Courts consider founder’s dilution by investors

Companies in the STEM sector routinely receive investment to super charge growth. The financial investment can trigger a change in company dynamic and a founder’s greatest fear can be dilution or being marginalised.

The English Courts recently considered Ndungu v SPG Limited which was a hard-fought shareholder dispute in respect of SPG Limited, the holding company for the global online gaming business trading under the brand name “SportPesa”. It comprised a consolidated claim by Mr Ndungu for compensation under section 563 of the Companies Act 2006 in respect of his dilution as a shareholder in SPG and a petition by him pursuant to section 994 of the Companies Act 2006 alleging that he had been unfairly prejudiced as a member of SPG. At the heart of both claims was an allegation that the directors of SPG and a number of prominent shareholders in SPG had engaged in a deliberate scheme to dilute Mr Ndungu’s shareholding.

In 2019, Mr Ndungu held around 17% of SPG’s shares. Following a series of investment rounds, his stake was diluted to approximately 0.85%. By 2024, this meant his shares were worth about £264,000, rather than over £5 million had he retained his original percentage.

Mr Ndungu alleged that he had been unlawfully excluded from the fundraising exercises and that the other shareholders had engineered his dilution. He claimed this was achieved through defective meeting notices sent to inaccessible email addresses, missing offer letters, and failures to follow statutory procedures — including alleged breaches of pre-emption rights, which require new shares to be offered to existing shareholders before being issued to outsiders. He also alleged a deliberate strategy to marginalise him from the company’s affairs, as well as a conspiracy and the fabrication of documents to legitimise the investment rounds.

The High Court dismissed the petition. While it accepted that SPG had not followed the correct procedures and that notices had not been properly given, the Court found this was not causative of Mr Ndungu’s loss. The evidence showed that, even if all procedures had been followed perfectly, he would not or could not have participated in the capital raises to prevent dilution. As a result, his losses did not stem from the procedural breaches.

The Court further rejected allegations of conspiracy, forgery, and document fabrication, finding no evidence of a scheme to push Mr Ndungu out.

The case serves as an important reminder of the need to evidence a link between the loss suffered and the alleged prejudice, highlighting the high threshold for establishing unfair prejudice. It also highlights that prejudice must be suffered in the petitioner’s capacity as a shareholder, not merely as a disappointed or sidelined participant in management. Following the ruling, the defendants were awarded substantial legal costs against Mr Ndungu, again a reminder of the risk of litigation.

Generally, investment can be vital to sustain a company or accelerate growth. However, founders may find the dynamics of the company have changed as the investor’s influence is felt. At the point of investment, founders should do their own due diligence into the investor to try to ensure they are the correct fit and try to protect their position contractually via the company’s constitution or an investment agreement.

Michael Cox, Partner: mco@bto.co.uk / 0131 381 5041

Gavin Stewart, Trainee Solicitor: gst@bto.co.uk / 0131 222 2939