UNFAIR PREJUDICE: AN OVERVIEW Gideon Roseman – Ten Old Sqaure INTRODUCTION 1. This article provides an overview of the statutory remedy of ‘unfair prejudice’. An unfair prejudice petition is intended to assist members who cannot otherwise help themselves because those of whom they complain have control, at least in a meeting of the Company, but also usually on the board of directors. HISTORY Companies Act 1948 and ‘oppressive conduct’ 2. The first attempt to fashion a remedy for minority shareholders was provided by s.210 of the Companies Act 1948. The threshold requirement for a petitioner was that the conduct complained of was “oppressive”.
3. Viscount Simonds in Scottish Co-operative Wholesale Society Ltd v Meyer  AC 324 at 342 held the word oppressive to mean ‘burdensome, harsh and wrong’. This proved to be a high hurdle for a petitioner to overcome. Companies Act 1980 4. The Companies Act 1980, s.75 was the first Act of Parliament to introduce a remedy for ‘unfair prejudicial’ conduct. Companies Act 1985 5. Section 75 of the Companies Act 1980 was superseded by s.459 of the Companies Act 1985. THE CURRENT LAW Companies Act 2006, Part 30 “Protection of Members Against Unfair Prejudice” 6. The statutory remedy for unfairly prejudicial conduct is now contained in Part 30 of the Companies Act 2006 (“CA 2006”). The governing provision is CA 2006, s.994(1), which provides: “A member of a company may apply to the court by petition for an order under [CA 2006, Part 30] on the ground
(a) That the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or (b) That an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.” Can Section 994 be excluded? 7. Whether or not this provision can be excluded is uncertain. In Exeter City AFC Ltd v Football Conference Ltd  1 BCLC 238 it was held that s.994 was ‘inalienable and cannot be diminished or removed by contract or otherwise’. This proposition was doubted and the decision not followed in Fulham Football Club (1987) Ltd v Richard  EWHC 3111 (Ch). What does a Petitioner need to establish? 8. Lewison J, in Re Neath Rugby Ltd (No.2)  BCC 390, , held that a petitioner must establish:
The acts or omissions of which he complains consist of the management of the affairs of the company;
That the conduct of those affairs has caused prejudice to his interests as a member of the company; and
The prejudice is unfair.
9. It should also be noted that the court has no jurisdiction to dispense with this requirement (Bamber v Eaton  EWHC 2437). A ‘member’ and his right to petition 10. A section 994 petition must be brought by either two classes of person:
Those to whom shares have been transferred or transmitted by operation of law.
Members 11. ‘Member’ is defined by CA 2006, s.112 as: “(1) The subscribers of a company's memorandum are deemed to have agreed to become members of the company, and on its registration become members and must be entered as such in its register of members. (2) Every other person who agrees to become a member of a company, and whose name is entered in its register of members, is a member of the company.” Those to whom shares have been transferred etc 12. CA 2006, s.994(2) provides: “The provisions of this Part apply to a person who is not a member of a company but to whom shares in the company have been transferred or transmitted by operation of law as they apply to a member of a company.” 13. For a someone to have locus standi as a person who has had shares transferred to them that person (“the Transferee”) will need to show (a) that they have agreed with an existing member in respect of the said transfer and (b) a proper instrument of transfer has been executed and delivered to the Transferee.
14. An example of where shares have been transmitted by operation of law will be where the shares have passed to:
a trustee in bankruptcy in the event of the members bankruptcy; and
a personal representative in the event of a member's death.
Summary 15. If a person is neither a member nor a person to whom the shares have been transferred, they have no locus standi to present a petition. This applies to a person who, although beneficially interested in the shares, does not have any legal interest therein; however a nominee does have sufficient standing (Atlasview Ltd v Brightview Ltd  2 BCPC 191 at ).
Majority shareholders? 16. There is no express prohibition on majority shareholders presenting a s.994 petition. However, Knox J in Re Baltic Real Estate Ltd (No.2)  BCLC 503 held that the phrase ‘unfair prejudice’ was not apt to encompass prejudice from which the person whose interests are said to be prejudiced can readily rid himself.
