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19.Theunfairlyprejudicialremedyandtheminorityshareholder.pdf
19. The unfairly prejudicial remedy and the minority shareholder
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Publisher: Oxford University Press Print Publication Date: Sep 2018 Print ISBN-13: 9780198787709 Published online: Sep 2018 DOI: 10.1093/he/ 9780198787709.001.0001
© Brenda Hannigan 2018
Chapter: (p. 503) 19. The unfairly prejudicial remedy and the minority shareholder
Author(s): Brenda Hannigan
Company Law (5th edn) Brenda Hannigan
19. The unfairly prejudicial remedy and the minority shareholder
DOI: 10.1093/he/9780198787709.003.0019
A Introduction
19-1 The most important shareholder remedy in practice is the ability of a member to petition for relief on the ground that the affairs of the company are being or have been conducted in a manner which is unfairly prejudicial to the interests of members generally or of some part of its members under CA 2006, s 994.
19-2 Before examining the unfairly prejudicial remedy in detail, it may be useful to draw attention to some background considerations which should be borne in mind.
Disputes in private companies
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19-3 The vast majority of companies registered under the CA 2006 and its predecessor, the CA 1985, are private companies. These companies typically have only a small number of shareholders,1 most if not all of whom are also the directors, and many of whom are also employees of the company. Often the shareholders will be members of the same family and, even if they are not, the relationships involved tend to be personal as well as commercial. Disputes too tend to be personal and bitter and settling such cases can be difficult.
19-4 A typical scenario would involve the initial enthusiastic participation of all the shareholders in the company as directors and employees rapidly followed by disagreements among the participants, perhaps about the direction of the company, or the respective merits of the contributions made by each participant, or the extent to which the parties are benefiting financially from the business, and culminating in the majority shareholder or shareholders voting to remove the minority shareholder from his position as a director and dismissing him as an employee. Voluntary exit by the minority shareholder from the company at this point is the desirable option but it may be difficult to achieve.
19-5 Finding a purchaser for a minority stake in a private company is not easy and, even if a purchaser is found, the minority shareholder may find that the company’s articles of association constrain him as to whom he can sell to. For example, the articles may require him to offer the shares initially to the existing members and may require the price to be determined by the company’s auditor and not by the vendor. It is commonly the case that the board of directors has a power in any event to refuse to register any transfer of any shares (see 16-62). Voluntary exit can be difficult to achieve, therefore, and legal action, or at least the threat of legal action, may be necessary.
(p. 504) 19-6 The position of minority shareholders once they are in disagreement with the majority is exacerbated by difficulties in obtaining accurate information about the company’s affairs, especially where the shareholder has been removed from the board and no longer has access to management accounts and minutes of board meetings2 although shareholders are entitled to the annual accounts.3
Disputes in public companies
19-7 Disputes in public companies do not have the focus on personal participation in the running of the business which characterises disputes in private companies. Instead there may be complaints about the standard of management and the level of their remuneration. A variety of mechanisms can be deployed to address these issues with litigation and legal redress generally low on the shareholders’ range of options. Management under-performance may be addressed by setting contractual targets and linking remuneration to performance and, in quoted companies, shareholders have a right to vote on remuneration payments and policy, see 18-45. Many of the shareholders in these companies are
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institutional shareholders who are able to exercise influence by voicing their concerns directly to the board. In the worst cases of mismanagement, a declining share price may mean that the company becomes a target of a takeover and so under-performing management may be replaced through the market for corporate control. Of course, for shareholders with a grievance in a publicly traded company, the best option is often to exit the company by selling their shares, even if that means a loss.
Majority and minority shareholders
19-8 Most disputes necessarily involve minority shareholders seeking redress as the majority can secure redress for themselves through the exercise of their voting power.4 It should be borne in mind, however, that minority shareholders too can behave in an obstructive and damaging way with a view to forcing the majority to buy them out at an inflated value simply to rid themselves of the nuisance.5
Anticipating and preventing disputes
19-9 As Professor Prentice has commented, a feature of shareholder disputes particularly in smaller private companies is the parties’ chronic failure to anticipate the nature, extent, and consequences of a breakdown in their relationship.6 He identified a variety of reasons (p. 505) for this stance including an unwillingness to contemplate breakdown of the relationship at the beginning of the venture; an inability in any event to anticipate all future contingencies; and the fact that the costs of trying to so anticipate may simply not be justified.7
19-10 These difficulties are compounded by the practice in this jurisdiction whereby a substantial percentage of companies incorporated annually are shelf companies (i.e. purchased from a formation agent as a ready-made company, see 1-10), with the result that those incorporating in this way are likely to have had minimal, if any, advice and the company’s articles of association will simply be a standard version which does not address future breakdown.8
Governing principles
19-11 Shareholder remedies were the subject of a detailed review9 by the Law Commission in 1996–97 and that work was considered and generally adopted by the Company Law Review10 which did not devote much time to this issue. The Law Commission in its report identified what it considered to be the governing principles appropriate to this area, principles which we encounter throughout our consideration of company law, namely the proper plaintiff rule, the principle of majority rule in matters of internal management, non-interference by the courts in commercial decisions, recognition of the sanctity of contract, and freedom from unnecessary shareholder interference.11
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19-12 The proper plaintiff rule means that normally the company should be the only party entitled to enforce a cause of action belonging to it, reflecting the fact that the company is a separate legal entity. Accordingly, a member should be able to maintain proceedings about wrongs done to the company only in exceptional circumstances. The principle of majority rule reflects the basic mechanism for decision- making in companies which has as its corollary that an individual member should not be able to pursue proceedings on behalf of the company about matters of internal management, that is, matters which the majority are entitled to regulate by ordinary resolution. These two principles are central to the derivative claim which is discussed in Chapter 20.
19-13 The importance of the courts having proper regard for the decisions of directors on commercial matters, provided the decision is made in good faith, on proper information and in the light of the relevant considerations, and appears to be a reasonable decision for the directors to have taken, has been a central theme in judgments for a century or more.12
19-14 The principle of freedom from unnecessary shareholder interference is reflected in the tight judicial control of the derivative claim, discussed in Chapter 20. The intention is that, in keeping with the right of directors to manage the company’s affairs, shareholders should not be able to involve the company in litigation without good cause.
(p. 506) 19-15 The principle of sanctity of contract means that a member is taken to have agreed to the terms of the constitution when he became a member, whether or not he appreciated what it contained at the time. In the interests of commercial certainty, the law should continue to treat him as so bound unless he shows that the parties have come to some other agreement or understanding which is not reflected in the constitution. The basis of the parties’ relationship, whether it be restricted to the articles or the subject of wider agreements or understandings, is central to the judicial approach to the unfairly prejudicial remedy which is the subject of this chapter.
B Petitioning on the grounds of unfair prejudice
19-16 The most valuable shareholder remedy is that contained in the Companies Act 2006, s 994(1), previously CA 1985, s 459, which provides:
‘A member of a company13 may apply to the court by petition for an order on the ground
(a) that the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to the
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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.’14
19-17 Where the court is satisfied that a petition under s 994 is well founded, it may make such order as it thinks fit for giving relief in respect of the matters complained of (s 996(2)). In practice, relief is most commonly sought in respect of private company disputes where the petitioner has been excluded from participation in the business and the remedy most commonly sought is a purchase order requiring the respondents to purchase the shares of the petitioner at a fair value. To encourage the parties to settle (so saving themselves time and costs and freeing up court time), given that the outcome of these disputes is so predictable (a purchase order), a petition will usually be struck out if, having excluded the petitioner, the respondents made a fair offer for her shares15 (see 19-72) which gives her everything which she could reasonably expect to achieve under CA 2006, s 994.
19-18 In Fulham Football Club (1987) Ltd v Richards16 the Court of Appeal resolved the uncertainty which had been created by conflicting first instance decisions17 as to whether it is possible for shareholders to contract out of their right to petition under CA 2006, s 994 (p. 507) and to agree instead to refer their disputes to arbitration.18 The court concluded that there is no express or implied statutory preservation of a right of access to the court and nothing in the nature of these disputes which requires the exclusive jurisdiction of the court. Unlike a winding-up order which an arbitrator cannot award, it being a class remedy, s 994 relief cannot be categorised as a class remedy. While orders under the section have some potential to affect third parties, that point has consequences for the remedies which an arbitrator can award but, as Patten LJ put it, these jurisdictional limitations on what an arbitration can achieve are not decisive of the question whether the subject matter of the dispute is arbitral. In the unanimous view of the Court of Appeal, these disputes can be subject to arbitration agreements.19
19-19 Notwithstanding this ruling, minority shareholders would be ill- advised to give up their right to petition under CA 2006, s 994, given that it is an expansive jurisdiction with flexible remedies which has proved invaluable to shareholders aggrieved at the unfairly prejudicial manner in which a company’s affairs are being conducted.
The petitioner
19-20 Only members20 have a right to petition and the definition of ‘member’ is extended to include persons to whom shares have been transferred or transmitted by law (CA 2006, s 994(2)) which extends
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standing to petition to persons such as personal representatives and trustees in bankruptcy.21 A petition may be brought by a nominee shareholder. In Atlasview Ltd v Brightview Ltd22 the court refused to strike out a petition holding that it was arguable that the ‘interests’ of a nominee shareholder were capable of including the (p. 508) economic and contractual interests of the beneficial owners of the shares.23 To hold otherwise, the court said, would produce the arbitrary result that the registered shareholder would have standing to petition as a member but no ‘interests’ for these purposes, while the beneficial owner would have an interest but no standing to present a petition, not being a member. There is nothing to preclude a majority shareholder from petitioning, but the court would normally expect a majority shareholder to exercise his control of the company to bring to an end the conduct complained of.24
19-21 While there is no requirement that a petitioner should come to the court with clean hands, the conduct of the petitioner may lead the court, depending on the seriousness of the matter and the degree of its relevance, to refuse relief, even if the conditions for the exercise of the discretion in his favour are otherwise satisfied.25 In Interactive Technology Corpn Ltd v Ferster,26 for example, the court accepted that the respondents had behaved badly, but it concluded that the petitioner’s wrongful conduct (he transferred the business and assets of the company to another company owned by the petitioner) was many times more significant than their misconduct and, in the circumstances, it was appropriate to refuse relief.
19-22 The respondents commonly include all of the members of the company and the company itself, though it plays no part in the proceedings. If the court would not order relief against a member, because there is no allegation of their involvement in the unfairly prejudicial conduct complained of, the respondent will be struck out of the petition.27
Conduct of the company’s affairs, acts or omissions
19-23 There are two distinct limbs to s 994(1), (a) that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of the members generally, etc, and (b) that an actual or proposed act or omission of the company is or would be so prejudicial. Arden LJ noted in Graham v Every28 that (b) means that the petitioner must identify something which the company does or fails to do whereas (a) does not contain the same stipulation and the petitioner can rely on the actions of some other persons, including his fellow shareholders, as long as those actions amount to the conduct of the company’s affairs.
(p. 509) 19-24 Shareholders’ disputes between themselves in their private capacities are not part of the conduct of the company’s affairs and are not within the section. As Harman J noted in Re Unisoft Group Ltd (No 3):29 ‘… the vital distinction between acts or conduct of the company
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and the acts or conduct of the shareholder in his private capacity must be kept clear. The first type of act will found a petition under s 459 [s 994]; the second type of act will not.’ For example, in Re Legal Costs Negotiators Ltd30 the complaint was about the failure of a shareholder to sell his shares. The company had been set up by four individuals with equal shareholdings. All the shareholders were directors and employees of the company. Three of the directors fell out with the fourth who was dismissed as an employee and resigned from the board just prior to being removed as a director. Having failed to persuade the fourth member to sell his shareholding to them, the majority shareholders petitioned for an order that he should transfer or sell his shares to them. In essence, they were unhappy with his continued presence as a shareholder in the prosperous business that they were creating. The Court of Appeal rejected the petition for complaint about the respondent’s retention of his shares is not a complaint about the conduct of the company’s affairs or an act or omission of the company.31 As David Richards J explained in Re Coroin Ltd (No 2),32 s 994 ‘is not directed to the activities of shareholders amongst themselves, unless those activities translate into acts or omissions of the company or the conduct of its affairs’. Non-compliance by a shareholder with pre-emption on transfer provisions in the company’s articles or a shareholders’ agreement does not amount to conduct of the company’s affairs,33 unless, perhaps, the non-compliance is part of a scheme to exclude a minority from the company.34 Actions or omissions in compliance or contravention of the articles of association of a company may or may not constitute the conduct of the company’s affairs depending on the precise facts.35
19-25 While the act of individual shareholders exercising their rights to vote are not acts of the company, or part of the conduct of the company’s affairs, the resolution consequent on (p. 510) the exercise of their voting rights is an act of the company and part of the conduct of the company’s affairs.36
19-26 Likewise, the behaviour of shareholders in another capacity does not amount to conduct of the company’s affairs. In Arrow Nominees Inc v Blackledge37 the Court of Appeal dismissed a petition based on allegations against the majority shareholders who were significant lenders and suppliers to the company. The court noted that the complaints against the majority related to the terms of those loan and supply contracts which, even if established, related to the majority’s conduct as a lender and supplier to the company and did not relate to the conduct of the company’s affairs by the majority. A decision to lend to the company at a certain rate of interest or to supply goods at a particular price could not amount to unfairly prejudicial conduct of the company’s affairs. That would only arise if the majority used their position to compel the company to accept the funds/supplies at that rate of interest/price by preventing it securing other, more favourable, funding/suppliers.
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19-27 Leaving aside these private disputes which fall outside the scope of CA 2006, s 994, the courts do ‘not adopt a technical or legalistic approach to what constitutes the affairs of the company but will look to the business realities’.38 It is frequently stressed that the requirement for the conduct to be of the ‘affairs of the company’ should be liberally construed for the purposes of the section39 and may extend to matters which are capable of coming before the board, rather than restricted to matters that actually come before the board.40 In Oak Investment Partners XII v Boughtwood41 the Court of Appeal endorsed taking an expansive view of whose conduct might amount to the conduct of the company’s affairs for this purpose, agreeing with the approach taken by Sales J in the lower court.42 Sales J had concluded that it is possible for the conduct of a shareholder or director who acts in the carrying out of the company’s affairs, but not through any company organ, to attract relief under CA 2006, s 994. In this case, the complaint was that the respondent shareholder (he held a majority of the ordinary shares) and director had persistently failed to adhere to his agreed management role and tried to dictate and ultimately did seize control of the management of the company. This behaviour was in breach of the constitutional arrangements agreed between him and a venture capital firm (the other significant shareholder in the company) as to the conduct of the company’s affairs.43 Sales J held, and the Court of Appeal agreed, that the respondent’s conduct did amount to conduct of the company’s affairs in an unfairly prejudicial manner, though the conduct was not that of the board or of the directors. Sales J had noted that the jurisdiction under CA 2006, s 994 (p. 511) is a broad jurisdiction which allows the court to take into account the myriad ways in which the affairs of a company may in practice be carried on, accepting that the precise distribution of management decision-making authority in any particular company might be a matter of chance.44 It was difficult to see, Sales J said, why the application of CA 2006, s 994 should turn upon such fortuitous matters. If a significant shareholder, appointed to the management, engages in the course of that role in a way that improperly asserts rights of control over the conduct of the company’s affairs, such conduct is capable of being conduct of the company’s affairs for the purposes of s 994. In this instance, the destructive conduct of the respondent in overriding the constitutional arrangements (as to board composition and division of management tasks) governing the operation of the business (in effect he seized control of the business) was unfairly prejudicial conduct.45
19-28 Likewise the courts look to the business realities in the group context. In Re Citybranch Group Ltd, Gross v Rackind46 the Court of Appeal accepted that a shareholder in a holding company may petition for relief though it is the affairs of its wholly-owned subsidiary that are being conducted in an unfairly prejudicial manner, it being possible to regard the conduct of the affairs of the subsidiary as part of the conduct of the affairs of the holding company, especially where the subsidiary is wholly owned and the directors of the holding company are a majority of the directors of the subsidiary. Likewise, in an appropriate case, the conduct
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of a holding company towards a subsidiary company may constitute the conduct of the affairs of the subsidiary and can be the subject of a complaint by a shareholder in the subsidiary.47
19-29 A related issue is whether a petitioner when seeking redress against a corporate respondent may seek redress against those who control the corporate respondent, whether they be individuals or a parent company, though they are not members of the company in respect of which the petition is brought. The court can order redress against third parties, i.e. non-members provided they are sufficiently implicated in the unfairly prejudicial conduct such that it would be just to make an award against them, see the discussion at 19-82. In effect, the allegation becomes one that the non-members have participated in the conduct of the company’s affairs in an unfairly prejudicial manner such that it is just that relief be awarded against them too. An interesting illustration can be found in F & C Alternative Investments (Holdings) Ltd v Barthelemy.48
This case involves an LLP, but the case remains useful as the unfairly prejudicial remedy applies to LLPs with appropriate modifications.49 The court held that the petitioners (‘A’, minority members of the LLP) were entitled to relief in respect of the conduct of the affairs of the LLP in an unfairly (p. 512) prejudicial manner by the majority member of the LLP (‘B’) which was a wholly-owned subsidiary of ‘C’. The essence of the unfairly prejudicial conduct was that B had unfairly removed decision- making and control of the LLP’s affairs from the minority members and the proper organs of the LLP in breach of agreed governance arrangements. The court found that B was a ‘mere cipher’ for C in whose interests the representatives of B tended in reality to act and it was to C that the practical benefits of the unfairly prejudicial conduct flowed as it was C which had the ultimate commercial interest in controlling the LLP’s affairs. The court found that ‘as a matter of business reality, C did not stand aloof from the conduct of the affairs of the LLP, but actively intervened in them’.50 In those circumstances, it was appropriate to order relief against the majority member, B, and its controller, its parent company C. See further at 19-82.
19-30 Generally, the petitioner’s complaints will be of the past conduct of the company’s affairs,51 but proposed acts of the company (such as resolutions of the general meeting) which, if carried out or completed, would be prejudicial to the interests of the petitioner, may be the subject of a petition.52 The petitioner must not be too hasty, however, in seeking relief. In Re Astec (BSR) plc53 the petition was premature when it was brought at a time when the majority had only made statements as to steps which they would or might take in the future, but they had not taken any of those steps at the time of the petition. A petitioner cannot complain of past conduct if all the members at the material time consented to the conduct, assuming there was no breach of any agreement that the shareholders would not so consent.54
Conduct unfairly prejudicial to the interests of members
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19-31 The conduct complained of must be conduct which is unfairly prejudicial to the interests of the member as a member as opposed to any other interests which the member might possess,55 but the courts have emphasised that this requirement must not be too narrowly construed and the courts take a broad view of what may properly be regarded as a petitioner’s interests as a member.56
(p. 513) 19-32 In particular, the courts have consistently held that if the terms on which a person became or continues as a member in a small private company include his participation in the management of the company, his removal as a director without cause is a prejudice suffered in his capacity as a member57 entitling him to petition for relief under CA 2006, s 994. This point is important in practice for removal as a director is a common basis for s 994 petitions.
