct complies with these duties. Whilst joint ventures are inherently built on trust, it is important these points are bottomed out at the outset of the relationship to avoid issues cropping up further down the line.  

If you require any further information in relation to this area, please do not hesitate to contact Gordon Drakes or  Kate Williams.