17. An example of where a majority shareholder could legitimately present petition would be where their holding did not carry voting control. ‘Companies’ susceptible to s.994 petitions 18. The following companies are susceptible:
Companies formed and registered under CA 2006;
Companies formed and registered under CA 1985; and
Companies which were existing companies for the purposes of CA 1985.
19. Companies incorporated outside the UK are excluded
WHAT NEEDS TO BE PROVED BY THE PETITIONER? ‘Company’s affairs’ 20. A petitioner needs to show that either (a) the ‘company’s affairs’ are being or have been conducted in an unfairly prejudicial manner or (b) that any actual or proposed ‘act or omission of the company’ would be so prejudicial.
21. The term ‘company’s affairs’ is not defined in CA 2006, however, the term is construed extremely widely and liberally – Concerned with corporate behaviour
22. Lewison J, Re Neath Rugby (as above at ) stated the ‘company’s affairs’ would “encompass all matters which may come before its board for consideration.”
When is conduct not part of the company’s affairs? 23. The distinction between acts within the scope of a company’s business and those outside it are not always easy to draw.
24. In Re Astec (BSR) plc  2 BCLC 556, Jonathan Parker J at 570b-570d: Acts of dissentient directors insufficient. “…the stance taken by a dissentient minority in the stages leading up to the taking of a collective board decision cannot amount to conduct of the company’s affairs in a manner unfairly prejudicial to the petitioner for the simple reason that the views of the dissentient minority are not reflected in the ensuring collective decision…” 25. Re a company (No. 001761 of 1986), Harman J held that the following, inter alia, were not conduct of the ‘company’s affairs’:
Rude and aggressive behaviour towards staff and customers;
Asking the secretary to part the director’s car; and
A request by the respondent’s solicitor to the petitioner’s solicitor in their personal capacity to transfer their shares and resign as directors.
26. Acts of members of a company in their capacity as members will not be acts of a company nor part of the conduct of the affairs of the company.
The Time of the occurrence of the ‘conduct’ Past Conduct 27. A typical scenario will involve a course of conduct which has occurred in the past. However, a single unfairly prejudicial act is sufficient (Lloyd v Casey  1 BCLC 454).
28. Past conduct remedied as at the date of the petition is not a bar (Re Kenyon Swansea Ltd  BCLC 514). However, the conduct so remedied must be capable of recurring (Re Legal Costs Negotiators  2 BCLC 171 at 196).
Proposed Conduct 29. A petition may be presented in respect of future or proposed unfairly prejudicial conduct. For example, a proposal to pass or not to pass a resolution. However, the future or proposed conduct must have gone beyond the ‘mere discussion stage’ (Re Gorwyn Holdings Ltd (1985) 1 BCC 99 at 479).
What is meant by the members ‘interests’? 30. Pursuant to CA 2006 s.994, a petitioner will need to demonstrate that the conduct of the company’s affairs of which he complains is unfairly prejudicial to the interests of the members generally, part of them including at least himself.
Source of the petitioner’s rights as a ‘member’ 31. The source of the petitioner’s rights will be the constitution of the company. Any breach of the member’s rights arising under the memorandum or articles usually affects his interests as a member. These ‘interests’ include the ‘real value of the petitioner’s shares’ (Re a company (No. 00314 of 1989), ex p Estate Acquisitions and Developments Ltd  BCLC 80, 87g-88a).
32. See also, rights conferred by collateral agreements, such as shareholders agreements.
‘Equitable considerations’ 33. A further source of rights may from understandings or other non-binding arrangements between the parties as in the case of quasi-partnership companies (as to which see below).
An example 34. In Re a Company (No. 00477 of 1986)  BCLC 376, Hoffmann J explained that where a managing director of large public Co is also owner of small holding in the company’s shares there is an obvious distinction between his interests as a managing director employed under a contract and his interests as a member. However, where the court is dealing with a small private company with two or three members who have invested capital by subscribing for shares and whom each will earn a living working as a director the distinction is more elusive. Summary 35. A member’s interests are those limited to the rights they have under the constitution of the company, such as the right to be employed as a director, participation in the management or the right to be consulted about policy decisions affecting the company.