19-33 A broad approach to what constitutes the interests of a member as a member may also allow the court to take account of the members’ interests as creditors in certain circumstances. In R & H Electrical Ltd v Haden Bill Electrical Ltd58 there were four equal shareholders and directors. The petitioner was one of the shareholders and he provided the company with its working capital through loans from another company wholly owned by him. These loans formed an essential part of the arrangements between him and his fellow shareholders who regarded it as immaterial whether the funding came from the petitioner or through his other company. The relationship between the parties broke down and the others attempted to remove the petitioner from office as a director. He petitioned for relief and the respondents argued that, in so far as he had concerns, they related to his role as a creditor of the company rather than matters affecting his interests as a member. In the circumstances, however, Robert Walker LJ considered the loan arrangements were sufficiently closely associated with his membership of the company59 to be within the scope of the statutory provision. It was unfairly prejudicial to his interests as a member, therefore, to remove him from management of the company while he was a significant creditor of the company and he was entitled to relief.60
19-34 That approach was endorsed by the Privy Council in Gamlestaden Fastigheter AB v Baltic Partners Ltd61 (details at 19-83) where similarly a joint venture company was funded primarily by loans by the petitioner (again via a company associated with the petitioner) and the court considered it would be appropriate to take into account the member’s interest as a creditor of the company when considering whether to grant relief. Lord Scott, giving the ruling of the Privy Council, emphasised the importance of the funding arrangements being part of, or in pursuance of, the joint venture arrangements between the parties, as was the case in R & H Electrical Ltd v Haden Bill Electrical Ltd. In each of these cases the key element bringing the petitioners within the section was that the company was a joint venture where the intertwining of roles as members and creditors is commonplace, such that it is possible to assert that what
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has occurred, though it impacts on the petitioners’ position as creditors, is unfairly prejudicial to their interests as members.
19-35 Finally, the removal of the company’s auditor from office on grounds of divergence of opinions on accounting treatments or audit procedures, or on any other improper grounds, is treated as being unfairly prejudicial to the interests of some part of the company’s
(p. 514) members so as to enable a member (not the auditor) to petition for relief in those circumstances (CA 2006, s 994(1A)).62 This provision gives effect to art 38 of Directive 2006/43/EC on statutory audit63 which requires Member States to ensure that statutory auditors may only be dismissed on proper grounds and is intended to safeguard the independence of auditors from undue pressure by the company’s directors.
Unfairly prejudicial conduct
19-36 Whether the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to the petitioner’s interests is an objective, and not a subjective, matter.64 Commonly, petitions include allegations on numerous grounds, not least because the court will look at the cumulative picture in assessing whether the company’s affairs have been conducted in an unfairly prejudicial manner. The prejudice must be real, rather than merely technical or trivial,65 and the petitioner does not have to show that the persons controlling the company have acted deliberately in bad faith or with a conscious intent to treat him unfairly.66
The conduct complained of must be prejudicial in the sense of causing prejudice or harm to the relevant interest of the member (usually, but not limited to, financial damage67) and also unfairly so (usually connoting some breach of company law or the constitution, but not limited to that) and it is not sufficient if the conduct satisfies only one of these tests.68
The conduct may be prejudicial but not unfair, for example, if the petitioner has acquiesced in the breaches of which he now complains,69
or it may be prejudicial to remove a member from his post as a director but not unfairly so if his conduct merited removal.70 It can be prejudicial not to consult a minority shareholder, but not unfair, if the petitioner has chosen to withdraw from active involvement in the business, as in Re Metropolis Motorcycles Ltd, Hale v Waldock.71 Vice versa, conduct
(p. 515) may be unfair but not prejudicial, as in Irvine v Irvine (No 1)72
where the court found that there had been a failure to meet the statutory requirements as to approving the accounts and holding of annual general meetings, but the failures could not be said to have caused the petitioner any material prejudice.73 In Re Coroin Ltd (No 2)74 David Richards J noted that where there is a breach of duty by directors which has no consequences, no loss to the company, and no profit by the directors, it would be difficult for a member to show prejudice, though the fact of a breach of duty would establish unfairness. It would be, as Jonathan Parker LJ suggested in Rock Nominees Ltd v RCO (Holdings) plc,75 a breach of duty, as it were, in the abstract. The result is that, while financial loss is not a prerequisite, there will be no prejudice if the ‘acts
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or omissions complained of do not in practice result in injury, whether materially or by impairing constitutional and/or equitable rights’.76
19-37 The difficulties faced by a petitioner of showing conduct which is unfairly prejudicial to his interests as a member where the company is insolvent (so there are no surplus funds in which the shareholders will have an interest) were addressed by the Court of Appeal in Re Tobian Properties Ltd, Maidment v Attwood77 which ruled that, if the company is insolvent, in general, the petitioner must show that his shares would have had a value but for the wrongdoing, while acknowledging that the courts take a wide view of prejudice suffered as a shareholder.78 Arden LJ noted that the court should not erect technical difficulties to prevent a petitioner from obtaining redress if there is a sufficient prospect that a potential surplus can at some stage be shown and no unfairness to other parties is involved.79 The Court of Appeal sent the case back to the first instance judge to consider whether the company would have had a surplus if the respondent had not acted as he had (drawing excessive director’s remuneration; permitting another business to use the company’s trading name without a fee; and selling at an undervalue the company’s name and goodwill on the eve of the company’s liquidation).80
If that hearing established that there would have been a surplus if those matters had not occurred, then the petitioner had suffered unfair prejudice as a member of the company in respect of which the court could grant relief.81
(p. 516) C O’Neill v Phillips and the boundaries to unfairly prejudicial conduct
19-38 The leading authority on the scope of the unfairly prejudicial jurisdiction is O’Neill v Phillips,82 the sole House of Lords authority on the provision, and the speech by Lord Hoffmann is definitive as to the approach to be taken when assessing allegations of unfair prejudicial conduct of the affairs of a company.83
19-39 The petitioner, O, joined the company as a manual worker in 1983. In 1985, the respondent, P, impressed by O’s abilities, gave him 25 per cent of the issued shares and appointed him a director. Between 1985 and 1990, P retired from the board, leaving O as sole director. The company prospered and O was credited with half of the profits. There were discussions with a view to O obtaining a 50 per cent shareholding, but no agreement was concluded. In 1991 P became concerned about the company’s financial position and O’s management so he resumed personal command and gave O the option of managing, under him, the UK or the German branches of the business. O decided to go to Germany and remained on the board as a director. Later that year P determined that O would no longer receive 50 per cent of the profits but would be paid only his salary and any dividends payable upon his 25 per cent shareholding. O decided to sever his links with the company and
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petitioned the court claiming that the company’s affairs were being conducted in a manner ‘unfairly prejudicial’ to his interests.
19-40 Following a difference of opinion in the lower courts, the matter reached the House of Lords where Lord Hoffmann (who gave the sole speech) concluded that a member will not ordinarily be entitled to complain of unfairness unless there has been:
(1) some breach of the terms on which the member agreed that the affairs of the company should be conducted; or (2) some use of the rules in a manner which equity would regard as contrary to good faith—i.e. cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers.84
In considering the scope of the unfairly prejudicial jurisdiction, Lord Hoffmann emphasised the need to appreciate the business context in which the section operates.85 Companies are associations of persons for economic purposes where the terms of association are contained in the articles and perhaps in shareholder agreements and the manner in which business is to be conducted is regulated by rules agreed to by the members.86 It follows that a member is not ordinarily able to complain of unfairness unless there has been some breach of those terms. Additionally, on occasion, equity will restrain the exercise of strict legal rights where equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers. Those equitable considerations arise in the context of winding up on the just and equitable ground and (p. 517) were considered by Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd87 and Lord Hoffmann considered that a similar approach was applicable to the concept of unfairness in what is now CA 2006, s 994. In his famous speech in Ebrahimi v Westbourne Galleries Ltd,88 Lord Wilberforce considered the nature of a limited company and said that its structure is ‘defined by the Companies Act 1948 and by the articles of association by which shareholders agree to be bound’. He went on: ‘[i]n most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small.’89
19-41 In some circumstances, however, the exercise of legal rights will be subject to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way. But the fact that a company is a small one, or a private company, is not enough for such considerations to arise, a point worth underscoring. In Lord Wilberforce’s view, the superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements:90
(1) an association formed or continued on the basis of a personal relationship involving mutual confidence;
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(2) 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; and (3) restrictions on the transfers of shares so that a member cannot take his stake and go elsewhere.
These companies are commonly described as ‘quasi-partnerships’ though ‘it is clear that Lord Wilberforce was not intending to set out an exhaustive list of factors, (but they are very useful starting positions) and that the term quasi-partnership is only intended as a useful shorthand label’.91 This important point must not be overlooked; the language is merely shorthand for the nature of the relationship which must exist between the parties if broader equitable considerations are to come into play. The point was underlined by Mann J in Brett v Migration Solutions Holdings Ltd92 where he pointed out that the existence of a ‘quasi- partnership’ is not determinative of the question of whether equitable constraints on the exercise of legal rights apply. As explained in Corran v Butters93 the underlying question is, ‘… whether the circumstances surrounding the conduct of the affairs of a particular company are such as to give rise to equitable constraints upon the behaviour of other members going beyond the strict rights and obligations set out in the Companies Act and the articles of association’.
(p. 518) 19-42 If the company is of this nature, i.e. something more than a merely commercial association, then equitable considerations enable the court to hold the majority shareholders to the mutual agreements, promises, or understandings which form the basis of the relationship and a petitioner under s 994 can base his petition on breach of these understandings also.
19-43 Returning to the facts in O’Neill v Phillips,94 the petitioner could not bring himself within either of the grounds identified by Lord Hoffmann. P had not acted in breach of the terms upon which it was agreed that the affairs of the company should be conducted and there was no ground, consistent with the principles of equity, for any belief, any mutual agreement or understanding, that O was entitled to half the profits and half the shareholding. As O could not bring his claim within either basis for relief, his petition was dismissed. Finally, note that Lord Hoffmann expressly rejected reliance on ‘legitimate expectations’ as a basis for a petition. This reliance had been a prominent element of the case law prior to this decision with petitions being brought essentially on the basis that a petitioner was aggrieved that (what he perceived to be) his legitimate expectations as to the conduct of the company’s affairs had not been met. For example, the petitioner in O’Neill v Phillips felt that he had ‘legitimate expectations’ to 50 per cent of the shares in the company and 50 per cent of the profits although he could establish no entitlement in law or equity to such equality.95 Lord Hoffmann noted that he himself had used the phrase ‘legitimate expectations’ in Re Saul D Harrison & Sons plc,96 but he conceded that this use was a mistake.97
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19-44 The key question is whether the relationship between the parties is such as to attract equitable considerations which will restrict the freedom of the majority to act as they wish and enable a petition to be brought on both the grounds identified by Lord Hoffmann. The scenario where the relationship is of that nature is most commonly a quasi-partnership, but VB Football Assets v Blackpool FC (Properties) Ltd98 is a good example of a company which was not a quasi-partnership but equitable considerations nevertheless came into play. Where equitable considerations do not come into play, the petitioner will be limited to allegations of breaches of the statute or the articles or other contractual arrangements governing the shareholders’ relationship. In the case of a public company, the expectation generally would be that the entire relationship of the parties is exhaustively determined by the constitution99 and there is no scope for equitable considerations to arise. This is particularly so if the company is a listed public company, a point made forcibly in Re Astec (BSR) plc100 by Jonathan Parker J:
‘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.’
19-45 If the relationship between the parties is spelt out in detailed agreements, especially agreements drafted and advised upon by professional advisers, there is little scope for (p. 519) arguing that the relationship is other than a purely commercial one,101 even if there are personal relationships between the participants and even if there are only a small number of participants. In Moxon v Litchfield,102 for example, the court found that, though the company was originally founded on personal relationships (there were just four ordinary shareholders), the parties had chosen to govern the relationships between the shareholders inter se and between the shareholders and the company with bespoke and detailed legal agreements, so emphasising the commercial character of the company.103 In Re Coroin Ltd (No 2)104 the company had a small number of shareholders, but they were highly sophisticated business people purchasing a group of hotels for hundreds of millions of pounds, with lengthy and complex articles of association and shareholders’ agreements negotiated between them. David Richards J concluded that he found it hard to image a case where it would be more inappropriate to overlay equitable considerations on the company structure.105 In VB Football Assets Ltd v Blackpool FC (Properties) Ltd106 the parties (a majority and a minority shareholder essentially) were experienced businessmen who entered into detailed share subscription and loan agreements concerning their relationship as owners of a football club. Nevertheless, the court found that these agreements did not represent the totality of their
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relationship. There were further important understandings between the parties as to the management of the company on the basis of unanimity and on securing a parity of shareholdings in due course which were not formally recognised (for tax reasons) but which did form the basis of the relationship. Equitable considerations therefore did arise in this instance.
19-46 The issue is the nature of the relationship at the time of the unfairly prejudicial conduct, not whether the company was from the outset a commercial association or a quasi-partnership,107 for the parties’ relationship may change over time. A company may start out on a purely commercial footing, but by the time of the conduct complained of, may have become one where equitable considerations come into play, as was the case in O’Neill v Phillips.108 The petitioner initially was an employee of the company, but the relationships within the company changed over the years as he became a shareholder and a director such that the company became a quasi-partnership, a not uncommon scenario. Likewise in Croly v Good109 where the court found that the relationship had changed from being that of employee to that of quasi-partner. The key factors were that the petitioner, who had initially been employed as a salesman, subsequently became a shareholder, participated in management to a significant degree, was held out to outside parties as a principal in the business, and reached agreement with effectively the only other shareholder on an equal division of profits. The court noted that the totality of the arrangements between (p. 520) the parties must be considered with no single element conclusive either way110 and, in this instance, the result was a relationship requiring the qualities of trust and confidence found in a quasi-partnership.
19-47 Equally, a relationship which begins on a quasi-partnership footing may become a more commercial venture, as in Re a Company (No 005134 of 1986), ex p Harries.111 Here the parties did operate initially as a quasi- partnership but, as the business developed, the petitioner withdrew into the role of a passive shareholder with the result that the relationship moved on to a purely commercial footing. In Re McCarthy Surfacing Ltd, Hequet v McCarthy112 the relationships originally were that of quasi- partners, but the minority shareholders had destroyed that quasi- partnership, the court found, by unfounded legal action some years earlier, after which they ceased to be involved in the running of the company and the position reverted to a formal commercial relationship.113
19-48 We turn now to consider the two grounds on which a petition may be based in more detail.
Breach of the terms on which the affairs of the company should be conducted
19-49 As noted earlier, Lord Hoffmann in O’Neill v Phillips stressed the importance of considering unfair prejudice in the context of a company being a commercial association regulated by rules agreed to by the
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parties. Arden LJ in Re Tobian Properties Ltd, Maidment v Attwood,114
noted the importance of that point and commented that, while the concept of fairness is flexible and open-textured, it is not unbounded and will be applied in context and an important part of that context is the terms on which the parties agreed to do business together which will include the obligations in the company’s articles and the statute. Equally, shareholder agreements may be relevant. As Hildyard J said in Moxon v Litchfield,115 ‘… neither equity nor the jurisdiction under s 994 sweeps away contractual arrangements; at most, the exercise of contractual rights is subjected to equitable restraint if it would be unconscionable or unfairly prejudicial. If the exercise of the legal right would not be unconscionable, the consequences of its exercise must be permitted to follow.’ In Moxon v Litchfield116 the extensive legal agreements which governed the parties’ relationships provided that a director who was a ‘bad leaver’ had to transfer his shares at par value which the court accepted was a potentially ‘harsh, even draconian’ provision but one to which the director had agreed. Once it was determined that the director was a ‘bad leaver’ and subject to the proper exercise of the power to require the transfer of his shares, the director could not complain that the application of contractually agreed measures was unfair.117
19-50 Typically, breaches of the CA 2006 will be central to many petitions, usually involving allegations of breaches of directors’ duties (for example, the misappropriation of corporate assets and improper allotments of shares) and breaches of the requirements (p. 521) governing disclosure (for example, failures to call meetings or provide accounts).118
The fact that shareholders have ratified a breach of duty does not necessarily prevent conduct from being unfair for the purposes of this section, if ratification is contrary to the agreed basis as to how the company is to be run, though ratification would preclude a derivative claim.119
Breach of the no-conflict duty
19-51 It is a common feature of many of these disputes that, when the majority and minority shareholders fall out, the majority look to use the company’s assets as their own and they often appropriate, without authorisation and for their own benefit, opportunities and contracts which properly belong to the company. Typically they extract from the company benefits beyond their strict entitlements and run down the business of the company (so reducing the value of the minority’s holding) while transferring business to another entity wholly owned by them. Such clear breaches of the no-conflict duty (CA 2006, s 175, see 12-22) amount to conduct of the company’s affairs in an unfairly prejudicial manner.
19-52 Illustrations of such breaches of duty amounting to unfairly prejudicial conduct can be found in the following cases:
• In Re Little Olympian Each-Ways Ltd (No 3)120 the assets of the company were transferred at an undervalue to another company
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wholly owned by the majority shareholders. The assets were then sold on at their market value to a third party.
• In Re Full Cup International Trading Ltd121 the respondents were found to have stifled the business of the company. They deprived it of its stock and business which was transferred to another entity in which they, but not the petitioner, had an interest.
• In Re Brenfield Squash Racquets Club Ltd122 the majority shareholders and directors caused the company’s assets to be used as security for debts of their businesses and transferred to those businesses assets that rightfully belonged to the company.
• In Lloyd v Casey123 a director arranged a variety of transactions for his own ultimate benefit including payments to a company controlled by him and additional contributions to his own pension fund.
• In Allmark v Burnham124 the majority shareholder and director opened a competing business in the same street as the company’s main retail outlet, failed to consult the minority shareholder and director on management matters, and doubled his own salary once he had removed the minority shareholder from the board.
• In Re Baumler (UK) Ltd, Gerrard v Koby125 the company was split 49 per cent and 51 per cent between two shareholders who were also the two directors. An opportunity to acquire the company’s premises and adjoining land from their landlord was taken up by a third party acting on information provided to him by the 51 per cent (p. 522) respondent with the expectation of a secret profit. The court found that the underhand conduct of the respondent in procuring the acquisition of the properties was a breach of duty by him and conduct unfairly prejudicial to the petitioner.
• In Irvine v Irvine (No 1)126 the respondent director in breach of the articles awarded himself excessive and unauthorised remuneration without reference to the board or the minority shareholders. A consequence of this conduct was that the petitioner received less by way of dividend than should have been received consistent with the company’s historic policy of maximum profit distribution. Conducting the company’s affairs in this manner was unfairly prejudicial to the interests of the petitioner.
• In Grace v Biagioli127 the respondent directors consciously and deliberately failed to pay a dividend which had been declared with the available profits distributed instead in the guise of management fees to the respondents. The non-payment of the declared dividend was unfairly prejudicial conduct.
• In Re McCarthy Surfacing Ltd, Hequet v McCarthy128 a bonus agreement was deliberately designed to benefit the directors (and majority shareholders) and to ensure that none of the profits made on a particular project would be available to the other shareholders. In such circumstances, the making of the bonus agreement was a breach of the duty to act fairly and of the no-conflict rule and was unfairly prejudicial, as was a persistent failure by the board to consider
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whether or not to declare dividends, as was a failure by the board to have regard to the company’s interests when negotiating transactions with the majority shareholder.
• In Re Woven Rugs Ltd129 the respondent director in breach of duty refinanced the company in a way which favoured the interests of the majority shareholders over the interests of the minority shareholders for no purpose other than to benefit the majority at the expense of the company. He was responsible also for the extraction of funds from the company in the form of unauthorised remuneration and management charges. All of these matters amounted to the conduct of the company’s affairs in an unfairly prejudicial manner.
• In VB Football Assets v Blackpool FC (Properties) Ltd130 the court found that significant sums of money had been paid away from a company (the football club) to support other companies in the group (all owned by the majority shareholder in the company). The payments were essentially disguised dividends, the court said, from which the other shareholders in the company did not benefit so there was clear discrimination between the interests of the majority shareholder and the interests of the rest of the shareholders. Such conduct was unfairly prejudicial to their interests.
• In Corran v Butters131 it was unfairly prejudicial for the majority shareholders to arrange for the company to make unauthorised pension contributions to them of £64,000 without a proper decision of the company to that effect or the unanimous agreement of the shareholders.
(p. 523) Breach of duty to act for a proper purpose and fairly between shareholders
19-53 A common ploy in these disputes is for the directors to make an allotment of shares, nominally to raise capital, but really for the purpose of diluting the petitioner’s interest in the company, something which is in breach of the directors’ duty to act in accordance with the constitution and to exercise their powers for the purposes for which they are conferred (CA 2006, s 171). The ability of directors to manipulate allotments is limited to some extent by the statutory requirement (subject to certain exceptions) for shares to be allotted on a rights basis (i.e. to existing shareholders in proportion to existing holdings, CA 2006, s 561, see 21-34). Allotting in breach of the rights requirement so diluting the holdings of the minority shareholder is unfairly prejudicial conduct. For example, in Re Coloursource Ltd, Dalby v Bodilly132 an allotment made in breach of the rights requirement by the company’s sole director and 50 per cent shareholder had the effect of diluting the other 50 per cent shareholder to a 5 per cent shareholder. There were allegations of other misconduct, but Blackburne J thought it was sufficient to look at the allotment of shares which was the plainest possible breach by the director of his fiduciary duty and unfairly prejudicial conduct.133
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19-54 In some circumstances even a rights issue can be unfairly prejudicial, as in Re Regional Airports Ltd134 where the ulterior motive for a proposed rights issue, the court found, was to enhance the majority’s position and to increase pressure on the (now to be diluted) minority to sell their shares at a discounted valuation.135 Other examples of an improper purpose behind an apparently fair rights issue which would justify a finding of unfairly prejudicial conduct are if it is known that a particular shareholder does not have sufficient funds to take up the rights offer and it is made for that reason, or where a shareholder is engaged in litigation with the majority and the offer is designed to deplete the resources available to him to finance that litigation.136
19-55 It is even possible for a rights issue which is made for a proper purpose, i.e. genuinely to raise capital, to be unfairly prejudicial if the directors act unfairly when determining the price of the shares. In Re Sunrise Radio Ltd, Kohli v Lit137 the court accepted that a rights issue had been made for the genuine purpose of raising capital though it was made at a time when it was likely that the minority shareholder would not take up the shares and (p. 524) therefore faced dilution (from a 15 per cent holding to 8.33 per cent). But the shares had also been issued at par when the evidence was that the shares, which were taken up by the majority shareholder, could have been issued for a significantly higher price, so the minority shareholder suffered a dilution in the value, as well as the size, of her holding. The court held that, even if the directors had acted in accordance with the duty to exercise their powers for a proper purpose (s 171), they were in breach of their duty to act fairly between shareholders (s 172(1)(f)).138 The court noted that what is the proper price for shares will necessarily fall within a range of possibilities, but the board is required to consider all these matters fairly in the interests of all groups of shareholders and having regard to the foreseeable range of responses from the shareholders to the rights issue. Where it is known or foreseen that the minority may not be able or wish to subscribe, the directors in the interests of even-handedness and fairness must consider the price which can be extracted from those who are willing to subscribe or be in breach of their duties to the company.139 On the facts, issuing the shares at par without considering any alternative, particularly when the directors (as the majority shareholders) benefited appreciably from the issue at par, was a breach of duty and unfairly prejudicial to the petitioner.140
Breach of duty of care and skill
19-56 The courts are reluctant to accept that disagreements over managerial decisions can amount to conduct of the company’s affairs in an unfairly prejudicial manner.141 The judicial view, essentially, is that differences as to commercial judgement are not for the courts to adjudicate upon, especially not with the benefit of hindsight which shows that the decisions were not in the company’s interest.142 After all, the directors are appointed by the shareholders and, if they are disappointed with the quality of the management provided, the remedy lies in the
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shareholders’ power to dismiss the directors. In Re Elgindata Ltd,143 for example, the complaint was a broad complaint where the shareholder was simply disappointed as to the poor quality of the management of the business.144 That was insufficient, the court said, as a basis for an allegation of unfairly prejudicial conduct.
19-57 If the decisions taken cause actual financial loss to the company, the petition is more likely to succeed since, in essence, the allegation then is of a failure to exercise reasonable care, skill and diligence as required by CA 2006, s 174. In Re Macro (Ipswich) Ltd,145 for example, it was possible to point to specific management failures repeated over many years which caused financial loss to the company. The company had a substantial portfolio of properties which had been mismanaged by the sole director who was 83 years of (p. 525) age and the father of the petitioners in this case. He had failed to institute a proper maintenance system for the properties or to ensure that they were properly let and rents duly paid with the result that the value of these assets had been depleted. Such conduct was unfairly prejudicial conduct. On the other hand, in Fisher v Cadman146 the court rejected complaints from a shareholder about the inactive management of a property company’s assets by its directors. It was the practice of the company to hold properties in the hope of realising capital gains without expending large sums of money on repairing and letting the properties. The court thought that the decision to manage the assets in that way was within the range of reasonable business decisions available to the directors as managers and did not amount to mismanagement.
Breach of statutory rights
19-58 A breach of members’ statutory rights, for example, repeated failures to hold annual general meetings and to lay accounts before the members (when required to do so147) so depriving members of their right to know and consider the state of the company’s affairs,148 may merit a petition, subject to the general qualification that trivial infringements will not found a petition.149
Use of the rules in an inequitable manner
19-59 The second basis for a petition under CA 2006, s 994 identified by the House of Lords in O’Neill v Phillips150 is that there has been some use of the rules in a manner which equity would regard as contrary to good faith. As noted at 19-43, care must be taken in relying on this ground and vague assertions that some legitimate expectations of the petitioner have not been met will be rejected by the court.151 This ground will be relevant where the company is something more than the usual commercial association and there is a common understanding on all sides that the articles of association do not represent a complete and exhaustive statement of the parties’ relationships.152 In addition to the articles, there are understandings and promises (though not contractually binding) between the parties, typically about matters such as participation in the
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management of the company, financial returns, and, more broadly, the nature of the venture on which the parties have embarked. While these understandings etc will usually be found at the time of entering into the association, there may be later promises, by words or conduct, which it may be unfair to ignore,153 given that relationships are not static but evolve over time. As Arden LJ explained in Strahan v Wilcock,154 ‘[i]n determining what equitable obligations arise between the parties, the court must look at all the circumstances, including the company’s constitution, any written agreement between the shareholders and the conduct (p. 526) of the parties’. Complaints on this ground therefore have to show that the conduct of the company’s affairs, while not necessarily a breach of the statute or of the constitution, is a breach of the understandings which form the basis of the association. A useful cross- check, as Lord Hoffmann noted in O’Neill v Phillips,155 is to ask ‘whether the exercise of the power in question would be contrary to what the parties, by word or conduct, have actually agreed’.
Understandings as to participation in management
19-60 Complaints about removal from office are central to most unfairly prejudicial petitions. If the parties in a small private company have come together as members on the basis that all or some of them shall participate in the management of the company, the exclusion of a shareholder from management by removing him without cause as a director (a power open to the majority by ordinary resolution under CA 2006, s 168) is unfairly prejudicial to his interests as a member in the absence of a fair offer by the majority to buy the petitioner’s shares or to make some other fair arrangement.156
19-61 A typical example is Brownlow v G H Marshall Ltd157 where the company was a family business built up over a long period of time and with the shares now held equally by a brother and two sisters, all of whom were directors. Following various disagreements and the breakdown of the personal relationships involved, an attempt was made to exclude one of the sisters from the board. The court held that attempting to exclude her without a fair offer for her shares amounted to the conduct of the company’s affairs in a manner which was unfairly prejudicial to her interests so entitling her to relief.
19-62 An issue which has arisen is whether the fact that the director has a service agreement undermines his case, i.e. by suggesting that the relationship is a commercial one rather than a broader association based on mutual understandings. The courts have been reluctant so to conclude if, when viewed overall, the relationship is broader than a mere commercial association. In Brownlow v G H Marshall Ltd,158 for example, the directors did have service agreements with the company but the court found that there was nothing in the arrangements reached which altered the basis on which the company operated, i.e. that it was a quasi- partnership. The service agreements were not designed, the court thought, to affect the shareholders’ position as shareholders or to
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preclude any potential remedy which a shareholder might have under CA 2006, s 994, but were designed to ensure fair arrangements for the working directors.159 A similar approach can be found in Quinlan v Essex Hinge Co Ltd160 where the court agreed that the existence of a service agreement between the director and the company did not prevent the company having the characteristics of a quasi-partnership.
(p. 527) 19-63 In the absence of these personal quasi-partnership elements, every director is subject to the possibility of removal and has no right to remain in office.161 Removal of a director for cause will not merit a petition for, while such removal is prejudicial to the petitioner, it is not unfair.162 If, as in O’Neill v Phillips,163 and despite a changing relationship between the parties, the respondent chooses to continue to work with the petitioner without attempting to remove him from office, no grounds for complaint exist.
Understandings as to participation in financial returns
19-64 Dividend issues can loom large in disputes in small companies. A common problem is that the company does not declare any dividends while continuing to amass reserves with the majority shareholders rewarded via directors’ remuneration.164 Of course, the mere absence of dividends to shareholders cannot of itself constitute unfairly prejudicial conduct, even if the situation continues for years on end, since the declaration of dividends is a matter within the discretion of the directors. If the directors duly consider that no dividends should be paid for any particular period, even a lengthy period, and do so bona fide in the interests of the company, it is not for the court to second-guess the directors’ reasoning or substitute its own view of what the directors ought fairly to have done. But if, as in Re McCarthy Surfacing Ltd, Hequet v McCarthy,165 the board of directors fails even to consider the payment of any dividends,166 that breach of duty is itself unfairly prejudicial conduct.167 In Re a Company (No. 00370 of 1987), ex p Glossop,168 having commented that one of the prime purposes of a company is as a vehicle to earn profits which should be distributed by way of dividend to the members, Harman J said:169
‘On that basis, … it is, in my judgment, right to say that directors have a duty to consider how much they can properly distribute to members. They have a duty, as I see it, to remember that the members are the owners of the company, that the profits belong to the members, and that, subject to the proper needs of the company to ensure that it is not trading (p. 528) in a risky manner and that there are adequate reserves for commercial purposes, by and large the trading profits ought to be distributed by way of dividends.’
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19-65 Even if the circumstances are not quite as blatant as in Re McCarthy Surfacing Ltd, Hequet v McCarthy,170 a failure to declare dividends may be unfairly prejudicial conduct if it can be shown to be contrary to the understandings of the parties as to how the financial rewards are to be shared.171 In Croly v Good172 the court found that the quasi-partners had an agreed remuneration strategy for an equal division of available funds between them.173 The intention was that a scheme would be operated whereby each of them would draw money from the company on their directors’ loan accounts as required during the year (so giving rise to a debt to the company) and a dividend would be declared at the end of the year which would reduce that debt as much as possible. In fact, no dividends were declared with the result that, when the parties subsequently fell out, and the minority shareholder was excluded from the management of the business, there was a considerable debt due from the petitioner to the company on his loan account which debt would have been reduced had dividends been declared. Given the understanding as to the manner of remuneration, the court found that the failure to declare dividends (when funds were available) with the result that the directors’ debts to the company continued to mount was unfairly prejudicial to the petitioner’s interests as a member.174 In VB Football Assets v Blackpool FC (Properties) Ltd175 the court found that significant sums of money had been paid away from the company (the football club) in circumstances which showed the payments were essentially disguised dividends to the majority shareholders and from which the other shareholders in the company did not benefit. The court ruled that, while shareholders have no right to a dividend, disguised payments to enrich the majority and discriminate against the other members is unfairly prejudicial conduct.
19-66 If the company’s financial situation prevents the company declaring dividends, as in Re Metropolis Motorcycles Ltd, Hale v Waldock,176 the minority shareholder has no grounds for complaint, even if the majority shareholder as a director is able to continue drawing a salary. It would not necessarily be fair for this position to go on forever, however, and the majority would have to recognise, the court said, that the minority could be said to have a legitimate claim to some form of return, see 19-71. In Grace v Biagioli177 a dividend had been declared, but the respondents (aggrieved by the conduct of the petitioner) then
(p. 529) deliberately chose not to pay it and instead distributed the available profits as management fees to themselves. This non-payment, the court held, was unfairly prejudicial conduct.
Understandings as to the basis of the relationship
19-67 In O’Neill v Phillips178 Lord Hoffmann also considered that relief will be available under CA 2006, s 994 where some event has occurred which puts an end to the basis on which the parties entered into association with each other, so making it unfair that one shareholder should insist on the continuance of the association (a frustration-type situation).179 But something more is needed than merely an assertion by the petitioner that the association should be brought to an end. Returning
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to O’Neill v Phillips,180 it will be recalled that the House of Lords found that there was no unfairly prejudicial conduct. The minority shareholder had not been removed from office and there was no basis for his complaints that he should have received 50 per cent of the shares and of the profits of the company, see 19-43. It was argued by counsel that, even if nothing unfair had occurred, the trust and confidence between the parties had broken down to such an extent that there had to be a parting of the ways and it would be unfair to leave the petitioner locked into the company as a minority shareholder. Lord Hoffmann noted that the argument essentially was that, in a quasi-partnership company, one partner ought to be entitled at will to require the other partner to buy his shares at a fair value where he considered that trust and confidence between the partners had broken down. Lord Hoffmann rejected the argument, noting that he could find no support in the authorities for such a stark right of unilateral withdrawal where the member had not been dismissed or excluded from the company.181 The purpose of the statutory provision (CA 2006, s 994) is ‘to provide relief for shareholders who have been unfairly prejudiced, not to enable a locked-in minority shareholder to require the company to buy him out’.182
19-68 Mere deadlock between parties who have lost trust and confidence in one another is insufficient then to merit relief under CA 2006, s 994, in the absence of unfairly prejudicial conduct. In Re Phoenix Office Supplies Ltd183 the court rejected a claim by a shareholder that his co- shareholders and directors were obliged to purchase his shares when he decided (for purely personal reasons) to leave the company. The Court of Appeal ruled that a quasi-partnership company relationship does not give rise to an entitlement to a ‘no-fault divorce’ enabling one member at will to require the other members to buy his shares at fair value. In Hawkes v Cuddy184 the Court of Appeal confirmed that deadlock alone is insufficient to found a petition under CA 2006, s 994 (though it would suffice for winding up on the just and equitable ground, see 19-95) even if it shows a breakdown of trust and confidence between the parties which makes it impossible for the company to conduct its affairs as originally contemplated. It is still necessary to establish unfair prejudice which may lie in the manner in which the other party reacts to the deadlock or the misconduct which created the deadlock and the resulting irrevocable breakdown in trust (p. 530) and confidence between the parties.185 In Re Abbington Hotel Ltd, DiGrado v D’Angelo186 one of the two effective shareholders tried to sell the business (a hotel) behind the back of the other shareholder in breach of an understanding that they would run the business for some time before selling. That conduct was a breach of the agreed basis on which the business was to be conducted, hence there was fault and unfairly prejudicial conduct. That fault destroyed the essential relationship of trust and confidence between the shareholder resulting in deadlock and relief under s 994, but it was not relief because of deadlock, it was relief as a consequence of the wrongful conduct of the respondent.
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19-69 Given the clear authority that deadlock and a mere desire to bring to an end the association is not a sufficient basis for a petition, and that unfairly prejudicial conduct is required, it is difficult to see exactly what this category as envisaged by Lord Hoffmann adds to the preceding categories identified as the basis for petitions, i.e. a breach of the statute or the constitution or a use of legal powers in an inequitable way contrary to the understandings which form the basis of the association. Any of these elements would be the ‘something more’ required in addition to deadlock,187 but they would in any event found the court’s jurisdiction so rendering this ‘category’ unnecessary.
19-70 The nature of Lord Hoffmann’s quasi-frustration category was considered by Mann J in Re Metropolis Motorcycles Ltd, Hale v Waldock188 where he noted that:
‘Lord Hoffmann was demonstrating that unfairness does not arise only out of a failure to comply with prior agreements or to fulfil prior expectations. The relationships between shareholders are more subtle than that, and Lord Hoffmann was recognising that unfairness can come out of a situation where the game has moved on [emphasis added] so as to involve a situation not covered by the previous arrangements and understanding. In those circumstances the conduct of the affairs of the company can be unfairly prejudicial within the section notwithstanding the absence of the prior arrangements, and the court can thus intervene. However, for the court to intervene the change in circumstances must be such that it is not reasonable or fair to require the former association to remain as it was, and such that the court’s intervention is required to adjust matters. Lord Hoffmann’s words have to be borne in mind: “[circumstances] making it unfair that one shareholder should insist upon the continuance of the association”.’189
19-71 The need for the ‘game to have moved on’ and the ‘quasi- frustration’ analogy suggest that the change in circumstances which would bring a case within Lord Hoffmann’s category would have to be a change which arose independently of the conduct of either (p. 531) party (so there would be no breach of the statute, constitution, or understandings), but which would nevertheless render the continuation of the association unfairly prejudicial. Such cases must be rare and, unsurprisingly, in Re Metropolis Motorcycles Ltd190 the court did not feel that the case fell into this ‘quasi-frustration’ category. The parties had an understanding that only the majority shareholder would be a director. The minority expected to be able to make monthly drawings from the company on account of profits, but the parties failed to anticipate that circumstances might arise which would prevent the minority having any return on his substantial investment in the company. The company fell into financial difficulties and, while the majority shareholder continued to
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get a financial return as a director, the company was not in a position to declare a dividend to the minority. The court concluded that that was a failure by the parties to anticipate what had occurred rather than a change in the circumstances requiring court intervention to bring the association to an end. Mann J indicated, however, that it might be appropriate for the minority to come back to court at a later date if the majority did not respond to the changed circumstances and make some provision for a financial return to the minority shareholder.191 In those circumstances, it would then be open to the minority to rely on the frustration analogy and to argue that circumstances were such that it would be unfair for the majority shareholder to insist upon the continuation of the association on a basis that gave a return to him but none to the minority shareholder. Even on that scenario, that would essentially involve an allegation that understandings as to financial participation had not been met, or perhaps a breach of the duty to act fairly between shareholders, something which would found the s 994 jurisdiction in any event. It seems unlikely that this ‘quasi-frustration’ category is of great significance, particularly given that the just and equitable winding-up jurisdiction will give relief in cases of deadlock in quasi-partnerships, see at 19-101.
A fair offer—striking out the petition
19-72 As noted, a petition under CA 2006, s 994 may be brought either on the basis of a breach of the terms on which the affairs of the company should be conducted or use of the rules in an inequitable manner, as per O’Neill v Phillips.192 However, while those are the grounds on which a petition may be based, it is not necessarily the case that the petition can proceed for, in some circumstances, the petition may be struck out by the court. Generally, the court will strike out a petition if an offer has been made to the petitioner (whether as required by the articles or otherwise) that gives the petitioner all the relief that he could realistically expect to obtain on the petition and it would therefore be an abuse to continue with the litigation.193
19-73 As the usual consequence of a successful petition based on the exclusion of the petitioner is an order that the respondents purchase the shares of the petitioner, tactically, it is important for the respondent to consider answering a legitimate complaint by an excluded minority shareholder with a fair offer. Likewise, an excluded petitioner must be careful not to reject a fair offer, for the court will not allow a petition to proceed in those (p. 532) circumstances. In effect, the fair offer/strike-out rule is used to force the parties to the negotiating table. The successful petitioner wants to recover his investment in the business and a fair offer will allow him to do that.