36. However, where there is a quasi-partnership (as to which see below), a petitioner may be able to point to ‘interests’ which are not found in the constitution of the company.
UNFAIRLY PREJUDICIAL CONDUCT What does this actually mean? 37. A petitioner must demonstrate that:
There is a causal link between the conduct complained of and the unfair prejudice suffered (Re Blackwood Hodge plc  2 BCLC 650, 673; and
The conduct complained of is both prejudicial and unfair (Re Saul D Harrison & Sons plc  1 BCLC 14, 31c).
Prejudice 38. Bovey Hotels Ventures Ltd (unreported, 31 July 1981), Slade J: “Without prejudice to the wording of the section, which may cover many other situations, a member of a company will be able to bring himself
within [s.994] if he can show that the value of his shareholding in the company has been seriously diminished or at least seriously jeopardised by reason of a course of conduct on part of those persons who have had de facto control of the company which has been unfair to the member concerned.” (emphasis added) 39. However, a petitioner is not limited to cases of diminution in value of or jeopardy to his shareholding (Quinlan v Essex Hinge Co Ltd  2 BCLC 417). Unfairness 40. The concept of ‘unfair prejudice’ is wide and general and is applied flexibly to meet the circumstances of any particular case; it is contextual.
41. The leading authority on this issue is still O’Neill v Phillips  1 WLR 1092 1. Lord Hoffmann held that unfairness for these purposes may be established where: (i)
There has been breach of the terms on which it has been agreed that the affairs of the company should be conducted; or
‘Equitable considerations’ make it unfair for those conducting the affairs of the company to rely on their strict legal powers under the company’s constitution.
Ground 1: Breach of terms 42. In O’Neill v Phillips (as above), Lord Hoffmann stated at 7f-8a: “…a company is an association of persons for an economic purpose, usually entered into with legal advice and some degree of formality. The terms of the association are contained in the articles of association and sometimes in collateral agreements between the shareholder’s Thus the manner in which the affairs of the company may be conducted is closely regulated by rules to which the shareholders have agreed…a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he has agreed that the affairs of the company should be conducted.”
43. The first step into the question of ‘unfairness’ requires an examination of whether the petitioner’s contractual rights, including those arising under the articles, have been infringed.
44. A de minimis or technical infringement of the articles will usually be insufficient. 45. However, be aware that in determining whether there has been any breach, the court will consider not only the articles or other agreements but the parties’ conduct and any subsequent understandings or acquiescence by the petitioner which may have led those in control of the company to act or continue in the way complained about. 46. It is important to note that the ‘breach of terms’ ground of ‘unfairness’ includes situations where a director has exercised his powers in bad faith or for an illegitimate ulterior purpose when purporting to carry out their fiduciary duties. In such a case the board would “step outside the terms of the bargain between the shareholders and the company” (Re Saul D Harrison & Sons plc (as above) per Hoffmann LJ at 18b-18c). Ground 2: Equitable considerations 47. As stated above, the relationship between shareholders is governed by the memorandum and articles of association. The rights and obligations of the relevant parties are derived from those documents and those documents alone. However, in certain situations the court may utilise ‘equitable considerations’ to regulate the affairs of the company.
48. Where there is no breach of any legal rights? In Saul D Harrison & Sons plc (as above), Hoffmann LJ stated at 19a-19h: “How can it be unfair to act in accordance with what the parties have agreed? As a general rule, it is not. But there are cases in which the letter of the articles does not fully reflect the understandings upon which the shareholders are associated…Thus the personal relationship between a shareholder and those who control the company may entitle him to say that it would in certain circumstances be unfair for them to exercise a 1
See also Re Phoenix Office Suppliers Ltd  1 BCLC 76,  per Auld LJ.
power conferred by the articles upon the board or the company in a general meeting…” 49. So when do these ‘equitable considerations’ come into play? QUASI-PARTNERSHIPS 50. For equitable considerations to come into play the court needs to be persuaded that the company in question is a ‘quasi-partnership’. In Ebrahimi v Westbourne Galleries Ltd  AC 360, Lord Wilberforce stated: “The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence – this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be ‘sleeping’ members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members’ interests in the company – so that if confidence is lost, or one member removed from management, he cannot take out his stake and go elsewhere.”(emphasis added) 51. The factors as identified by Lord Wilberforce are not closed. In addition, it is not a precondition for a company to be classed as a quasi-partnership that the parties have equal status therein.
The ‘Ebrahimi’ Factors Factor 1: A Personal Relationship 52. It is apparent that the existence of a ‘personal relationship’ between the parties is very important (O’Neill v Phillips (as above) at 10g).
53. The court will be interested in the ‘conscience’ of the person (i.e. the respondent) in seeking to exercise their powers when conducting the affairs of the company. 54. There is no requirement for the company to be a quasi-partnership ab initio. The relationship between the parties may become sufficiently ‘personal’ at a later
date. In addition, it is equally possible for a company to lose its ‘status’ as a quasi-partnership.
55. A typical example, as identified by Lord Wilberforce, of a ‘quasi-partnership’ company is where the company’s business was previously a partnership in which the shareholders were partners who decided to setup the company for ‘tax’ reasons. Limits on invoking ‘equitable considerations’ 56. A petitioner will face some difficulty, in the absence of special circumstances, to show there is any ‘personal relationship’ in the case of a large public company. In Re Astec (BSR) plc, Jonathan Parker J held at 588d-589b: “…in order to give rise to an equitable constraint based on ‘legitimate expectation’ what is required is a personal relationship or personal dealings of some kind between the parties seeking to exercise the legal right and the party seeking to restrain such exercise, such as will affect the conscience of the former. In my judgment, in the absence of a personal relationship or personal dealings of that kind a shareholder can reasonably and legitimately expect no more than the board of the company will act in accordance with its fiduciary duties and that the affairs of the company will be conducted in accordance with its articles of association and with the Act. Such expectations merely affirm the existence of the shareholder’s legal rights. They do not constrain the exercise of those rights. In my judgment, as the authorities stand today, the concept of ‘legitimate expectation’ as explained by Hoffmann LJ in Re Saul D Harrison & Sons plc can have no place in the context of public listed companies. Moreover, its introduction in that context would, as it seems to me, in all probability prove to be a recipe for chaos. If the market in a company’s shares is to have any credibility members of the public dealing in that market must it seems to me be entitled to proceed on the footing that the constitution of the company is as it appears in the company’ s public documents, unaffected by any extraneous equitable considerations and constraints.” (emphasis added) Factor 2: An agreement or understanding 57. Whether or not ‘equitable considerations’ arise is a question of fact and will involve consideration of all the relevant documentation. The mere existence of
complex documentation does not, by itself, exclude the possibility of the existence of other non-written arrangements, understandings, express or implied.
58. The court will consider the parties’ relationship ‘as a whole’. 59. There is no requirement that the ‘agreement’ be enforceable in law (O’Neill v Phillips as above) at 11a). However, in such a case it must be established that the petitioner relied upon the agreement or understanding (Re Guidezone Limited  2 BCLC 321, ). 60. Equitable considerations may come into play where the circumstances of the company have changed to such an extent so as involve a situation not covered by any previous arrangement or understanding.
Factor 3: Restrictions on the transferability of shares 61. This is not a pre-requisite to a company being a quasi-partnership. However, the presence of restrictions on transferability of shares is often indicative of a quasipartnership. ‘legitimate expectations’? 62. This is a phrase which is used in the cases and in some books on this subject. It is misleading as it suggests a further ground for invoking ‘equitable considerations’.