19-74 In a quasi-partnership, to be a fair offer, the offer typically has to be an offer to purchase the minority shares on a pro-rata basis, see 19-88, on a valuation made by an independent valuer.194 The valuer must be independent and, while this does not automatically rule out the
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company’s auditors, the nature of the auditors’ relationship with the majority shareholders and their past involvement in matters which will affect the valuation means that in many instances the court will agree that the petitioner need not accept such a valuation and the petition can continue.195
19-75 Valuable guidance on what is a fair offer such that generally a petition should be struck out was given, obiter, by Lord Hoffmann in O’Neill v Phillips196 as follows and this now provides the basic benchmark for a fair offer rendering pursuit of the petition an abuse of process:
‘i) the offer must be to purchase the shares at a fair value; ii) the value, if not agreed, should be determined by a competent expert; iii) the offer should be to have the value determined by the expert as an expert. It is not required that the offer should provide for the full machinery of arbitration or the half-way house of an expert who gives reasons. The objective should be economy and expedition, even if this carries the possibility of a rough edge for one side or the other (and both parties in this respect take the same risk) compared with a more elaborate procedure; iv) the offer should provide for equality of arms between the parties. Both should have the same right of access to information about the company which bears upon the value of the shares and both should have the right to make submissions to the expert; and v) when the offer is made after a lengthy period of litigation, it cannot serve as an independent ground for dismissing the petition, on the assumption that it was otherwise well founded, without an offer of costs. But this does not mean that payment of costs need always be offered. If there is a breakdown in relations between the parties, the majority shareholder should be given a reasonable opportunity to make an offer (which may include time to explore the question of how to raise finance) before he becomes obliged to pay costs.’
19-76 An example of an offer which did not justify striking out the petition as an abuse of process can be seen in North Holdings Ltd v Southern Tropics Ltd197 concerning alleged misuse by the respondents of the company’s assets and goodwill to develop the business of another company in which they were interested. The court thought that valuation of the petitioner’s shares in this case raised serious questions of law (as to the extent of the first company’s interest in the second company, given the alleged misuse of the first company’s assets) which it was not appropriate to leave to a valuer. The offer was not sufficient therefore to remove any potential unfair prejudice and the petition should not be
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struck out. In (p. 533) Allmark v Burnham198 the purported ‘offers’ were unsatisfactory on a variety of grounds including an absence of equality of arms between the parties with the respondent, but not the petitioner, being allowed to influence the valuation; an absence of detail on matters such as the fair value to be paid (i.e. whether a minority discount would apply) and the date of valuation and the absence of proper accounts in relation to the company. In Graham v Every199 the Court of Appeal agreed that it was not unreasonable to refuse an offer where the petitioner had not been sent a copy of the valuation report at the time of the offer; he was not able to make any submissions to the valuer before the valuation was completed or to have access to the information which was placed before the valuer; he was not offered his costs; and the valuation did not take into account his allegations about financial mismanagement of the business.
19-77 The role of ‘O’Neill’ offers was considered in detail in Harborne Road Nominees Ltd v Karvaski200 where HHJ David Cooke was anxious to stress that the guidance given by Lord Hoffmann does not have the status of legislation.201 Lord Hoffmann was not prescribing a system whereby someone is protected from a petition, despite behaving in an unfairly prejudicial manner, provided an offer is then made in the specified form. It would be a cardinal error, the court said, to assume that if an offer complied with the guidance, any petition would inevitably be struck out.202 Also, HHJ Cooke noted that the guidance was given in the context of a majority shareholder buying out a minority, not in the context of equal shareholders where it is not always clear which of the shareholders should exit from the company.203 In that situation, it would be unjust, he said, if one of them was able to seize control of the company and then effectively force the other to accept an offer.204 He noted: ‘Lord Hoffmann’s remarks were not intended to have the effect of establishing a mechanism for seizure and exclusion.’205
19-78 The question for the court in all cases is whether it is appropriate to strike out the petition because its continued prosecution is an abuse or bound to fail, which will always be highly sensitive to the facts of each case.206 In particular, the offer must give the petitioner all that he could reasonably achieve at trial207 and it may be difficult to determine that this is the case where, for example, the petitioner has had limited access to information about the company and so cannot determine whether the offer reflects the true value of his shares.208 There is also the difficulty that if the petition alleges wrongdoing, such as a diversion of business or misappropriation of assets, the determination of that claim by the court would have a direct bearing on the value of the shares and would be reflected in any order a court might make, but a valuer would only be able to express an opinion as to the impact of the potential claim on the value of the shares.209 Often the relief sought is wider than a purchase order210 and so an offer which is limited to an offer to purchase the
(p. 534) petitioner’s shares would not give the petitioner all the relief which he could reasonably expect to achieve from the proceedings and
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therefore the petition would not be struck out. On the facts in Harborne Road Nominees Ltd v Karvaski,211 there were a number of factors (a failure to resolve all the disputes between the parties, ambiguity as to whether the company would declare certain dividends, and a lack of information about the company’s affairs) which meant that the petitioner might well obtain from the court an offer which would be more advantageous to him in material respects than the offer made and so the court declined to strike out the petition.212
19-79 In Harborne Road Nominees Ltd v Karvaski,213 the court also considered the situation where the petitioner has refused an offer from the respondent so no offer remains on the table and then the court strikes out the petition as an abuse. HHJ Cooke considered that if a fair offer is made which clearly and finally cures the alleged prejudice and it is rejected, the petitioner cannot complain that he is left without an exit mechanism and has to remain as a minority shareholder in an unhappy situation, for he is not entitled to insist on a standing offer that he can accept at any time.214 This does not mean that he is forever without a remedy, for subsequent unfairly prejudicial conduct may occur which would allow him to petition again.215
D Court’s power to grant relief
19-80 Where the court is satisfied that a petition under CA 2006, s 994 is well founded, it may make such order as it thinks fit for giving relief in respect of the matters complained of (CA 2006, s 996(1)).216 Without prejudice to the generality of that power, the court’s order may (s 996(2)):217
‘(a) regulate the conduct of the company’s affairs in the future; (b) require the company—
(i) to refrain from doing or continuing an act complained of, or (ii) to do an act that the petitioner has complained it has omitted to do;
(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; (d) require the company not to make any, or any specified, alterations in its articles without the leave of the court;
(p. 535) (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.’
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The remedy most commonly sought and obtained is a purchase order requiring the respondents to purchase the petitioner’s shares at a fair value which normally requires the shares to be valued as if the wrongdoing had not occurred so ensuring that the shareholder recovers any diminution in the value of his shares caused by the wrongdoing.
19-81 The courts have consistently taken the view that the wording of CA 2006, s 996 (‘such order as the court thinks fit’) offers the widest possible discretion to grant relief, including interim relief.218 In making an order under CA 2006, s 996, the court must consider the whole range of possible remedies219 and it is not limited merely to reversing or putting right the immediate conduct which justifies the order, but it must also look to cure for the future the unfair prejudice suffered by the petitioner220 so any likelihood of the conduct recurring is a relevant consideration. In determining what is the appropriate remedy, as Patten J noted in Grace v Biagioli,221 the court is ‘entitled to look at the realities and practicalities of the overall situation, past, present and future’.222 In making an order, the court is not restricted to considering the effect on the members of the company, but can take into account the interests of others and the interests of the creditors will often be relevant, though the weight to be given to interests other than those of the shareholders will depend on the circumstances.223 The relief ordered must be proportionate to the unfair prejudice which has occurred and while, as discussed later, a purchase order is the usual remedy, in the case of relatively modest unfair prejudicial conduct, that remedy may be disproportionate.224 In Corran v Butters225 the only unfairly prejudicial conduct established was an improper pension payment of £64,000. The court considered that an (p. 536) order for the purchase of the petitioner’s one-third shareholding would be disproportionate. The appropriate relief was to order the repayment of the pension contribution.
19-82 The court may make an order against third parties where they are involved, innocently or knowingly, in the prejudicial conduct.226 In F & C Alternative Investments (Holdings) Ltd v Barthelemy227 Sales J considered that it is appropriate to order relief against a non-member where ‘… the defendant in a s 994 claim is so connected to the unfairly prejudicial conduct in question that it would be just, in the context of the statutory regime contained in ss 994 to 996, to grant a remedy against that defendant in relation to that conduct’. Orders against non-members can extend to orders against the parties behind a corporate respondent and, while shareholders in corporate respondents should not be joined to a petition as of right,228 they may be added if they are sufficiently implicated in the unfairly prejudicial conduct such that relief may be ordered against them. In Apex Global Management Ltd v Fi Call Ltd229
Vos J accepted that persons who were the driving forces behind a corporate respondent could be joined as respondents and he agreed that a purchase order may potentially be made against such persons who can be primarily and secondarily liable to buy the petitioner’s shares if they are responsible for the unfairly prejudicial conduct.
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19-83 Orders may be made for the benefit of the company,230 but if the only purpose of the petitioner is to secure the payment of a sum of money to the company, the petitioner has to show that he will obtain some real financial benefit from the order which, in exceptional cases, need not benefit the petitioner in his capacity as a member. This point derives from Gamlestaden Fastigheter AB v Baltic Partners Ltd231 where the Privy Council considered the Jersey statutory equivalent232 of CA 2006, s 996. The petitioners in Gamlestaden were minority shareholders in a joint venture company and the essence of their allegation was that the directors had negligently allowed the bulk of the company’s assets to be lost rendering it insolvent (allegedly the assets were withdrawn from the business for no consideration by the majority shareholders). The minority shareholder had lent the company DM165.5m and an award of damages payable by the majority shareholders to the company, while it would not restore the company to solvency, would at least offer some prospect for the minority as creditors to recover some of these loans.233 The respondent (p. 537) directors unsuccessfully applied to have the petition struck out on the basis that relief had to be of benefit to the petitioner in his capacity as a member rather than for the benefit of the creditors. The Privy Council concluded that, given the width of the jurisdiction to give relief under what is now CA 2006, s 996, exceptionally the court may grant relief though the company is insolvent and will remain insolvent, so long as the petitioner derives some real financial benefit from the petition.234 The exceptional element in Gamlestaden was that the company was a joint venture formed on the basis of an agreement between the joint venturers that the company be funded through share and loan capital. These funding arrangements were so closely connected to the petitioner’s membership of the joint venture that if the relief sought was of real value to the joint venturer in recovering some part of his investment then, in their Lordships’ opinion, he ought not to be precluded from relief on the ground that it would benefit him as a loan creditor and not as a member.235 It would be inconsistent with the statutory purpose, Lord Scott said, to limit the availability of remedies to cases where the value of the share or shares held by the petitioner would be enhanced by the value of the relief sought.236 The application to strike out the petition was denied.
19-84 This issue of corporate relief on an unfairly prejudicial petition requires further consideration in the light of the statutory derivative claim under CA 2006, Pt 11. Where in essence a petitioner is seeking corporate relief for breach of directors’ duties, the petition should be dismissed and the petitioner required instead to seek permission to bring a derivative claim (see Chapter 20), other than in the rare case where the petitioner seeks personal and corporate relief and it is convenient and appropriate to deal with the corporate claim on the petition.237 In a different but still relevant context (unfairly prejudicial conduct of a company’s affairs in administration) Millett J in Re Charnley Davies Ltd (No 2),238 having commented that it is a matter of perspective, explained that there is a distinction between cases where the unlawfulness of the
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conduct complained of is the whole gist of the complaint and it may be adequately addressed by the remedy provided by the law for that wrong and cases where the burden is of alleging and proving that the acts or omissions complained of evidence or constitute unfairly prejudicial conduct of the company’s affairs and wider relief may be sought. In essence, instances of misconduct should be the subject of a derivative claim under CA 2006, Pt 11 while unfairly prejudicial mismanagement of the company’s affairs should be the subject of a petition under CA 2006, s 994.
(p. 538) Purchase orders
19-85 As noted, in practice, a petitioner usually requests an order under CA 2006, s 996(2)(e), requiring the respondents to purchase the shares held by the petitioner239 and, as the Court of Appeal commented in Grace v Biagioli,240 in most cases of unfairly prejudicial conduct nothing less than a clean break between the parties is likely to be required. In this case the respondents consciously and deliberately failed to pay a dividend which had been declared and the available profits were distributed instead as management fees to the respondents. At first instance, the trial judge considered that the appropriate relief was to order the company to pay the petitioner the missing dividend plus interest. On appeal, the Court of Appeal concluded that the judge had erred as to the scope of the discretion to order relief, in particular as to the need to cure the problem for the future. In this case, there was some evidence of changes in trading arrangements which would reduce the profits available to be distributed as dividends, a change which the court noted ‘does not bode well for future relations between the parties’.241 Taking everything into account, the Court of Appeal thought that nothing short of a purchase order would provide appropriate protection for the petitioner.242 A purchase order, the court said, frees the petitioner from the company and enables him to extract his share of the value of the business and assets in return for forgoing any future right to dividends.243 It also preserves the company and its business for the benefit of the respondents, free from the petitioner’s claims, and removes the possibility of future difficulties between the shareholders.244
19-86 In Re Coloursource Ltd, Dalby v Bodilly245 the unfairly prejudicial conduct was an improper allotment of shares which had the effect of diluting a 50 per cent shareholder to a 5 per cent shareholder. The respondent argued that the appropriate relief was a reversal of the allotment, rectification of the register of members, and an undertaking by him not to make further allotments of shares. The court refused to limit the relief in that way and granted the purchase order sought by the petitioner. A buy-out order was an entirely appropriate order, the court said, when the respondent had conducted himself in such a way as to forfeit the other shareholder’s confidence in the respondent’s ability to conduct the company’s affairs in a proper way.
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19-87 Once the court determines that a purchase order is the appropriate relief, it is not required to add to the order an ‘escape clause’, i.e. an order for alternative relief in the event that the respondent is unable to raise the necessary funds to purchase the shares. That approach was rejected as wrong in principle by the Court of Appeal in Re Cumana Ltd246 for a (p. 539) purchase order is a reflection of the amount of compensation due to the petitioner for the wrong (the unfairly prejudicial conduct) done to him by the respondent and the fact that the respondent is impecunious is no reason for not giving judgment for the amount due to the victim.247 For the same reason, it is irrelevant that the shares which the respondent is ordered to buy are worthless, as where the company is in administration, for the payment is compensation to the petitioner for the damage caused by the wrongful conduct.248
Valuation issues
19-88 The basic approach to the valuation of the shares to be acquired was established in Re Bird Precision Bellows Ltd249 which has been followed in numerous cases. The key considerations are:
(1) The price fixed by the court must be fair,250 so the valuation must be adjusted to take into account the unfairly prejudicial conduct, for example, any misappropriation of assets or opportunities or use of company funds by the respondents for their personal benefit, etc which will have had the effect of diminishing the value of the shares.251 The regular practice of the court is to value the shares ‘not as they are, but as they would have been if events had followed a different course’,252 i.e. if the unfairly prejudicial conduct had not occurred. (2) There is no rule that the shares have to be bought on a pro-rata basis, but nor is there a general rule that they have to be bought on a discounted basis to reflect the fact that they are a minority holding. It all depends on the circumstances of the case. (3) In general, however, the court would distinguish between two types of shareholding in small private companies: (a) where the holding is in what is essentially a quasi-partnership and the sale is being forced on the holder because of the unfairly prejudicial manner in which the majority have conducted the affairs of the company; and (b) where the company is not a quasi-partnership. (4) Where the sale is of a holding acquired in what is essentially a quasi-partnership and the sale is being forced on the holder because of the unfairly prejudicial manner in which the majority have conducted the affairs of the company then, as a general rule, the correct course would be to fix the price pro rata according to the value of the shares as a whole and without any discount.
(p. 540) 19-89 As already explained, the majority of petitions do relate to quasi-partnerships and therefore the general approach is to require a pro- rata valuation. The offer should be on a pro-rata basis because, as Lord
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Millett explained in CVC/Opportunity Equity Partners Ltd v Demarco Almeida,253 the matter should be approached as a notional sale of the whole business as a going concern to an outside purchaser.254 In order to be free to manage the company’s business without regard to the relationship of trust and confidence which formerly existed between the parties, the majority must buy the whole business, ‘part from themselves and part from the minority, thereby achieving the same freedom to manage the business as an outside purchaser would enjoy’.255
19-90 Classifying a relationship as a quasi-partnership (see 19-40) will then have a significant impact on valuation. In Strahan v Wilcock256 it was argued that this general rule (pro-rata valuation in a quasi-partnership) should be set aside. In that case the parties’ relationship had developed from one of employer/employee into a quasi-partnership, but the acquisition of shares in the business by the petitioner had also been the subject of commercial option agreements. The question was whether such commercial aspects to the relationship meant that a pro-rata basis should be set aside in favour of a discounted value. The Court of Appeal concluded that the relationship overall was correctly classified as a quasi- partnership when the petitioner’s employment, his rights under the option agreements (the terms of which did not suggest a purely commercial relationship), and his participation in the management of the business were all taken into account. Given all the circumstances of the relationship, on the petitioner’s exclusion from the management of the company, fairness required that his shares be purchased on a non- discounted basis.
19-91 Where the company is not a quasi-partnership, different considerations apply and the price fixed will normally be discounted to reflect the fact that it is a minority holding held essentially as an investment. For example, in Re Elgindata Ltd257 a discounted value was appropriate for the shares had been acquired by the petitioners for investment purposes. In Re McCarthy Surfacing Ltd, Hequet v McCarthy258 the relationships originally were those of quasi-partners but, after previous disputes, the position had reverted to a formal commercial relationship so a purchase order on a discounted basis was appropriate.259 In Re Planet Organic Ltd260 the purchase order related to preference shareholders and (p. 541) the court concluded that, as they were investors rather than active participants in the running of the company, they should be bought out at a discount. A discounted valuation applies, even if the minority holding is substantial, as in Irvine v Irvine (No 2).261 In that case, the petitioners tried to persuade the court that their 49.96 per cent shareholding was so substantial that the holding should be valued on a pro-rata, non-discounted basis, though the company was not a quasi-partnership. The court rejected their claim and ruled that a minority shareholding, even where the extent of the minority is slight, is to be valued as a minority shareholding unless a good reason exists (i.e. that the company is a quasi-partnership or some other exceptional circumstance) to attribute to it a pro-rata share of the overall
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value of the company. In this case, the company was not a quasi- partnership and there was no good reason or exceptional circumstance to order anything other than a discounted valuation. Indeed, in Strahan v Wilcock,262 Arden LJ considered it difficult to conceive of circumstances in which a pro-rata valuation would be appropriate where there was no quasi-partnership relationship.