63. Where a petitioner can point to an understanding or agreement which he has relied upon, then it may also be said that he has a legitimate expectation in respect of the said understanding or agreement. But a mere expectation which is ‘morally’ ‘legitimate’ is insufficient. 64. The facts of O’Neill v Phillips (as above) make this point. That case, R owned 100 issued shares in a company and was a director. He gave 25% of the shares to P, who was an employee. R appointed P as a director and offered to allow P a share of 50% of the profits on the basis that P ran the business. R retired as a director leaving P as the de facto managing director. R continued to credit P with
50% of the profits. Although dividends were declared, R waived his entitlement so as to produce equality with P. There had been some preliminary discussions between R and P with a view to P obtaining 50% shareholding, but these had not concluded. R subsequently reappointed himself a director and took back control. P remained on the board but R terminated the profit sharing arrangement. P presented a petition complaining of R’s conduct in (a) terminating the profit sharing arrangement and (b) repudiating an agreement to allot him more shares. 65. The House of Lords held that although it could be argued P had a ‘legitimate expectation’ that he would receive half the profits etc. P could not identify any legal right to 50% of the shares nor to any agreement or understanding that he would be so entitled. Therefore, no ‘equitable considerations’ could be brought into play on the basis of any legitimate expectation. To hold otherwise would: “not be restraining the exercise of legal rights. It would be imposing upon [R] an obligation to which he never agreed.” (O’Neill v Phillips (as above) per Lord Hoffmann at 12g-13a). Unfairness must be judged on an objective basis 66. The court will judge the conduct complained of on an objective basis. There is no requirement for the petitioner to prove that the majority acted in bad faith or subjectively intended to conduct the company’s affairs in a unfairly prejudicial manner (Re Saul D Harrison & Sons plc (as above) at 17g-17f).
EXAMPLES OF UNFAIRLY PREJUDICIAL CONDUCT 67. The following are typical examples of ‘unfairly prejudicial’ conduct:
Exclusion from management and/or removal as a director;
Failure to consult the petitioner or to provide information;
Mismanagement of company’s business;
Breaches of articles or shareholders’ agreements;
Remuneration and bonuses;
Failure to pay reasonable dividends;
Allotments of shares and rights issues;
(viii) Illegality and failure to comply with CA 2006; (ix)
Removal of auditors; and
Breaches of director’s fiduciary duties.
Exclusion from management and/or removal as a director 68. This is a frequent complaint. Even if the petitioner holds 50% of the shares this of itself does not confer any rights of participation in the management nor make it inequitable for the majority to refuse to admit him into the management.
69. However, if the petitioner has an express right to so act, a breach of this will found the basis of a petition. 70. In the absence of an express right, the petitioner will need to persuade the court the company is a quasi-partnership (Re Guidezone Limited  2 BCLC 321). But is the exclusion ‘unfair’? 71. If the petitioner has acted in a way so as to justify his exclusion it cannot be maintained that his removal is ‘unfair’. Failure to consult the petitioner or to provide information 72. This is related to the previous ground as consultation is an aspect of managerial participation.
73. The question is whether the petitioner has an express legal right to be consulted (Re Cumana Ltd  BCLC 430).
74. In any event, a member is entitled to a copy of the company’s accounts and a director’s and auditor’s reports (CA 2006, s.423). However, unless the articles or any shareholders’ agreement makes contrary provision, a member does not have any right to inspect the accounting records of the company.
75. Equitable considerations? Not unless the company is a quasi-partnership. Mismanagement of the company’s business
76. Courts are usually reluctant to interfere with the decisions of those in control. There are two reasons for this:
Usually the real complaint of the petitioner is that he simply disagrees with the decisions which have been taken in good faith. The judge is not qualified to resolve such disagreements; and
Part of the bargain under which the shareholder acquires his shares is that they take the ‘risk’ that the management of the company will not be perfect (Re Elgindata Ltd  1 BCLC 453, ).
77. A petitioner will need to demonstrate that the mismanagement amounts to serious misconduct (Re Macro (Ipswich) Ltd  2 BCLC 354, 404i-405a).
Breaches of the articles or a shareholders’ agreement 78. Lord Hoffmann in O’Neill v Phillips (as above) expressly confirmed this as an example of unfair prejudice. However, as stated above, minor or technical breaches will be unlikely to sustain a petition.
Remuneration and bonuses 79. Whether or not there has been unfair prejudice on this basis will depend upon a construction of the relevant documentation. However, remuneration or a bonus paid in breach of the articles is clearly capable of being unfairly prejudicial conduct (Fisher v Cadman  1 BCLC 499, ).
80. Whether a director has received excessive remuneration is a question of fact which will be assessed by reference to objective criteria.
Failure to pay reasonable dividends 81. Where such an allegation has been made the court will consider the director’s reasons for their decision not to pay a dividend as at the time of their decision; again this is a question of fact.
82. Obviously, where the directors fail to make a payment of a reasonable dividend in circumstances where the company can clearly afford to make such a payment, this is capable of amounting to unfairly prejudicial conduct (Quinlan v Essex Hinge Co Ltd  2 BCLC 417, 427d).
Allotments of shares and rights issues 83. Although the directors have a power to allot shares and cause a rights issue, if they do so in bad faith or for an ulterior purpose, this may amount to unfairly prejudicial conduct under the ‘breach of terms’ basis as stated in paragraph 42 above.
84. A blatant example: Re a company (No. 005134 of 1986) ex p Harries  BCLC 383). R increased his shareholding from 60-96% and reduced P’s from 40-4%.
Illegality and failure to comply with CA 2006 85. Non-trivial breaches may be sufficient as a basis of a petition. However, this will depend upon the factual matrix of the parties.
86. Example seen in Re a Company (No. 00789 of 1987) ex p Shooter  BCLC 384.
Removal of auditors 87. CA 2006, s.994(1A) provides: “[(1A) For the purposes of subsection (1)(a), a removal of the company's auditor from office— (a) on grounds of divergence of opinions on accounting treatments or audit procedures, or
(b) on any other improper grounds, shall be treated as being unfairly prejudicial to the interests of some part of the company's members.]” Breaches of a director’s fiduciary duties 88. The mere fact a director is guilty of such a breach is not of itself unfairly prejudicial conduct. However, it may be an important factor whether unfair prejudice is a direct consequence of the said breach.
89. An example: Re London School of Economics Ltd  BCLC 273.
THE RELEVANCE OF THE PETITIONER’S CONDUCT 90. No requirement for ‘clean hands’. However, the petitioner’s conduct may be relevant may render the conduct complained of as merely prejudicial and not unfair. Although the conduct complained of is both unfair and prejudicial, the petitioner’s conduct may impact on the relief the court ultimately decides to grant. Delay or laches 91. There is no statutory limitation period for a s.994 petition.
92. A significant delay by a petitioner may result in the court finding that the company has ceased to be a quasi-partnership. This may have a serious impact on the valuation of the petitioner’s shares (as to which see below). REMEDIES 93. The courts’ powers: CA 2006, s.996 provides: “(1) If the court is satisfied that a petition under this Part is well founded, it may make such order as it thinks fit for giving relief in respect of the matters complained of. (2) Without prejudice to the generality of subsection (1), the court's order may—
(a) regulate the conduct of the company's affairs in the future2; (b) require the company— (i) to refrain from doing or continuing an act complained of 3, or (ii) to do an act that the petitioner has complained it has omitted to do 4; (c) authorise civil proceedings to be brought in the name and on behalf of the company by such person or persons and on such terms as the court may direct 5; (d) require the company not to make any, or any specified, alterations in its articles without the leave of the court; (e) provide for the purchase of the shares of any members of the company by other members or by the company itself and, in the case of a purchase by the company itself, the reduction of the company's capital accordingly.” 94. It will be observed that the court has discretion as to whether or not to grant any remedy at all. In Re Bird Precision Bellows Ltd  Ch 458 at 669d-669, Oliver LJ stated that the effect of CA [2006, s.996]: “is to confer on the court a very wide discretion to do what is considered fair and equitable in all the circumstances of the case, in order to put right and cure for the future the unfair prejudice which the petitioner has suffered at the hands of the other shareholders of the company.” 95. However, the discretion must be exercised judicially and on rational principles; there are no ‘palm trees’ here. The relief is discretionary 96. The onus is on the petitioner to establish that the relief sought should be granted.
97. Once the court decides to grant relief it will include in the order any terms it thinks are appropriate in respect of the matters of which the complaint is made. 2
E.g. order a single meeting to be held. E.g. refrain from holding a meeting. 4 E.g. amend the articles of association. 3
98. The court is will endeavour to exercise its discretion in a way proportionate to the unfair prejudice found. 99. However, the court is not limited to making an order which the petitioner seeks. 100.