19-92 An example can be found, however, in Re Sunrise Radio Ltd, Kohli v Lit263 where the court did order a pro-rata valuation though the company was not a quasi-partnership, noting that there is no inflexible rule of universal application excluding a pro-rata valuation.264 The unfairly prejudicial conduct in this case (see 19-55) essentially involved improper allotments of shares at par (when a significant premium might have been obtained) which diluted both the petitioner’s shareholding in the company and the value of her shares. In the circumstances, the court thought that there were a variety of reasons why a pro-rata value was appropriate.265 First, the petitioner was an original shareholder who did not obtain her shares at a discounted value and she was not a willing seller, rather her exit was occasioned by the unfairly prejudicial conduct of the respondents. Secondly, the company had not declared dividends as the strategy was to look for capital growth and, though not in itself a ground for complaint,266 it was unfair that she would be deprived of any part of the fruits of that capital growth. Thirdly, a solvent winding up of the company would have been open to her on the just and equitable ground (see 19-95) whereby she would have received a rateable proportion of the realised assets. The court saw no reason why she should be in a worse position under a s 994 petition than she would be under a winding-up petition,267 given that her choice of remedy kept the company alive for the benefit of the remaining shareholders. Fourthly, the court considered that the particular value of the shares to the respondents might be a very material factor.268 The company was very successful and was likely to be floated on the stock exchange in the near future, something which the petitioner would have benefited from, had the unfairly prejudicial conduct of the respondents not made her into an unwilling seller of her shares. There was a risk that the respondents would end up unjustly enriched by the acquisition of her shares which had been triggered by their wrongful conduct which was especially unjust if there was reason to suspect that their conduct was influenced by a desire to buy out or worsen the position of the minority.269 The first three reasons given by the court seem insufficiently compelling to justify a pro- rata valuation and they would be present in many cases so, if they are the determining factors, then the categories of petitioner entitled to a pro- rata valuation would be greatly expanded. The fourth factor, however, appears to be a (p. 542) genuinely exceptional element which merits a pro-rata valuation though the company was not a quasi-partnership. Exceptionally, fairness did require a different outcome in this case from the normal discount and fairness, as noted in Re Bird Precision Bellows Ltd,270 is the key objective in valuing the shares.
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19-93 In addition to disputes as to the basis of valuation, it is common for there also to be disagreements as to the appropriate date for valuation for this may have a significant bearing on the outcome. The starting point is that the shares should be valued at the date of the court’s order for purchase, as that is the time when the unfairly prejudicial conduct is brought to an end, and an interest in a going concern should be valued at the date when it is ordered to be sold.271 As the overriding criterion is fairness, in the circumstances of a particular case, fairness may require that the valuation be directed to take place at an earlier date,272 such as the date of the petition,273 or the date of improper exclusion from participation in the management of the company if exclusion has been established.274 In relation to the latter possibility, the court is particularly so disposed to value the shares as at the date of exclusion if, as in Croly v Good,275 the value of the company declines significantly after the exclusion in circumstances which raise suspicions as to how that decline has occurred. A feature of a number of cases is that, by the time of the judgment, the company is in administration, sometimes dubiously so.276
The fact that the company is in administration is not a bar to making a purchase order, but it does suggest that the valuation date should not be the date of the order.277 It is possible for the court exceptionally to award interest to the petitioner.278
E Relationship with other shareholder remedies— winding up on the just and equitable ground
19-94 The range of conduct covered and the flexibility of the relief offered means that petitioning for relief under CA 2006, s 994 is almost invariably the most attractive solution for an (p. 543) aggrieved shareholder, but there are other options available, including various statutory rights under the CA 2006, see 20-84, which may be relevant in some circumstances, and it may be possible to obtain permission to bring a derivative claim on behalf of the company (discussed in Chapter 20). Another option is for a member to petition under IA 1986, s 122(1)(g) for a winding-up order on the just and equitable ground,279 a provision which has traditionally provided the court with a wide discretionary jurisdiction.280
Winding up on the just and equitable ground
19-95 In addition to petitioning for relief under CA 2006, s 994, a petitioner may petition in the alternative for a winding-up order on the just and equitable ground under IA 1986, s 122(1)(g), there being no power to make a winding-up order under CA 2006, s 996. The effect of petitioning under the winding-up jurisdiction is to oblige the company to seek a validation order281 under IA 1986, s 127 which otherwise avoids dispositions of company property made after the commencement of the winding up (i.e. after the presentation of the petition). The requirement of a validation order under IA 1986, s 127 means that presenting a winding- up petition alongside the unfairly prejudicial petition maximises the pressure that the petitioner can bring to bear on the respondents. The
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courts are alert to the oppressive possibilities of this tactic, however, and a Practice Direction makes clear that a petitioner should not seek relief under CA 2006, s 994 and winding up unless winding up is the relief which the petitioner prefers or it is thought that it may be the only relief to which he is entitled.282 In practice, it is unlikely that a petitioner does want a winding-up order. As discussed, the successful petitioner is able under CA 2006, s 996 to obtain a purchase order and exit the company and has no reason to pursue a winding-up order. Moreover, the very availability of relief under s 994 means that the court may refuse to exercise its discretion to make a winding-up order: see IA 1986, s 125(2), discussed at 19-98. Having said that, there may be circumstances, such as deadlock, in which a claim cannot be brought within CA 2006, s 994 (see 19-68), but would fall within the just and equitable winding-up jurisdiction. Equally, misconduct by an individual director may not amount to the conduct of the company’s affairs in an unfairly prejudicial manner,283 but may amount to a lack of probity which merits a winding up on the just and equitable ground, see 19-101. It is possible therefore that the claim for a winding-up order will be instead of or additional to a claim under s 994. We turn therefore to consider the extent of that jurisdiction.
Procedural matters
19-96 An application to the court for a winding-up order may be made by a contributory,284 defined as every person liable to contribute to the assets of a company in the event of its being wound up.285 For example, a partly paid-up shareholder who remains liable to (p. 544) contribute the amount unpaid on his shares in the event of the company being wound up is a contributory, but it is rare now for shareholders to be partly-paid. A fully paid-up member must establish that he has a tangible interest in the winding up, defined as a prima facie probability of surplus assets remaining after the creditors have been paid for distribution amongst the shareholders.286 In other words, in an insolvent company, a fully paid-up member has no locus standi to seek a winding up. A further condition is that a contributory is not entitled to present a winding-up petition unless the number of members is reduced below two or the shares held by him, or some of them, either were originally allotted to him, or have been held by him and registered in his name for at least six months during the 18 months before the commencement of the winding up, or have devolved on him through the death of a former holder.287
19-97 A petitioner seeking a winding-up order on the just and equitable ground must come with clean hands.288 If the breakdown in the conduct of the company’s affairs is a result of the petitioner’s own misconduct,289
or the petitioner has acquiesced in the conduct of which he now complains,290 the court will refuse the application. If the petitioner can establish sufficient grounds for petitioning, however, the fact that he also has an ulterior, perhaps personal, motive for pursuing the matter does not render those grounds insufficient.291
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19-98 The court has a discretion under IA 1986, s 125(2) to refuse to make a winding-up order where there is some alternative remedy available to the petitioner and he is acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy. An obvious alternative remedy is the ability to petition for relief on the unfairly prejudicial ground under CA 2006, s 994. In Re a company (No 001363 of 1988), ex p S-P292 the court accepted that the availability of relief, possibly wider relief, under the unfairly prejudicial remedy does not of itself make it plainly unreasonable to seek a winding-up order so as to justify striking out the petition. However, winding up is a remedy of last resort and, given the width of the jurisdiction under CA 2006, s 994, generally the courts would expect a petitioner to seek alternative relief under the unfairly prejudicial jurisdiction.293
19-99 Another option which may be open to the aggrieved shareholder is to exit from the company by selling his shares via a purchase mechanism provided by the articles of association or pursuant to an offer to acquire his shares made by the other shareholders. The courts initially took quite a strict line and regarded a refusal to use such mechanisms as unreasonable and grounds for striking out the winding-up petition.294
This approach was somewhat harsh, given that in many instances the mechanism in the articles or offer requires the petitioner to accept a valuation of his shares as determined by the company’s auditor. (p. 545) Petitioners often feel that such valuations are arbitrary and biased in favour of the majority shareholder, hence their preference for obtaining a winding-up order from the court.
19-100 The strict position altered with the decision in Virdi v Abbey Leisure Ltd295 which established that there is no hard-and-fast rule that a petitioner who declines to utilise an exit mechanism in the articles or to accept an offer to acquire his shares is necessarily acting unreasonably in pursuing a winding-up order.296 It depends on the fairness of the purchase mechanism and in Virdi the Court of Appeal found that the petitioner’s refusal to use the mechanism was not unreasonable, given that the value of his shares might be discounted under that scheme though on the facts a discount was inappropriate.297 But where a fair offer is available,298 a petitioner will be acting unreasonably in seeking to have the company wound up rather than pursuing that alternative: he is not entitled to his day or month in court.299
Grounds for the petition
19-101 The courts have been reluctant to limit the just and equitable jurisdiction by categorising the grounds on which a petition might be brought but certain recognised (and overlapping) categories have developed over the years which centre on quasi-partnerships (see 19-106, though the jurisdiction is not limited to quasi-partnerships) and on the breakdown in relations between the parties and/or a lack of probity in the conduct of the company’s affairs.300 In Re Yenidje Tobacco Co Ltd301 the relationship between the two shareholders (who were also
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the directors) had completely broken down. They refused to talk to one another and all communications were through a third party. The court found that the company was in essence a partnership and that there was such a state of animosity between the parties as to preclude all reasonable hope of reconciliation or friendly cooperation.302 In such circumstances, it is just and equitable that the company be wound up. But the jurisdiction is not limited to situations of deadlock303 and in looking at a lack of probity in the conduct of the company’s affairs, the court looks for conduct ‘which substantially impairs those rights and protections to which shareholders, both under statute and contract, are entitled’.304 In Loch v John Blackwood Ltd305 the directors failed to hold general meetings or submit accounts or recommend a dividend. Instead the majority shareholder treated the business as if it was his own business and ran it down with a view to forcing the minority shareholder to sell out at an undervalue. Though the (p. 546) company was not deadlocked, the lack of probity in the conduct of the company’s affairs merited a winding- up order.306
19-102 It was also possible to get a winding-up order if it was or became impossible or illegal to achieve the main objectives for which a company was formed.307 These loss of substratum cases, as they were known, became less relevant as modern drafting techniques ensured that companies had many and varied objects such that loss of substratum was rarely an issue. Now, companies formed under the CA 2006 have unrestricted objects unless the parties choose to restrict them (see s 31).
The modern jurisdiction
19-103 The landmark modern authority on the just and equitable jurisdiction is the decision of the House of Lords in Ebrahimi v Westbourne Galleries Ltd308 which established that, where a company has the characteristics of a quasi-partnership, as described by Lord Wilberforce, see 19-106, the court may subject the exercise of legal rights to equitable considerations, i.e. considerations of a personal character arising between one individual and another which may make it unjust or inequitable to insist on strict legal rights or to exercise them in a particular way. It may therefore be just and equitable to wind up a company where the majority have acted in disregard of those equitable considerations.
19-104 In this instance, two shareholders (E and N) had formed a company which operated on a quasi-partnership basis including an understanding that both would be involved in the management of the company. N’s son later joined the company. The majority shareholders (N and his son) were not entitled in those circumstances subsequently to exercise their undoubted legal power to remove the minority shareholder (E) as a director and, having done so, the House of Lords concluded that the only just and equitable course was to dissolve the association and to grant E a winding-up order under IA 1986, s 122(1)(g).
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19-105 The House of Lords found that, as a matter of law, the majority shareholders had acted completely within their rights, within the provisions of the articles, and the Companies Act in removing E as a director. But the just and equitable jurisdiction was not limited to proven cases of mala fides and the legal correctness of their conduct did not make it unassailable.
19-106 The words ‘just and equitable’ were:
‘a recognition of the fact that a limited company is more than a mere judicial entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act 1948 and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The “just and equitable” provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It (p. 547) does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.’309
As to when these equitable considerations will arise, Lord Wilberforce noted:
‘Certainly the fact that a company is a small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, of which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles. 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 on the transfer of the members’ interest in the company—so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere. It is these, and
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analogous, factors which may bring into play the just and equitable clause, and they do so directly, through the force of the words themselves.’310
Lord Wilberforce went on to note that such companies are commonly, if confusingly, called quasi-partnerships, a term which must not obscure the fact that the parties are members in a company.311
19-107 It has already been noted that this judgment in Ebrahimi plays a key role in determining the scope of the unfairly prejudicial jurisdiction, as Lord Hoffmann acknowledged in O’Neill v Phillips,312 see 19-40. The question is whether there is any role left to be played by the winding-up remedy, given the availability of relief under s 994. The Court of Appeal made clear in Hawkes v Cuddy313 that the winding-up jurisdiction remains an important shareholder remedy in its own right and there are cases where it will be the more appropriate remedy, and possibly the only remedy, available to a shareholder.314 A situation where relief will be available under IA 1986, s 122(1)(g), but not under the unfairly prejudicial jurisdiction, is where there is deadlock between the parties involving a breakdown in mutual trust (such as Re Yenidje Ltd,315 see 19-101) where winding up is warranted but where there is no objective unfairness to support a petition under CA 2006, s 994, see 19-68.
(p. 548) Equally, there may be cases of misconduct which will amount to a breach of probity within the Lock v John Blackwood316 category, see 19-101, but which do not amount to a carrying on of the company’s affairs in an unfairly prejudicial manner. Clearly, winding up on the just and equitable ground remains an option and it may be the desired remedy, depending on the particular circumstances.317
A derivative claim
19-108 As is evident from the authorities discussed in this chapter, breaches of directors’ duties are classic examples of conduct of the company’s affairs in a manner which is unfairly prejudicial to the interests of members generally318 and therefore within the unfairly prejudicial jurisdiction. But such breaches are primarily wrongs done to the company, of course, in respect of which the company may sue or a derivative claim may lie under CA 2006, Pt 11. Where the derivative claim and the petition raise substantially the same issues, the court may want to look at what is the whole gist of the complaint and the relief sought before determining which proceedings would be most appropriate,319 see 19-84. The mere fact that the conduct would merit a derivative claim is not a reason to strike out the petition;320 equally if a petition would give the petitioner all the relief which he is seeking, the court is likely to refuse permission to continue a derivative claim.321 If the only substantive relief sought on the petition is a claim on behalf of the company against a third party, however, the court will not necessarily allow the claimant to proceed by petition instead of by derivative claim.322 The advantage of proceeding by way of a petition under CA 2006, s 994 is that it avoids the procedural obstacles surrounding the derivative claim which require a
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claimant to obtain the permission of the court to continue the claim. A petition also secures a personal remedy for the petitioner rather than a remedy for the company, as is the case with a derivative claim. On the other hand, a derivative claim may be attractive where the shareholder does not wish to have his shares purchased by the respondents, but wants a remedy for misconduct and the recovery of assets belonging to the company323 and he wishes to take advantage of the indemnity for costs which is possibly available with respect to a derivative claim.324
Notes: 1 Research carried out for the Company Law Review showed that 70 per cent of the companies on the register had only one or two shareholders and 90 per cent had fewer than five shareholders: Company Law Review, Developing the Framework (2000), para 6.9.
2 Shareholders have no right of access to board minutes, only to minutes of general meetings: see CA 2006, s 358; but they can obtain details of directors’ service contracts: s 228; and inspect statutory registers such as the register of members, s 116, subject to the company’s ability to refuse permission under s 117. As to a petitioner’s entitlement to disclosure of company documents, see CAS (Nominees) Ltd v Nottingham Forest FC plc [2002] 1 BCLC 613; Arrow Trading & Investment Est 1920 v Edwardian Group Ltd [2005] 1 BCLC 696.
3 The accounts may be quite dated, however, since a private company has nine months from the end of the financial year in which to send the accounts to each member: see CA 2006, ss 423–424, 442.
4 See Re Legal Costs Negotiators Ltd [1999] 2 BCLC 171; Re Baltic Real Estate Ltd (No 2) [1993] BCLC 503.
5 The courts are alert to this possibility, see Re a Company (No 007623 of 1984) [1986] BCLC 362 at 367, per Hoffmann J: ‘… the very width of [the unfairly prejudicial] jurisdiction means that unless carefully controlled, it can become a means of oppression’.
6 Prentice, ‘Protecting Minority Shareholders’ Interests’ in Feldman and Meisel (eds), Corporate and Commercial Law: Modern Developments (1996), p 80.
7 Prentice, n 6, 89–93.
8 See Prentice, n 6, 90.
9 See Law Commission, Shareholder Remedies (Law Comm No 246) (Cm 3769, 1997).
10 Company Law Review, Developing the Framework (2000), paras 4.70– 4.71; Completing the Structure (2000), para 5.106.
11 See Law Commission Report, n 9, para 1.9.
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12 The courts’ reluctance to interfere in commercial decisions is long- standing: see Carlen v Drury (1812) 1 Ves & B 154, 35 ER 61 at 63: ‘This Court is not to be required on every Occasion to take the Management of every Playhouse and Brewhouse in the Kingdom …’ (per Lord Eldon); also Burland v Earle [1902] AC 83 at 93, per Lord Davey; Hogg v Cramphorn Ltd [1966] 3 All ER 420 at 428, per Buckley J; and Shuttleworth v Cox [1927] 2 KB 9 at 23: ‘It is not the business of the court to manage the affairs of the company.’
13 ‘Company’ means a company within the meaning of the Act: CA 2006, s 994(3)(a), meaning a company formed and registered under the CA 2006 and its predecessors, see s 1.
14 See generally Joffe, Minority Shareholders (5th edn, 2015), Chs 6, 7; Hollington, Shareholders’ Rights (8th edn, 2016), Chs 7–9; Payne, ‘Sections 459–461 Companies Act 1985 in Flux: The Future of Shareholder Protection’ (2005) 64 CLJ 647; Boyle, Minority Shareholders’ Remedies (2002).
15 See O’Neill v Phillips [1999] 2 BCLC 1.
16 [2012] 1 All ER 414. See McVea, ‘Section 994 of the Companies Act 2006 and the Primacy of Contract’ (2012) 75 MLR 1123.
17 See Re Vocam Europe Ltd [1998] BCC 396 (unfair prejudice petition was stayed by the court as a shareholders’ agreement provided for disputes to go to arbitration); Re Exeter City AFC v Football Conference Ltd [2005] 1 BCLC 238 (shareholders’ right to petition was an inalienable right which could not be limited by agreement and an arbitration agreement could not be invoked to require a stay of a petition).
18 See too the decision of the Singapore Court of Appeal in Tomolugen Holdings Ltd v Silica Investors Ltd [2015] SGCA 57 at [84] et seq, 26 October 2015, where there is a detailed discussion of Fulham. The essence of an unfairly prejudicial petition is to uphold the commercial agreement between the parties found in the constitution, the articles, shareholder agreements, or understandings of the parties; the company is almost always solvent so there is in general no public element to the dispute which makes it unsuitable for arbitration. The remedial deficiencies in arbitration are not so serious as to preclude these matters going to arbitration.
19 It is noteworthy that the authorities on the issue, see n 17, had unusual facts; two concerned disputes between football clubs and football bodies (Exeter City AFC and Fulham Football Club) and the other involved a company where the majority shareholders were Australian companies and the shareholders’ agreement provided for arbitration in Melbourne (Vocam). None presented the more usual scenario of persons within the jurisdiction engaged in a business venture together.
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20 In certain circumstances, the Secretary of State may petition on the same grounds under CA 2006, s 995, but this power is never used.
21 See Re McCarthy Surfacing Ltd [2006] EWHC 832 where the court allowed a petition by two shareholders (who had executed a transfer of their shares) and the transferee (whose request for registration had been refused by the directors), noting that the transferee has to have standing to petition for a period of time after the transfer and before registration, otherwise CA 2006, s 994(2) would have no effect. The court also considered that there was nothing to prevent the three petitioners having concurrent standing as long as care was exercised on any relief being ordered to prevent double recovery. See also Harris v Jones [2011] EWHC 1518 at [36], [149] (share transferred by one shareholder to another shareholder to be held on trust, the shareholder trustee executed an undated share transfer form back in favour of the original transferor which made the original transferor a transferee for the purposes of CA 2006, s 994(2) and therefore entitled to petition under s 994(1)).
22 [2004] 2 BCLC 191. The court noted with some surprise that this precise point as to the standing of a nominee shareholder had not previously been determined, but it also noted that numerous successful proceedings have been brought by nominee shareholders.