The court will bear in mind the prospective nature of its jurisdiction. It
will assess the appropriateness of any particular remedy at the date of the hearing as opposed to the presentation of the petition. It will take into account the conduct between those dates; it is entitled to look at the reality and practicability of the overall situation, past, present and future.
SHARE PURCHASES (CA 2006, S.996(2)(e) 101.
It is common for the court to order that the respondent shall purchase the
petitionerâ€™s shares. This will achieve a separation of the parties which is an obvious objective where the relationship has irretrievably broken down.
It is possible for the court to order that the minority shall purchase the
majorityâ€™s shareholding but this will be rare (Re a Company No.00789 of 1987 ex p Shooter). What happens where both the petitioner and respondent wish to purchase one anotherâ€™s shares? 103.
The court will ask itself who has a strong claim to the company and this
will usually be obvious. However, difficulties will arise in the case of equal shareholders. It is likely that a court will consider the following factors:
Who had or retains a predominant role in the management of the company;
The views of the non-shareholding directors;
The employees views;
The ability of each party to pay for the shares; and
In whose hands the company is likely to prospect.
i.e. a derivative action.
Any shares subject to such an order will have to be valued. The parties
may agree to the value of the shares or, in absence of any agreement, the court will determine, whether directly by itself at trial or direct that an expert is to value the shares. 105.
Ultimately, the court is guided by a criterion of fairness and any
valuation carried out or ordered to be carried out must be fair. Bases of Valuation 106.
There are three possible bases:
A rateable proportion of the total value of the company as a going concern without any discount for the fact that the holding in question is a minority holding;
As before with a discount; and
A rateable proportion of the net assets of the company at their breakup or liquidation value.
The usual valuation ordered by the court is that stated in paragraph
106(i) above (O’Neill v Phillips (as above) per Lord Hoffmann at 16i: “This is not to say that there may not be cases in which it will be fair to take a discounted value. But such cases will be based on special circumstances…” The Valuation date 108.
This is falls within the discretion of the trial judge and ‘fairness’ is
ultimate consideration. Interest on the purchase price for the shares? 109.
The court does not have jurisdiction to award interest pursuant to s.35A
of the Senior Courts Act 1981 or any inherent equitable jurisdiction (Re Bird Precision Bellows Ltd (as above)).
However, an equivalent sum can be awarded under CA 2006, s.996 so as
to represent interest (Profinance Trust SA v Gladstone  1 BCLC 141, ).
PRE-LITIGATION PROTECTION FOR BOTH SIDES 111.
So as to protect a party’s position on costs it is important that a
reasonable offer is made by either the petitioner or the respondent in respect of, respectively, the sale or purchase of the petitioner’s shares.
In O’Neill v Phillips (as above at 16h-17f), Lord Hoffmann gave
guidance as to the five essential elements of a reasonable offer:
The offer for the purchase of the shares must be at a fair value (i.e. no discount);
The value if not agreed will be determined by a competent expert;
The offer should provide for the expert to determine the value as an ‘expert’ as opposed to an arbitrator. No reasons should be given for the expert’s valuation;
The offer should provide for ‘equality of arms’ i.e. both sides to have equal access to all the relevant information; and
The is no requirement for an offer to pay costs.
It is hoped that this presentation has provided you with a sufficient
overview of the law relating to the statutory remedy of ‘unfair prejudice’, the available remedies and the ways to protect a client’s position with respect to costs. FURTHER READING
Further information in respect of the above and related issues can be
found in the following books: Palmer’s Company Law; Gower and Davies: The Principles of Modern Company Law, 7th edition; Joffe QC et all, Minority Shareholders: Law and Practice and Procedure, 4th Ed. 2011; Boyle A J,
Minority Shareholders’ Remedies; and Whittaker and Machell, Law of LLPs, 2nd Edition, 2007.
© GIDEON ROSEMAN Ten Old Square Lincoln’s Inn.