23 In this instance, the registered shareholder was a company controlled by X. The court ruled that the nominee shareholder was the appropriate petitioner and X had no locus standi to be a petitioner.
24 See Re Legal Costs Negotiators Ltd [1999] 2 BCLC 171 at 199, 201.
25 Richardson v Blackmore [2006] BCC 276; Re London School of Electronics Ltd [1985] BCLC 273; Re R A Noble & Sons (Clothing) Ltd [1983] BCLC 273. If the conduct of the petitioner is neither sufficiently serious nor sufficiently closely related to the respondents’ unfairly prejudicial conduct, however, it is not appropriate for the court to refuse its discretion to grant relief: Richardson v Blackmore; see also Re BC & G Care Homes Ltd [2016] BCC 615. And see comments of HHJ David Cooke in Khoshkhou v Cooper [2014] EWHC 1087 at [94] that it is normally impossible with hindsight to determine which of the parties in the breakdown of a business relationship was most at fault and the court should not conduct a ‘contest of virtue’.
26 [2016] EWHC 2896 at [318]–[325].
27 Re Pedersen (Thameside) Ltd [2018] BCC 58; see also Crolly v Good [2011] BCC 105 at [101]; Shah v Shah [2010] EWHC 313 at [140]–[141]. In Re Pedersen (Thameside) Ltd there was no allegation in the petition of any direct or indirect involvement of the respondent in the unfairly prejudicial conduct alleged or any assistance by him of the other respondent. The relief sought—that the respondent (who held 5 per cent of the share capital) might be required to purchase the shares of the 45.7 per cent petitioner—was manifestly excessive and would never be
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ordered by the court. The respondent was struck from the petition; see also Re Little Olympian Eachways Ltd [1994] 2 BCLC 420 at 429, 432.
28 [2015] 1 BCLC 41 at [37], see too at [77].
29 [1994] 1 BCLC 609 at 623. See also Re Estate Acquisition and Development Ltd [1995] BCC 338.
30 [1999] 2 BCLC 171; see also Re Astec (BSR) plc [1998] 2 BCLC 556 (statements by the majority shareholder which allegedly depressed the share price could not amount to conduct of the company’s affairs since the statements were made on behalf of the shareholder and not on behalf of the company: petition dismissed).
31 See too Re Leeds United Holdings plc [1996] 2 BCLC 545 (disagreement between shareholders as to the manner of the disposal of their shares, petition dismissed, matter did not relate to the conduct of the company’s affairs).
32 [2013] 2 BCLC 583 at [626], Ch D.
33 Re Coroin Ltd (No 2), McKillen v Misland (Cyprus) Investments Ltd [2013] EWCA Civ 781, aff’g [2012] EWHC 2343, [2013] 2 BCLC 583 (Ch D and CA); though a failure by directors to exercise pre-emption powers in the articles if triggered by a shareholder could be an omission of the company and within the section, see at [639].
34 See Graham v Every [2015] 1 BCLC 41. On an appeal on a strike-out application, the Court of Appeal considered it was possible for an allegation of non-compliance with a pre-emption requirement on transfer of shares to amount to conduct of the company’s affairs. McCombe and Vos LJJ seemed to consider that the non-compliance was part of a bigger picture of exclusion of the petitioner and dilution of his influence in the management of what was a quasi-partnership and therefore it was part of the conduct of the company’s affairs (at [73], [81]–[84]). Arden LJ emphasised that, in this particular company, the directors were remunerated by dividends and therefore a director’s shareholding dictated the return for a director’s work. Denying the petitioner his pre- emption rights at a time when he was a director arguably therefore was an interference with directors’ remuneration which is conduct of the company’s affairs (at [40]).
35 Re Charterhouse Capital Ltd, Arbuthnott v Bonnyman [2015] 2 BCLC 627 at [45]; Gross v Rackind [2005] 1 WLR 3505 at [29]; McKillen v Misland (Cyprus) Investments Ltd [2012] EWHC 2343 (Ch) at [626].
36 See Re Unisoft Group Ltd (No 3) [1994] 1 BCLC 609 at 611. See too Re Charterhouse Capital Ltd, Arbuthnott v Bonnyman [2015] 2 BCLC 627 at [48]—an alteration of the company’s articles even if legally valid may still constitute in all the circumstances unfairly prejudicial conduct.
37 [2000] 2 BCLC 167.
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38 Re Coroin Ltd (No 2) [2013] 2 BCLC 583 at [628], per David Richards J.
39 Hawkes v Cuddy [2009] 2 BCLC 427 at [50]. See O’Neill v Phillips [1999] 2 BCLC 1 at 15; Gamlestaden Fastigheter AB v Baltic Partners Ltd [2008] 1 BCLC 468 at [35], PC; Re Macro (Ipswich) Ltd [1994] 2 BCLC 354 at 404; Re Little Olympian Each-Ways Ltd [1994] 2 BCLC 420 at 429.
40 It also extends to matters which must go for consideration to the general meeting, rather than the board, see David Richards J in Re Coroin Ltd (No 2) [2013] 2 BCLC 583 at [629].
41 [2010] 2 BCLC 459.
42 See [2010] 2 BCLC 459 at [120], [122].
43 The company had been formed as an engineering joint venture with the respondent providing technical expertise and the venture capital firm providing the necessary funding. The respondent subsequently ousted, in effect, the management team which the parties had jointly agreed on and took control of the business when the parties had agreed that he would no longer have overall management control, see [2010] 2 BCLC 459 at [120], [122].
44 See [2010] 2 BCLC 459 at [77].
45 See too F & C Alternative Investments (Holdings) Ltd v Barthelemy [2012] Ch 613 at [1097]—and see 19-29.
46 [2004] 4 All ER 735 at [26]; also Oak Investment Partners XII v Boughtwood [2010] 2 BCLC 459 at [8]; Irvine v Irvine (No 1) [2007] 1 BCLC 349 at [259]; Re Ravenhart Service (Holdings) Ltd, Reiner v Gershinson [2004] 2 BCLC 376 at [104]. See Tan, ‘Unfair Prejudice from Beyond: Minority Protection in Corporate Group Structures’ (2014) 14 JCLS 367 who considers that the courts are giving effect to the economic reality that these companies are being operated as a single entity; and Goddard and Hirt, ‘Section 459 and Corporate Groups’ [2005] JBL 247 who criticise the court’s failure to respect the separate legal entities involved, noting that this approach gives an unnecessarily wide interpretation to the statutory provision.
47 Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324, HL (a parent company which stood behind its nominee directors as they ran down the business of the subsidiary to the advantage of the majority and disadvantage of the minority shareholders had conducted the affairs of the subsidiary company in an oppressive manner—the predecessor provision to s 994 required oppression—the parent company was ordered to purchase the shares of the minority).
48 [2012] Ch 613 at [1099]–[1104].
49 See SI 2009/1804, reg 48.
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50 [2012] Ch 613 at [1102], per Sales J.
51 Past acts of the company which have been remedied may be the basis of a petition if they are likely to recur but, if they are unlikely to recur, the court would have no scope to give relief. See Re Kenyon Swansea Ltd [1987] BCLC 514 at 521; Re Legal Costs Negotiators Ltd [1999] 2 BCLC 171 at 198. A member can support his petition by relying on unfairly prejudicial conduct which took place before he became a member: Lloyd v Casey [2002] 1 BCLC 454.
52 See Re Kenyon Swansea Ltd [1987] BCLC 514; Re a Company (No 00314 of 1989), ex p Estate Acquisition and Development Ltd [1991] BCLC 154.
53 [1998] 2 BCLC 556; see also Re a Company (No 005685 of 1988), ex p Schwarcz (No 2) [1989] BCLC 427 at 451 (concerns about what might happen if the company was re-registered as a private company were premature).
54 Re Bateson Hotels Ltd, Bateson v Bateson [2014] 1 BCLC 507.
55 Re a Company (No 004475 of 1982) [1983] 2 All ER 36 at 44; Re a Company (No 00314 of 1989), ex p Estate Acquisition & Development Ltd [1991] BCLC 154 at 160. For example, in Re J E Cade & Son Ltd [1992] BCLC 213 the petition was struck out when the petitioner was protecting his interests as a freeholder of a farm rather than his interests as a member of the company running the farm; also Re Unisoft Group Ltd (No 3) [1994] 1 BCLC 609 at 626 where the allegations concerned the relationship of the parties as landlord and tenant rather than as members of the company.
56 See O’Neill v Phillips [1999] 2 BCLC 1 at 15: ‘the requirement that prejudice must be suffered as a member should not be too narrowly or technically construed’, per Lord Hoffmann; Gamlestaden Fastigheter AB v Baltic Partners Ltd [2008] 1 BCLC 468 at [35], PC; Re Tobian Properties, Maidment v Attwood [2013] 2 BCLC 567 at [12].
57 See O’Neill v Phillips [1999] 2 BCLC 1 at 14–15 (‘It is the terms, agreement, or understanding on which [the petitioner] became associated as a member which generates the restraint of the power of expulsion’, per Lord Hoffmann); see also R & H Electric Ltd v Haden Bill Electrical Ltd [1995] 2 BCLC 280 at 292–3.
58 [1995] 2 BCLC 280.
59 [1995] 2 BCLC 280 at 293–4.
60 See also Re Woven Rugs Ltd [2010] EWHC 230. The shareholders had funded the company through large-scale, interest-free, subordinated debt. The director and majority shareholder organised a restructuring of the company’s finances in a way which left the petitioners as creditors, but the majority shareholder’s debt was repaid and replaced by expensive
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bank loans. The restructuring was unfairly prejudicial to the petitioners’ interests as members and as creditors, positions which the court said were in substance indistinguishable, at [96].
61 [2008] 1 BCLC 468, PC; noted Walters (2007) 28 Co Law 289; Singla (2007) 123 LQR 542.
62 As Judge Purle QC commented in Re Sunrise Radio Ltd, Kohli v Lit [2010] 1 BCLC 367 at [9], the effect of this mandatory section is to classify conduct by the board which may have been the result of a good faith genuine disagreement with the auditors as unfairly prejudicial conduct and it is unfairly prejudicial though it may have no necessary impact on the value of the petitioner’s shareholding. See Gray v Braid Group (Holdings) Ltd [2015] CSOH 146, aff’d [2016] CSIH 68.
63 OJ L 157/87, 9.6.2006.
64 Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, CA.
65 Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, CA.
66 See Re R A Noble & Sons (Clothing) Ltd [1983] BCLC 273 at 290–1.
67 While there need not be financial loss which might, for example, be damage to the value of the petitioner’s shares or loss of income, ‘[w]here the acts complained of have no adverse financial consequence, it may be more difficult to establish relevant prejudice’, per David Richards J in Re Coroin Ltd (No 2) [2013] 2 BCLC 583 (Ch and CA) at [630]–[631]; see too Arden LJ at [16]. See also Rock Nominees Ltd v RCO (Holdings) plc [2004] 1 BCLC 439 at [73],[79]; Re C & MB Holdings Ltd, Hamilton v Brown [2017] 1 BCLC 269 at [60]–[61].
68 Re Saul D Harrison & Sons plc [1995] 1 BCLC 14 at 31, CA; Re Sunrise Radio Ltd, Kohli v Lit [2010] 1 BCLC 367 at [4]; Re R A Noble (Clothing) Ltd [1983] BCLC 273.
69 Re Batesons Hotels (1958) Ltd, Bateson v Bateson [2014] 1 BCLC 507. If the shareholders are agreed that the company should be run in disregard of the obligations imposed by the Companies Act, none of them can complain that such conduct by another shareholder is unfair on that ground alone, see Croly v Good [2010] 2 BCLC 569 at [94]; also Hawkes v Cuddy [2009] 2 BCLC 427 at [72]: a shareholder who had been a party to the other shareholder’s unlawful participation in the management of the company (in breach of IA 1986, s 216) could not then found a petition under CA 2006, s 994 on that unlawful conduct. But a shareholder who has agreed or acquiesced for a period of years in the company being run quite informally in disregard of the requirements of the statute and constitution is entitled subsequently, on giving reasonable notice, to revive reliance on her strict entitlements under the articles: see Fisher v Cadman [2006] 1 BCLC 499.
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70 See, for example, Grace v Biagioli [2006] 2 BCLC 70; Corran v Butters [2017] EWHC 2294.
71 [2007] 1 BCLC 520.
72 [2007] 1 BCLC 349. Likewise, in Oak Investment Partners XII v Boughtwood [2010] 2 BCLC 459 at [121], there was some evidence of unfair conduct by the petitioners (non-disclosure of information) but it had caused no prejudice; Watchstone Group plc v Quob Park Estate Ltd [2017] EWHC 2621 (failure to give petitioner notice of special resolution was unfair, but not prejudicial since the resolution would have been passed in any event).
73 See also Re Sunrise Radio Ltd, Kohli v Lit [2010] 1 BCLC 367 at [7], [8] (in judging unfair prejudice, isolated trivial complaints, even when in breach of some legal requirement, having no impact on the value of the petitioner’s shares or on any realistic objective assessment of the integrity and competence of the board, will be ignored, unless that requirement is an absolute standard imposed by the statute or constitution and, even then, minor inadvertent departures can be ignored as will irregularities which can be set right at any moment).
74 [2013] 2 BCLC 583 at [631], [641].
75 [2004] 1 BCLC 439 at [79].
76 Re C & MB Holdings Ltd, Hamilton v Brown [2017] 1 BCLC 269 at [61] and see [159]–[162].
77 [2013] 2 BCLC 567, CA, noted Lim (2013) 34 Co Law 115.
78 [2013] 2 BCLC 567 at [11]–[12].
79 [2013] 2 BCLC 567 at [13].
80 [2013] 2 BCLC 567 at [58]. Reflecting the two stages involved, the court usually holds a ‘liability hearing’ to determine whether a purchase order should be made followed by a ‘quantum hearing’ to determine the value of the shares; see Arden LJ in Re Tobian Properties, Maidment v Attwood [2013] 2 BCLC 567 at [27], who explains that, where the company is insolvent, the court has to reverse the stages and deal with quantum issues first.
81 [2013] 2 BCLC 567 at [58].
82 [1999] 2 BCLC 1; noted Prentice and Payne, ‘Section 459 of the Companies Act 1985—The House of Lords View’ (1999) 115 LQR 587; Goddard, ‘Taming the Unfair Prejudice Remedy: Sections 459–461 of the Companies Act 1985 in the House of Lords’ (1999) 58 CLJ 487; Boyle (2000) 21 Co Law 253.
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83 See Oak Investment Partners XII v Boughtwood [2010] 2 BCLC 459 at [118], per Rimer LJ. For a succinct account of Lord Hoffmann’s speech, see Grace v Bialioli [2006] 2 BCLC 70 at [61].
84 [1999] 2 BCLC 1 at 8.
85 [1999] 2 BCLC 1.
86 See [1999] 2 BCLC 1 at 7; Re Saul D Harrison & Sons plc [1995] 1 BCLC 14 at 17–18.
87 [1972] 2 All ER 492 at 500; the case is discussed in detail at 19-103.
88 [1972] 2 All ER 492 at 500.
89 [1972] 2 All ER 492 at 500.
90 [1972] 2 All ER 492 at 500.
91 Fisher v Cadman [2006] 1 BCLC 499 at [84]. In this case the court noted that the family relationship between the parties (two brothers and a sister) was as important as the relationship defined by the articles of association and the company was a quasi-partnership though the petitioner had never taken any role in the management of the company and had contributed no capital, having been given or inherited her shares from her parents. The company did not therefore have some of the typical characteristics of a quasi-partnership. See Nourse J in Re Bird Precision Bellows Ltd cited by Oliver LJ in CA at [1986] Ch 658 at 667 who noted that Lord Wilberforce did not intend to be exhaustive and stated that, in his view, there may be other typical and important elements, in particular the provision of capital by all or some of the participants (of course, they will have to contribute capital if they are shareholders).
92 [2016] EWHC 523.
93 [2017] EWHC 2294 at [114].
94 [1999] 2 BCLC 1.
95 [1999] 2 BCLC 1 at 12–13.
96 [1995] 1 BCLC 14.
97 [1999] 2 BCLC 1 at 11.
98 [2017] EWHC 2767.
99 See Re Saul D Harrison & Sons plc [1995] 1 BCLC 14; VB Football Assets Ltd v Blackpool Football Club (Properties) Ltd [2017] EWHC 2767 at [319].
100 [1998] 2 BCLC 556 at 589. See also CAS (Nominees) Ltd v Nottingham Forest FC [2002] 1 BCLC 613 at 627; Re Tottenham Hotspur plc [1994] 1 BCLC 655 (the shareholders are entitled to expect that the entire
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relationship between the company and the chief executive is set out in his service agreement and the constitution).
101 See Re a Company (No 005685 of 1988), ex p Schwarz (No 2) [1989] BCLC 427; also Gray v Briad Group (Holdings) Ltd [2015] CSOH 146, aff’d [2016] CSIH 68 (small number of shareholders, but required to contribute at least £100,000 in share capital, not well acquainted with one another, detailed shareholder agreements); Wootliff v Rushton-Turner [2017] EWHC 3129, [2018] 1 BCLC 479 (professionally drafted articles, service agreements, allotments of differing amounts to eight different investors).
102 [2013] EWHC 3957.
103 On the other hand, in Oak Investment Partners XII v Boughtwood [2010] 2 BCLC 459, though the relationship was a joint venture between a large US venture capital firm and an individual entrepreneur and inventor, and therefore it might have been thought that it would be a commercial relationship, there was no dispute that the relationship was of a quasi-partnership nature giving rise to mutual obligations of good faith and trust, see at [119].
104 See [2013] 2 BCLC 583 at [636].
105 [2013] 2 BCLC 583 at [636].
106 [2017] EWHC 2767.
107 See Croly v Good [2010] 2 BCLC 569 at [88]; Re Sunrise Radio Ltd, Kohli v Lit [2010] 1 BCLC 367 at [306].
108 [1999] 2 BCLC 1.
109 [2010] 2 BCLC 569. See also Strahan v Wilcock [2006] 2 BCLC 555 at [19]–[25], another case where an employment relationship developed into participation on a quasi-partnership basis in the company.
110 [2010] 2 BCLC 569 at [89]–[92].
111 [1989] BCLC 383.
112 [2009] 1 BCLC 622; see also Fowler v Gruber [2010] 1 BCLC 563 where the company started as a quasi-partnership, but became a commercial relationship when the petitioner sold some of his shares and subsequently a local authority also became a shareholder.
113 [2009] 1 BCLC 622 at [93]–[96].
114 [2013] 2 BCLC 56 at [21], [31].
115 [2013] EWHC 3957 at [45].
116 [2013] EWHC 3957 at [8].
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117 [2013] EWHC 3957 at [44]–[46], [52]–[55]. Especially since the company had distributed profits each year so it was not a case that the director lost all the intermediate benefit of his participation in the company, at [52].
118 A breach of duty, while unfair, if it has no consequence for the company is not likely to produce any prejudice to a member, see Re Coroin Ltd (No 2) [2013] 2 BCLC 583 at [631], [641]–[642].
119 See Re Saul D Harrison & Sons plc [1995] 1 BCLC 14 at 18: ‘Enabling the court in an appropriate case to outflank the rule in Foss v Harbottle was one of the purposes of the section’, per Hoffmann LJ.
120 [1995] 1 BCLC 636.
121 [1995] BCC 682.
122 [1996] 2 BCLC 184.
123 [2002] 1 BCLC 454. See also Fowler v Gruber [2010] 1 BCLC 563 (director had the company lend him money to purchase shares from an existing shareholder which purchase made the director the majority shareholder; he had the company write off the loan and awarded himself excessive remuneration as well as making substantial payments to his pension fund).
124 [2006] 2 BCLC 437.
125 [2005] 1 BCLC 92.
126 [2007] 1 BCLC 349.
127 [2006] 2 BCLC 70. See also Re CF Booth Ltd, Booth v Booth [2017] EWHC 457 where there was a policy not to pay dividends under any circumstances, though the company was profitable. At the same time, the majority enjoyed what the court found to be excessive remuneration. The court found this conduct to be a breach of CA 2006, ss 171, 172, and 173.
128 [2009] 1 BCLC 622.
129 [2010] EWHC 230.
130 [2017] EWHC 2767.
131 [2017] EWHC 2294.
132 [2005] BCC 627. See also Re a Company (No 005134 of 1986), ex p Harries [1989] BCLC 383 (majority shareholder and director made an allotment of shares in breach of the statutory requirements for a rights issue for the purpose of increasing his shareholding and decreasing the petitioner’s holding from 40 per cent to 4 per cent). However, where there was a genuine desire to raise capital, a scheme proposed by the directors, although devised so as to avoid the need for a rights issue, was
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not conduct which was unfairly prejudicial to those shareholders who were thereby denied the possibility of taking up additional shares: see CAS (Nominees) Ltd v Nottingham Forest FC plc [2002] 1 BCLC 613 at 627–32.
133 [2005] BCC 627 at [16]. In the circumstances, it was irrelevant that no dividend had been declared on any of the additional shares and that no use had been made of the additional shareholding. See too Re Zetnet Ltd, Harris v Jones [2011] EWHC 1518 at [152] (dilution from 50 per cent to 0.1 per cent shareholding was unfairly prejudicial).
134 [1999] 2 BCLC 30.
135 It was obvious to the majority shareholder that the minority shareholders either could not or would not take up the rights issue—it had been made clear to them that their continued presence as investors was not welcome—therefore their holdings were bound to be diluted as a consequence of the issue, see [1999] 2 BCLC 30 at 72–3, 80.
136 See Re a Company (No 002612 of 1984) [1985] BCLC 80 (injunction granted to restrain a proposed rights issue which had followed immediately on the presentation by the minority shareholder of a petition. Had it gone ahead, it would have reduced the petitioner’s shareholding in the company from 33 per cent to 0.33 per cent); also Re a Company (No 007623 of 1984) [1986] BCLC 362.
137 [2010] 1 BCLC 367.
138 See Mutual Life Insurance Co of New York v The Rank Organisation [1985] BCLC 11; also Re McCarthy Surfacing Ltd, Hequet v McCarthy [2009] 1 BCLC 622 at [77]–[81] (the directors in adopting a bonus agreement designed to ensure that profits were not available to all the shareholders acted for an improper purpose and contravened their duty to act fairly between the shareholders).
139 [2010] 1 BCLC 367 at [95].
140 A subsequent increase in authorised share capital and a disapplication of the rights issue requirement was also unfairly prejudicial, though no shares had been issued pursuant to that authority, when the petitioner had been misled as to the calling of the general meeting where these matters were agreed, see [2010] 1 BCLC 367 at [135].
141 See Re Elgindata Ltd [1991] BCLC 959 at 993–4; Re Saul D Harrison & Sons plc [1995] 1 BCLC 14 at 31, CA.
142 See Oak Investment Partners XII v Boughtwood [2010] 2 BCLC 459 at [8].
143 [1991] BCLC 959.
144 [1991] BCLC 959 at 993–4.
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145 [1994] 2 BCLC 354. See also Re C&MB Holdings Ltd, Hamilton v Brown [2017] 1 BCLC 269 (unfairly prejudicial for the management to include a person who was an undischarged bankrupt who was disqualified from management—petitioners had a right to have the company managed properly and not by disqualified persons).
146 [2006] 1 BCLC 499.
147 Only public companies are required to hold annual general meetings or to lay accounts before such meetings: see CA 2006, ss 336, 437.
148 See Re a Company (No 00789 of 1987), ex p Shooter [1990] BCLC 384; Fisher v Cadman [2006] 1 BCLC 499.
149 See Re Saul D Harrison & Sons plc [1995] 1 BCLC 14 at 18, CA; also Irvine v Irvine (No 1) [2007] 1 BCLC 349. See Re Sunrise Radio Ltd, Kohli v Lit [2010] 1 BCLC 367 at [7]–[8] as to trivial infringements, but even a trivial infringement may amount to unfairly prejudicial conduct if the requirement infringed is imposed as an absolute requirement by the statute.
150 [1999] 2 BCLC 1.
151 The members must have reached a sufficient degree of agreement that it can be said that there has been a breach of good faith in departing from it: Khoshkhou v Cooper [2014] EWHC 1087 at [24].
152 Fisher v Cadman [2006] 1 BCLC 499 at [89].
153 O’Neill v Phillips [1999] 2 BCLC 1 at 10–11.
154 [2006] 2 BCLC 555 at [27].
155 [1999] 2 BCLC 1 at 10. See Grace v Biagioli [2006] 2 BCLC 70 at [61].
156 O’Neill v Phillips [1999] 2 BCLC 1 at 14 (‘It is the terms, agreement, or understanding on which [the petitioner] became associated as a member which generates the restraint of the power of expulsion’, per Lord Hoffmann). See also Re BC & G Care Homes Ltd [2016] BCC 615 (exclusion of petitioner without an offer for his shares in breach of the understanding that he would be a director and employee was unfairly prejudicial to his interests as a member).
157 [2000] 2 BCLC 655. See also Shepherd v Williamson [2010] EWHC 2375 at [131]; Fowler v Gruber [2010] 1 BCLC 563 at [129]. See also VB Football Assets v Blackpool FC (Properties) Ltd [2017] EWHC 2767, the parties (a 76 per cent shareholder and a 20 per cent shareholder) had an unwritten agreement that the business would be managed on the basis of unanimity, so excluding the minority from significant decision-making which was conducted outside of the board was unfairly prejudicial conduct.
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158 [2000] 2 BCLC 655.
159 [2000] 2 BCLC 655 at 669.
160 [1996] 2 BCLC 417.
161 Re Estate Acquisition and Development Ltd [1995] BCC 338; Re Tottenham Hotspur plc [1994] 1 BCLC 655; Re a Company (No 005134 of 1986), ex p Harries [1989] BCLC 383; Re a Company (No 005685 of 1988), ex p Schwarcz (No 2) [1989] BCLC 427; Re Blue Arrow plc [1987] BCLC 585.
162 See Grace v Biagioli [2006] 2 BCLC 70 (not unfairly prejudicial conduct to remove a director when he had been negotiating secretly to acquire a company dealing in the same line of business as the company and had put himself in a position of actual or potential conflict with his duties as a director). See also Hussain v Cooke [2009] EWHC 3690.
163 [1999] 2 BCLC 1. See too Re Coroin Ltd (No 2) [2013] 2 BCLC 583 at [637]—the majority took no steps to exclude the petitioner who continued to attend (or his alternate did) and participate in board meetings in the usual way.
164 See, for example, Quinlan v Essex Hinge Co Ltd [1996] 2 BCLC 417 (non-declaration of dividends, despite the company having substantial reserves, with profits distributed by bonus payments to working directors or retained in the company). It is unfairly prejudicial conduct for the majority shareholders and directors to pay themselves remuneration when the understanding of the parties is that remuneration will not be paid, see Fisher v Cadman [2006] 1 BCLC 499 where the directors provided only limited services to the company which merely held properties for investment purposes and it was the understanding of all concerned that they would not be paid. It was unfairly prejudicial conduct, therefore, for them to award themselves remuneration in excess of £50,000.
165 [2009] 1 BCLC 622.
166 In this instance, the directors and majority shareholders were in a long-running dispute with the other shareholders and the majority received remuneration in other ways.
167 See also Re J & J Insurance and Financial Consultants Ltd, Judge v Bahd [2014] EWHC 2206 at [125] (director’s failure to give proper consideration each year to whether a dividend ought to be paid, given past practice was for profits to be shared equally by dividend, and that the petitioner’s capital was tied up in the company, was unfairly prejudicial conduct; dividends were stopped once the parties fell out).
168 [1988] BCLC 570.
169 [1988] BCLC 570 at 576–7.
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170 [2009] 1 BCLC 622.
171 See Irvine v Irvine (No 1) [2007] 1 BCLC 349; Quinlan v Essex Hinge Co Ltd [1996] 2 BCLC 417; Re a Company (No 004415 of 1996) [1997] 1 BCLC 479; Re Sam Weller & Sons Ltd [1990] BCLC 80. In Re a Company (No 004415 of 1996) Sir Richard Scott noted that, if it is established at trial that dividends have been kept at an unreasonably low level, that fact would be reflected in the price which would be set for the petitioner’s shares if a purchase order is made under CA 2006, s 996.
172 [2010] 2 BCLC 569.
173 [2010] 2 BCLC 569 at [65]. The company had a 60/40 shareholding split with the 40 per cent shareholder having moved from being an employee to being a quasi-partner, see 19-46.
174 Further, given the agreement as to equal division of spoils, drawings by the respondent director in excess of that received by the petitioner also amounted to unfairly prejudicial conduct, see [2010] 2 BCLC 569 at [96] and [99]. See too Sikorski v Sikorski [2012] EWHC 1613 at [48], [50], [86] where the court found that the parties’ bargain required the payment of a certain level of dividend to the minority shareholder so that failure to make those payments was unfairly prejudicial conduct.
175 [2017] EWHC 2767.
176 [2007] 1 BCLC 520. In this case, the court found that the situation which had occurred—the inability of the company to make payments to the minority shareholder—had not been contemplated by the parties when they had set up the company so, in the absence of anything in the nature of a promise of payments to the minority shareholder, there was no basis for an order that he be bought out.
177 [2006] 2 BCLC 70.
178 [1999] 2 BCLC 1.
179 [1999] 2 BCLC 1 at 11 where Lord Hoffmann noted that the analogy of contractual frustration suggested itself.
180 [1999] 2 BCLC 1.
181 [1999] 2 BCLC 1 at 13.
182 Re a Company [1983] BCLC 126 at 136. See, for example, Re Abbington Hotel Ltd, DiGrado v D’Angelo [2012] 1 BCLC 410 at [105].
183 [2003] 1 BCLC 76. See also Re Jayflex Construction Ltd, McKee v O’Reilly [2004] 2 BCLC 145.
184 [2009] 2 BCLC 427 at [108].
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185 [2006] 2 BCLC 70 at [77]. See also Re Neath Rugby Ltd, Hawkes v Cuddy [2009] 2 BCLC 427 at [108]; Oak Investment Partners XII v Boughtwood [2010] 2 BCLC 459 at [8], [120] (there the parties were deadlocked but misconduct lay in the respondent’s underhand, destructive, and unconstitutional usurping of management power within the company which destroyed the relationship between the quasi- partners); Re Sunrise Radio Ltd, Kohli v Lit [2010] 1 BCLC 367 at [32] (no-fault divorce is not available, the failure of trust and confidence must be justified by reference to some unfair conduct on the part of those in control—in this case, an improperly priced rights issue).
186 [2012] 1 BCLC 410. Deadlock can be seen too in Shepherd v Williamson [2010] EWHC 2375, but created by the unfairly prejudicial conduct of the respondent in excluding the petitioner from participation in the management of what was a quasi-partnership.
187 Examples can be seen in Re Coloursource Ltd, Dalby v Bodilly [2005] BCC 627 where the court found the trust and confidence between the parties had been destroyed by the willingness of the majority shareholder to make manipulative allotments of shares (so a breach of the statute) and in Irvine v Irvine (No 1) [2007] 1 BCLC 349 where the court found a breach of trust and confidence as a result of excessive remuneration awarded to himself by the majority shareholder.
188 [2007] 1 BCLC 520.
189 [2007] 1 BCLC 520 at 560.
190 [2007] 1 BCLC 520.
191 See [2007] 1 BCLC 520 at [91].
192 [1999] 2 BCLC 1.
193 O’Neill v Phillips [1999] 2 BCLC 1. See also Wilkinson v West Coast Capital [2007] BCC 717 at [329]–[331]. Typically the offer will be to buy out the petitioner, but it need not be, see Music Sales Ltd v Shapiro Bornstein & Co Inc [2006] 1 BCLC 371. See also Re a Company (No 007623 of 1984) [1986] BCLC 362; Re a Company (No 004377 of 1986) [1987] BCLC 94; Re a Company (No 003843 of 1986) [1987] BCLC 562; Re a Company (No 006834 of 1988), ex p Kremer [1989] BCLC 365; Re Castleburn Ltd [1991] BCLC 89; Re a Company (No 00836 of 1995) [1996] 2 BCLC 192.
194 See Re a Company (No 00836 of 1995) [1996] 2 BCLC 192.
195 See North Holdings Ltd v Southern Tropics Ltd [1999] 2 BCLC 625 at 639; Re Rotadata Ltd [2000] 1 BCLC 122 at 132–3; Re Benfield Greig Group plc [2002] 1 BCLC 65, CA; also Re Belfield Furnishings Ltd, Isaacs v Belfield Furnishings Ltd [2006] 2 BCLC 705 at [38]–[40].
196 [1999] 2 BCLC 1 at 16.
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197 [1999] 2 BCLC 625.
198 [2006] 2 BCLC 437 at [97]–[103]. See also Re Woven Rugs Ltd [2010] EWHC 230 (offers made did not provide redress for the dissipation of the company’s funds which had been found to be unfairly prejudicial conduct); Rahman v Malik [2008] 2 BCLC 403 (offers did not make provision for the under-declaration of profits by the company and unpaid dividends); Hussain v Cooke [2009] EWHC 3690 at [74] (offer ‘subject to affordability’ did not meet the requirements of a fair offer); Shepherd v Williamson [2010] EWHC 2375 (various defects in the offers made including no equality of arms, no provision for independent valuation, and deferred consideration, all of which meant, the court said, that these were not ‘O’Neill’ type offers).
199 [2015] 1 BCLC 41.
200 [2012] 2 BCLC 420.
201 [2012] 2 BCLC 420 at [24].
202 [2012] 2 BCLC 420 at [26].
203 [2012] 2 BCLC 420 at [27].
204 [2012] 2 BCLC 420 at [27].
205 [2012] 2 BCLC 420 at [27].
206 [2012] 2 BCLC 420 at [26].
207 [2012] 2 BCLC 420 at [35].
208 [2012] 2 BCLC 420 at [31].
209 [2012] 2 BCLC 420 at [30].
210 [2012] 2 BCLC 420 at [35]. Often the petition will ask for other matters such as adjustments to directors’ loan accounts, or provision to be made for any company property which the petitioner used or may seek to keep, see Joffee et al, Minority Shareholders (5th edn, 2015), paras 7.128–7.135.
211 [2012] 2 BCLC 420.
212 [2012] 2 BCLC 420 at [40], [43]–[47].
213 [2012] 2 BCLC 420.
214 [2012] 2 BCLC 420 at [34].
215 [2012] 2 BCLC 420 at [34]. Also, where the company is a quasi- partnership, the petitioner may be in a position to petition for a winding
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up on the just and equitable ground on the basis of the breakdown of the relationship of trust and confidence between the parties, see 19-101.
216 The court’s power extends to granting relief which the petitioner has not sought or agreed to: Hawkes v Cuddy [2009] 2 BCLC 427 at [85]–[91], though in practice all petitions specify the relief sought as well as asking for ‘such other order as the court thinks fit’. The making of any order is ultimately a discretionary exercise by the court which in a case where there is unfairly prejudicial conduct by both parties (see, for example, Re Abbington Hotel Ltd, DiGrado v D’Angelo [2012] 1 BCLC 410) involves a more complicated balancing exercise as to how to exercise the discretion, see Oak Investment Partners XII v Boughtwood [2010] 2 BCLC 459 at [119].
217 In the exceptional case where a member petitions with respect to the improper removal of an auditor under CA 2006, s 994(1A), see 19-35, presumably any order would relate to the re-appointment of the original auditors, the appointment of new auditors, or any other remedy which the court deems appropriate. See Gray v Braid Group (Holdings) Ltd [2015] CSOH 146, aff’d [2016] CSIH 68.
218 See Pringle v Callard [2008] 2 BCLC 505, where Arden LJ gives useful guidance on the role of interim remedies in this context; also Re Ravenhart Service (Holdings) Ltd, Reiner v Gershinson [2004] 2 BCLC 376.
219 While a purchase order is the common remedy, it is not the only option. See Briggs J in Sikorski v Sikorski [2012] EWHC 1613 at [74]–[75] who noted that other solutions may be possible, as long as that other solution ‘does not of itself perpetuate an impossible relationship of joint management, or otherwise risk aggravating an existing dispute’. In this case, a purchase order was not the appropriate remedy, rather the court ordered the majority shareholder to adhere to an agreement reached many years previously as to how the company’s business was to be run and the financial rewards divided between the two shareholders, at [76] and [86].
220 Re Bird Precision Bellows Ltd [1985] BCLC 493 at 499–500; Grace v Biagioli [2006] 2 BCLC 70. See, for example, Re Woven Rugs Ltd [2010] EWHC 230 where in addition to the usual purchase order—the majority to purchase the shares of the minority—the court also ordered the majority to repay a loan made by the minority to the (now insolvent) company on the basis that the majority had procured the repayment of their equivalent loan and the loan was inextricably bound up with the shareholders’ membership of the company.
221 [2006] 2 BCLC 70 at [73].
222 For example, in Fowler v Gruber [2010] 1 BCLC 563, the court rejected the successful petitioner’s request that he be appointed managing director of the company. Given the level of disagreement
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between the parties, the court thought that would be neither sensible nor practical and the court ordered instead that the petitioner’s shares be purchased by the respondent.
223 Re Neath Rugby Ltd (No 2), Hawkes v Cuddy (No 2) [2009] 2 BCLC 427 at [84], CA; Fulham Football Club (1987) Ltd v Richards [2012] 1 BCLC 335 at [46], CA.
224 See VB Football Assets v Blackpool FC (Properties Ltd) [2017] EWHC 2767 at [425]; Re Neath Rugby Ltd [2008] BCC 390 at [246]; Re Phoenix Office Supplies Ltd [2003] 1 BCLC 76 at [51]. Also, Re Pedersen (Thameside) Ltd [2018] BCC 58 (a petitioner who seeks a disproportionate remedy runs the risk of having the claim struck out—the relief sought was a potential order that the respondent (who held 5 per cent of the shares) should purchase the petitioner’s 47.5 per cent shareholding—disproportionate).
225 [2017] EWHC 2294.
226 See, for example, Clark v Cutland [2003] 2 BCLC 393 (order addressed to pension fund trustees—the petition was based on unauthorised payments of company money (£145,000) by a director to his pension fund—the court ordered that the company was entitled to a charge over the pension fund cash reserves to secure the sum of £145,000 (set off by £100,000 owed by the company to the pension fund)). See also Lowe v Fahey [1996] 1 BCLC 262 at 268; Re a Company (No 005287) [1986] BCLC 68 at 71; Re Little Olympian Each-Ways Ltd [1994] 2 BCLC 420 at 429.
227 [2012] 3 WLR 10 at [1096], though an LLP case, CA 2006, s 994 applies to LLP, with appropriate modifications, see SI 2009/1804, reg 48.
228 Re Little Olympian Each-Ways Ltd [1994] 2 BCLC 420.
229 [2013] EWHC 1652, [2014] BCC 286 at [125]–[130], [135].
230 See Clark v Cutland [2003] 2 BCLC 393; Bhullar v Bhullar [2003] 2 BCLC 241; Anderson v Hogg [2002] BCC 923, SC, but these cases should be seen as confined to their exceptional facts, see Hannigan, ‘Drawing Boundaries between Derivative Claims and Unfairly Prejudicial Petitions’ [2009] JBL 606 at 620–6.
231 [2008] 1 BCLC 468, PC, noted Walters (2007) 28 Co Law 289; Singla (2007) 123 LQR 542 and discussed in detail in Hannigan, n 230, [2009] JBL 606 at 620–6. See also Atlasview Ltd v Brightview Ltd [2004] 2 BCLC 191 at [55].
232 See Companies (Jersey) Law 1991, art 141.
233 The loans had been provided by the petitioner’s parent company, though procured by the petitioner pursuant to its obligations to do so under the joint venture agreement. Their Lordships agreed with Robert
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Walker J in R & H Electric Ltd v Haden Bill Electrical Ltd [1995] 2 BCLC 280 at 294, where there was a similar arrangement, that this feature should not bar the petitioner from relief, see [2008] 1 BCLC 468 at [38] and discussion at 19-33, though in Haden Bill the company was solvent.
234 [2008] 1 BCLC 468 at [36]. Their Lordships rejected the argument that, as on a winding-up petition, the petitioner under CA 2006, s 994 needs to show a tangible interest in the winding up (essentially that surplus funds would be available for return to the shareholders) on the basis that the public interest considerations which underlie that requirement in winding up do not apply to unfairly prejudicial petitions: see [2008] 1 BCLC 468 at [32]–[33]. There is little difference between a ‘real financial benefit’ and a tangible interest, but the tangible interest must accrue to the shareholder as such (Re Rica Gold Washing Co (1879) 11 Ch D 36) whereas a real financial benefit can arise more broadly as Gamlestaden demonstrates.
235 [2008] 1 BCLC 468 at [36]–[37].
236 [2008] 1 BCLC 468 at [33].
237 For a detailed consideration of the issue of corporate relief on an unfairly prejudicial petition, see Hannigan, ‘Drawing Boundaries between Derivative Claims and Unfairly Prejudicial Petitions’ [2009] JBL 606. The court can give permission under s 996(2)(c) for a derivative claim to be commenced, but if that is the relief which is sought, it was suggested in Hughes v Weiss [2012] EWHC 2363 at [67], that the matter should be more appropriately dealt with under s 260 by an application for permission to bring a derivative claim.
238 [1990] BCLC 760 at 783. This approach was supported by Lord Scott sitting in the HK Court of Final Appeal in Re Chime Corp [2004] HKFCAR 546 at [63], discussed in Hannigan, n 237.
239 On occasion, the petitioner asks for and obtains an order entitling him to purchase the respondent’s shares at a fair value, see, for example, Re Abbington Hotel Ltd, DiGrado v D’Angelo [2012] 1 BCLC 410; Oak Investment Partners XII v Boughtwood [2010] 2 BCLC 459 at [123]; Re Hedgehog Golf Co Ltd, Lantsbury v Hauser [2010] EWHC 390; Clark v Cutland [2003] 2 BCLC 393; Re Brenfield Squash Racquets Club Ltd [1996] 2 BCLC 184. Where there is an equality of shareholdings, the court may order the persons responsible for the unfairly prejudicial conduct to sell their shares to the petitioner: see Re Planet Organic Ltd [2000] 1 BCLC 366.
240 [2006] 2 BCLC 70.
241 [2006] 2 BCLC 70 at [82].
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242 [2006] 2 BCLC 70 at [83]. The court also noted that it would not have been appropriate in any event to order the company, as opposed to the respondents, to pay the missing dividend, see at [86].
243 [2006] 2 BCLC 70 at [75].
244 [2006] 2 BCLC 70 at [75].
245 [2005] BCC 627. See also Irvine v Irvine (No 1) [2007] 1 BCLC 349; the unfairly prejudicial conduct was the payment of excessive and unauthorised remuneration, but the court considered that the breakdown in trust between the parties had gone too far to be rectified by an order requiring the respondent to repay the excessive amount and fixing the level of his remuneration as to the future. A purchase order requiring him to purchase the minority’s shares was the only appropriate remedy.
246 [1986] BCLC 430.
247 [1986] BCLC 430 at 436–7; Re Scitec Group Ltd, Sethi v Patel [2011] 1 BCLC 277 at [34].
248 Re Woven Rugs Ltd [2010] EWHC 230 at [175]. The company going into administration may itself be suspect, see Re Scitec Group Ltd, Sethi v Patel [2011] 1 BCLC 277 where the court was suspicious of the fact that the company’s value declined rapidly before going into administration whereupon it was sold, by way of a pre-pack, back to the respondent shareholder; likewise in Shepherd v Williamson [2010] EWHC 2375, see at [151]–[152].
249 [1984] BCLC 195, aff’d [1985] BCLC 493. Often even when there is agreement that a purchase order is appropriate, there is disagreement over the valuation, see, for example, Re Southern Counties Fresh Foods Ltd [2010] EWHC 3334 (Ch) where a purchase order was made in January 2009 and in December 2010 the parties were still arguing without an end in sight, the court said, about the proper valuation method to be adopted.
250 For example, the valuation of ordinary shares, where there are also preference shares in the company with a priority to a return of capital on a winding up, should reflect that liquidation preference which is an integral feature of the respective rights of the ordinary and preference shares and likely to have an impact on the valuation of the ordinary shares, but the court might have a discretion to order otherwise in the circumstances of a particular case: Oak Investment Partners XII v Boughtwood [2010] 2 BCLC 459 at [129].
251 See, for example, Re Scitec Group Ltd, Sethi v Patel [2011] 1 BCLC 277; Croly v Good [2010] 2 BCLC 569; Re Little Olympian Each-Ways Ltd (No 3) [1995] 1 BCLC 636.
252 Profinance Trust SA v Gladstone [2002] 1 BCLC 141 at [31], per Robert Walker LJ. It is not open to the respondent to argue that the
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shares are valueless if they are so because of his own conduct, see Croly v Good [2010] 2 BCLC 569 at [118].
253 [2002] 2 BCLC 108.
254 [2002] 2 BCLC 108 at [41]. The analogy, Lord Millett said, is between quasi-partnerships and partnerships and on the dissolution of a partnership the court will direct a sale of the partnership business as a going concern with any former partner who wishes to bid for the business able to do so. The valuation is not based on a notional sale of the outgoing partner’s share to the continuing partners who, being the only possible purchasers, would offer relatively little. It is based on a notional sale of the business as a whole to an outside purchaser. In valuing the whole of the share capital for this purpose, it is appropriate to take into account the net borrowings of the company, since a willing purchaser would do so when negotiating the price: Wann v Birkinshaw [2017] EWCA Civ 84.
255 [2002] 2 BCLC 108 at [43], per Lord Millett. See also Re Annacott Holdings Ltd, Attwood v Maidment [2013] 2 BCLC 46 at [11]; there is no inflexible rule that only in a quasi-partnership case can the court order a valuation on a going concern basis, per Arden LJ.
256 [2006] 2 BCLC 555, CA.
257 [1991] BCLC 959.
258 [2009] 1 BCLC 622.
259 See also Fowler v Gruber [2010] 1 BCLC 563 (company started as a quasi-partnership, but became a commercial relationship when the petitioner sold part of his shares and a local authority became a shareholder—discounted value appropriate); Re a Company (No 005134 of 1986), ex p Harries [1989] BCLC 383 (company started as a quasi- partnership but had reverted to a more commercial footing when the petitioner withdrew from the business—discounted value appropriate).
260 [2000] 1 BCLC 366.
261 [2007] 1 BCLC 445.
262 [2006] 2 BCLC 555 at 561, CA.
263 [2010] 1 BCLC 367.
264 [2010] 1 BCLC 367 at [291]–[297].
265 The reasons are summarised in [2010] 1 BCLC 367 at [308].
266 See [2010] 1 BCLC 367 at [136]–[142].
267 [2010] 1 BCLC 367 at [301].
268 [2010] 1 BCLC 367 at [305].
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269 [2010] 1 BCLC 367 at [305].
270 [1984] BCLC 195, aff’d [1985] BCLC 493.
271 Profinance Trust SA v Gladstone [2002] 1 BCLC 141.
272 Guidance as to the circumstances in which an earlier valuation might be called for was given by the Court of Appeal in Profinance Trust SA v Gladstone [2002] 1 BCLC 141. In determining the date, the Court of Appeal emphasised that the date of valuation may be heavily influenced by the parties’ conduct in making and accepting or rejecting ‘O’Neill offers’ (see 19-72) either before or during the course of the proceedings. In Re Scitec Group Ltd, Sethi v Patel [2011] 1 BCLC 277 the petitioner chose the (earlier) date of his resignation from the company which then worked to his disadvantage when his shares would possibly have been given a higher value at the date of the court order, see at [42].
273 See, for example, Re C&F Booth Ltd, Booth v Booth [2017] EWHC 457.
274 See Pinfold v Ansell [2017] 2 BCLC 489. In this case, the appropriate valuation date was the date of the petitioner’s exclusion from the company since thereafter he was subject to a commercial strategy over which he had no input or influence. He had no exit route for no reasonable offer had been made to purchase his shares. See also Re BC & G Care Homes Ltd [2016] BCC 615.
275 [2010] 2 BCLC 569 at [113], [117].
276 See also Shepherd v Williamson [2010] EWHC 2375 (significant decline in value of the company after the petitioner’s exclusion followed by the company being placed into administration and sold by way of a pre-pack to persons connected with the original company and therefore with the respondent—the court ordered that the valuation date should be the date of exclusion).
277 See, for example, Re Woven Rugs Ltd [2010] EWHC 230 at [173] (company in administration—earlier date appropriate, a date which preceded the damaging conduct and dissipation of company funds by the majority shareholder); also Re Cabot Global Ltd [2016] EWHC 2287.
278 Profinance Trust SA v Gladstone [2002] 1 BCLC 141; Re Annacott Holdings Ltd, Attwood v Maidment [2013] 2 BCLC 46.
279 Various other parties (including the directors and creditors) may also petition for a winding up: see 24-28. Here we deal only with petitioning shareholders.
280 See Re Yenidje Tobacco Co [1916] 2 Ch 426; Loch v John Blackwood Ltd [1924] AC 783; Ebrahimi v Westbourne Galleries Ltd [1972] 2 All ER 492; Re Zinotty Properties Ltd [1984] 3 All ER 754; Re A & BC Chewing Gum Ltd [1975] 1 All ER 1017.
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281 A validation order permits the company to make dispositions of its property after the commencement of the winding up.
282 See CPR, PD 49B which contains a standard form IA 1986, s 127 validation order.
283 See Re Charnley Davies Ltd (No 2) [1990] BCLC 760 at 783.
284 IA 1986, s 124(1).
285 IA 1986, s 79(1); every present and past member is included in the definition: s 74(1). In the case of a company limited by shares, no contribution is required from any member exceeding the amount (if any) unpaid on the shares in respect of which he is a liable as a present or past member: s 74(2)(d).
286 Re Rica Gold Washing Co (1879) 11 Ch D 36; Re Expanded Plugs Ltd [1966] 1 All ER 877; Re Othery Construction Ltd [1966] 1 WLR 69; Re Bellador Silk Ltd [1965] 1 All ER 667. See also Re Chesterfield Catering Co Ltd [1976] 3 All ER 294 at 299 where Oliver J suggested that ‘tangible interest’ is not limited to surplus assets but could cover where, as a member of the company, the shareholder will achieve some advantage or avoid or minimise some disadvantage which would accrue to him by virtue of his membership of the company.
287 IA 1986, s 124(2) and subject to sub-s (3), and see 24-29.
288 Ebrahimi v Westbourne Galleries Ltd [1972] 2 All ER 492 at 507, per Lord Cross.
289 Ebrahimi v Westbourne Galleries Ltd [1972] 2 All ER 492 at 507, per Lord Cross.
290 Re Fildes Bros Ltd [1970] 1 All ER 923.
291 Bryanston Finance Ltd v De Vries [1976] 1 All ER 25.
292 [1989] BCLC 579.
293 See, for example, Re a Company (No 004415 of 1996) [1997] 1 BCLC 479.
294 See Re a Company (No 002567 of 1982) [1983] 2 All ER 854; Re a Company (No 004377 of 1986) [1987] BCLC 94 at 103; Re a Company (No 003843 of 1986) [1987] BCLC 562; Re a Company (No 003096 of 1987) (1988) 4 BCC 80; Re a Company (No 005685 of 1988), ex p Schwarcz (No 2) [1989] BCLC 427 at 452.
295 [1990] BCLC 342, CA.
296 See Re a Company (No 00330 of 1991), ex p Holden [1991] BCLC 597 at 604.
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297 [1990] BCLC 342 at 349. See also Re a Company (No 001363 of 1988), ex p S-P [1989] BCLC 579 where the petitioner’s refusal to accept an offer for his shares under the articles was not unreasonable when there was a dispute as to the number of shares to which he was actually entitled.
298 The guidance as to what is a fair offer provided in O’Neill v Phillips [1999] 2 BCLC 1 at 16–17, see 19-72, will be influential on this point.
299 See Fuller v Cyracuse Ltd [2001] 1 BCLC 187 at 193.
300 See Chesterman, ‘The Just and Equitable Winding Up of Small Private Companies’ (1973) 36 MLR 129; Prentice, ‘Winding Up on the Just and Equitable Ground’ (1973) 89 LQR 107.
301 [1916] 2 Ch 426. See also Symington v Symington Quarries Ltd 1906 SC 121; Re Davis and Collett Ltd [1935] Ch 693; Re Wondoflex Textiles Pty Ltd [1951] VLR 458; Re Worldhams Park Golf Course Ltd, Re Whidbourne v Troth [1998] 1 BCLC 554; Jesner v Jarrad Properties Ltd [1993] BCLC 1032; Langley Ward Ltd v Trevor [2011] EWHC 1893 at [15].
302 [1916] 2 Ch 426 at 430, per Cozens Hardy MR.
303 See Ebrahimi v Westbourne Galleries Ltd [1972] AC 360 at 376.
304 Loch v John Blackwood Ltd [1924] AC 783 at 788, per Lord Shaw.
305 [1924] AC 783.
306 See also Re Worldhams Park Golf Course Ltd, Whidbourne v Troth [1998] 1 BCLC 554; see Re Sunrise Radio Ltd, Kohli v Lit [2010] 1 BCLC 367 at [308] (lack of probity indicated by improper allotments of shares would have merited a winding-up order); see also Re Internet Investment Corporation Ltd [2010] 1 BCLC 458.
307 The doctrine originated in Re Suburban Hotel Co (1867) 2 Ch App 737. See also Re Haven Gold Mining Co (1882) 20 Ch D 151; Re German Date Coffee Co (1882) 20 Ch D 169; Re Red Rock Gold Mining Co Ltd (1889) 61 LT 785; Re Baku Consolidated Oilfields Ltd [1944] 1 All ER 24; Re Kitson & Co Ltd [1946] 1 All ER 435.
308 [1972] 2 All ER 492, HL.
309 [1972] 2 All ER 492 at 500.
310 [1972] 2 All ER 492 at 500. See also CVC/Opportunity Equity Partners Ltd v Demarco Almeida [2002] 2 BCLC 108 at 117.
311 [1972] 2 All ER 492 at 500. Though Lord Wilberforce cautioned against the use of that term, it has entered common parlance, especially as noted earlier in this chapter in the context of the unfairly prejudicial jurisdiction, and it is too late now to limit its use.
19. The unfairly prejudicial remedy and the minority shareholder
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312 [1999] 2 BCLC 1.
313 [2009] 2 BCLC 427, overruling a controversial decision by Jonathan Parker J in Re Guidezone Ltd [2000] 2 BCLC 321 to the effect that the jurisdiction under IA 1986, s 122(1)(g) was, at the very least, no wider than CA 2006, s 994. The decision was much criticised as a unnecessary conflation of the two jurisdictions, not required by anything said by Lord Hoffmann in O’Neill v Phillips, see Boyle, Minority Shareholders’ Remedies (2002), pp 96–100; Acton, ‘Just and Equitable Winding up: The Strange Case of the Disappearing Jurisdiction’ (2001) 22 Co Lawyer 134.
314 As was pointed out in Re Sunrise Radio Ltd, Kohli v Lit [2010] 1 BCLC 387 at [303], a winding-up order will often be at break-up value and therefore will not necessarily be advantageous to the petitioning shareholder though it produces a pro-rata distribution of the realised assets for all shareholders.
315 [1916] 2 Ch 426.
316 [1924] AC 783.
317 The Singapore Companies Act, s 254(2A) allows the court on a petition for winding up on the just and equitable ground to order the interests in shares of one or more members to be purchased by the company or one or more other members on terms to the satisfaction of the court: see Koh and Tang, ‘Towards a “Just and Equitable” Remedy for Companies’ (2017) 133 LQR 372.
318 See Atlasview Ltd v Brightview Ltd [2004] 2 BCLC 191 at [61].
319 See Cooke v Cooke [1997] 2 BCLC 28; see also Clark v Cutland [2003] 2 BCLC 393 at [2], [8].
320 See Re a Company (No 005287) [1986] BCLC 68; Lowe v Fahey [1996] 1 BCLC 262; Re Little Olympian Each-Ways Ltd (No 3) [1995] 1 BCLC 636 at 665.
321 See Kleanthous v Paphitis [2012] BCC 676 (permission refused: evidence suggested that the remedy that the applicant really wanted was to be bought out and he was pursuing the derivative claim because of the availability of a costs indemnity); also Mission Capital plc v Sinclair [2010] 1 BCLC 304 (permission refused: the court did not consider that the claimants were seeking anything which could not be recovered by means of an unfair prejudice petition); Franbar Holdings Ltd v Patel [2009] 1 BCLC 1 (permission refused: claims by the member for breach of a shareholders’ agreement as well as under CA 2006, s 994 should give the applicant all the relief sought).
322 Lowe v Fahey [1996] 1 BCLC 262.
323 See, for example, Wishart v Castlecroft Securities Ltd [2009] CSIH 615, [2009] SLT 812, see 20-63.
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324 There was some blurring of the lines on this issue in Clark v Cutland [2003] 2 BCLC 393 at [35] where it was accepted that where, exceptionally, corporate relief is ordered on a petition, the petitioner is entitled to an indemnity for costs.
- Brenda Hannigan
- (p. 503) 19. The unfairly prejudicial remedy and the minority shareholder
- A Introduction
- Disputes in private companies
- Brenda Hannigan
- Disputes in public companies
- Majority and minority shareholders
- Anticipating and preventing disputes
- Governing principles
- B Petitioning on the grounds of unfair prejudice
- The petitioner
- Conduct of the company’s affairs, acts or omissions
- Conduct unfairly prejudicial to the interests of members
- Unfairly prejudicial conduct
- (p. 516) C O’Neill v Phillips and the boundaries to unfairly prejudicial conduct
- Breach of the terms on which the affairs of the company should be conducted
- Breach of the no-conflict duty
- (p. 523) Breach of duty to act for a proper purpose and fairly between shareholders
- Breach of duty of care and skill
- Breach of statutory rights
- Use of the rules in an inequitable manner
- Understandings as to participation in management
- Understandings as to participation in financial returns
- Understandings as to the basis of the relationship
- A fair offer—striking out the petition
- D Court’s power to grant relief
- (p. 538) Purchase orders
- Valuation issues
- E Relationship with other shareholder remedies—winding up on the just and equitable ground
- Winding up on the just and equitable ground
- Procedural matters
- Grounds for the petition
- The modern jurisdiction
- A derivative claim
- Notes:
