Chapter 3 Minority protection

Question 1

What is the most common remedy sought under s. 994?

Answer 1

That the majority must purchase the shares of the minority at a price which reflects their proportion of the company’s value.

Question 2

What is unfairly prejudicial conduct? (4)

Answer 2

1. Exclusion from management - particularly in a small, quasi-partnership company
2. Gross Mismanagement
3. Excessive management renumeration coupled with failure to pay dividends to shareholders - Rahman v Malik
4. Autocratic conduct - HR Harmer

Question 3

Who is entitled to sue under s. 994?

Answer 3

A member, a person to whom shares have been transferred, and a person to whom shares have been transmitted by operation of law and also the Secretary of State.

Question 4

Who cannot sue under s. 994?

Answer 4

A former member, even where the conduct complained of occurred when he was a member of the company.

Question 5

What must the applicant prove to succeed under s. 994? (2)

Answer 5

1. The company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members

OR

2. An actual or proposed act or omission of the company .. is or would be unfairly prejudicial.

Question 6

The conduct must be both unfair and prejudicial, this is based on which case?

Answer 6

Saul Harrison & Sons

Question 7

What are the remedies available for minority shareholders? (2)

Answer 7

1. Winding-up on just and equitable ground s. 122 IA 1986

2. Unfair prejudice s. 994 CA 2006

Question 8

Why was it in the past easier for minority shareholder to kill off the company by petitioning for its winding-up on the just and equitable ground rather than the procedure under Foss v Harbottle or the unfair prejudice provision?

Answer 8

This was because of the procedural
obstacles presented by Foss v Harbottle (see Chapter 2) and the
restrictive approach taken towards the predecessor of s.994 CA 2006
and, indeed, towards the unfair prejudice provision itself prior to its
amendment by the Companies Act 1989.

Question 9

Where in the law can we find winding-up of the company?

Answer 9

Section 122 IA 1986

Question 10

Where does the winding-up provision derives from and why?

Answer 10

This provision derives from partnership law, where the court had
equitable jurisdiction to dissolve a partnership where relations had
broken down between the partners and there was no other alternative
but to dissolve the business.

Question 11

Why does section 122 IA 1986 winding-up still apply?

Answer 11

Section s.994 does not expressly provide for winding-up. Therefore s.122(1)
(g) IA 1986 is still of relevance, although given the wide discretion which
s.996 confers on the court in framing a remedy, technically winding-up is
probably available for unfair prejudice petitions.

Question 12

What is the leading case for winding-up on just and equitable grounds?

Answer 12

Ebrahimi v Westbourne Galleries Ltd

Question 13

Explain the case of Ebrahimi v. Westbourne

Answer 13

The company was incorporated to take over the oriental rug business
which N and the petitioner, E, had been running as a partnership for
some 10 years.
Initially N and E were equal shareholders and the only directors.
However, when N’s son joined the company as director and
shareholder, E became a minority both within the board and at the
general meeting, where he could be outvoted by the combined
shareholding of N and his son.
Relations between E on the one hand, and N and his son on the other,
broke down. E was voted off the board using the power conferred by
s.303 CA 1985.
It was held that even though E had been removed from the board in
accordance with the Companies Act and the articles of association,
the just and equitable ground conferred on the court the jurisdiction to subject the exercise of legal rights to equitable considerations.
Since E had agreed to the formation of the company on the basis that
the essence of their business relationship would remain the same as in
their prior partnership, his exclusion from the company’s management
was clearly in breach of that understanding. It was therefore just and
equitable to wind up the company.

Question 14

Which elements are typical to be brought in petitions under just and equitable?

Answer 14

Lord Wilberforce listed the typical elements in petitions brought under
this ground:
• a business association based on a personal relationship and mutual
confidence (generally found where a pre-existing partnership has
converted into a limited company)
• an understanding that all or certain shareholders (excluding
‘sleeping’ partners) will participate in management
• restriction on the transfer of members’ interests preventing the
petitioner leaving.

Question 15

What did Lord Wilberforce say that the words just and equitable are?

Answer 15

a recognition of the fact that a limited company is more
than a mere legal 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.

Question 16

Lord Cross stressed that relief will be denied when?

Answer 16

It should be noted that Lord Cross stressed that petitioners under
s.122(1)(g) should come to court with clean hands – that is, they should
not themselves be guilty of unconscionable conduct. If a petitioner’s
own misconduct led to the breakdown in relations, relief will be denied.

Question 17

What happens when the petitioner is partially responsible for the breakdown in the relationship? Also name the case.

Answer 17

However, the fact that a petitioner is partially responsible for the
breakdown in the relationship with his co-director is not necessarily
fatal to the claim. The Privy Council in Chu v Lau [2020] UKPC 24,
applying Ebrahimi, held that the equitable doctrine of clean hands
would only bar the petitioner’s claim in this way if he had been solely
responsible for the breakdown.

Question 18

On which grounds will a petition under s. 122 IA 1986 be allowed?

Answer 18

A petition under s.122(1)(g) of the IA 1986 will be allowed on several
grounds, including:
• failure of the company’s substratum
• fraud
• deadlock
• justifiable loss of confidence in the company’s management
• exclusion from participation in a small private company where
there was a relationship based on mutual confidence.

Question 19

What does the petitioner need to establish to prove that the company’s substratum has failed?

Answer 19

The petitioner will need to establish that the commercial object
for which the company was formed has failed or has been fulfilled.

Question 20

Name a classical case law example where the company’s substratum has failed.

Answer 20

In Re German Date Coffee Co (1881–82) 20 Ch D 169 the company
was registered with the object of acquiring a German patent for
manufacturing from dates a substitute for coffee. The patent was not
granted. The Court of Appeal held that the whole substratum of the
company had gone and it ought to be wound up.

Question 21

Explain an example based on case law for fraud being a ground to wind-up the company.

Answer 21

In Re Thomas Edward Brinsmead & Sons [1887] 1 Ch 45 (Sealy and Worthington, p.795 (10th edn), p.841 (11th edn)) three men named Brinsmead, who were former employees
of John Brinsmead & Sons, an established and reputable firm which
manufactured pianos, formed a company called Thomas Brinsmead
& Sons to make pianos which were to be passed off as made by
John Brinsmead & Sons. By way of a promotion fraud, the public had
subscribed for shares worth thousands of pounds in their company. It
was held by the Court of Appeal that it was just and equitable to wind
up the company.

Question 22

Why is deadlock rare?

Answer 22

Total deadlock is rare, since if there is an equality of votes at a meeting
of the directors or members, the chair of the meeting will generally
have a casting vote.

Question 23

When will the court wind up a company in case of deadlock and based on which case?

Answer 23

The court will order a company to be wound up where there is practical, although not total, deadlock in its management.

Question 24

When may a company be wound up on the ground: justifiable loss of confidence in the company’s management?

Answer 24

Winding-up may be ordered where there is a lack of confidence in the
competence or probity of its management, provided the company is, in
essence, a quasi-partnership.

Question 25

Explain Justifiable loss of confidence int he company's management based on case law.

Answer 25

In Loch v John Blackwood Ltd the company was a small private company and the shareholders were related. The board was dominated by the majority shareholder, who treated the company as his own. He was attempting to buy out the minority shareholders, who were not directors, at an undervalue. Further, the board failed to hold general meetings, render accounts or declare a dividend. The Privy Council found that there was a justifiable lack of confidence in the probity of the majority shareholder and ordered the company to be wound up.

Question 26

What did Lord Shaw stressed in Loch v. John Blackwood?

Answer 26

Lord Shaw stressed that the lack of confidence must relate to directors in their conduct of the company’s affairs.

Question 27

What is the classic example for the ground exclusion from participation in a small private company where there was a relationship based on mutual confidence?

Answer 27

A classic example of this is the case of Ebrahimi v Westbourne Galleries.

Question 28

Which point has been made in Chu v Lau regarding quasi partnership?

Answer 28

the point was made by the PC in Chu v Lau (above), that a quasipartnership can still be found to exist even if all the factors listed in Ebrahimi are not present. Further, the Privy Council held that exclusion from management in the circumstances of a just and equitable winding-up of a quasi-partnership company was not confined to a removal from the office of director.

Question 29

Winding-up is a measure of last resort, when may the petition possible be truck out based on s. 125 IA 1986?

Answer 29

Where the petitioner is acting unreasonably in seeking to have the company wound up instead of seeking an alternative remedy.

Question 30

When is an petitioner considered to be acting unreasonably in seeking to have a company wound up?

Answer 30

If the company is solvent and s.994 CA 2006 provides a suitable route for the petitioner to exit the company, the court will generally consider the petitioner to be acting unreasonably in seeking to have the company wound up.

Question 31

What is an important conclusion from Stanley Burnton in Hawkes v Cuddy?

Answer 31

That facts which were sufficient to justify a winding-up on the just and equitable ground were not necessarily sufficient to give the court jurisdiction to award relief under s.994. The two jurisdictions were parallel but not coterminous, and a winding-up could be ordered under s.122(1)(g) where no unfair conduct was alleged.

Question 32

Is it true if an applicant can prove just and equitable winding-up that he then can also prove unfair prejudice?

Answer 32

It is not necessary in winding-up petitions to prove the same standard of impropriety or unfairness necessary to succeed under s 994: ‘unfair prejudice in the management of a company is a different allegation from either deadlock or breakdown of trust and confidence. It is not lightly to be assumed that an applicant who can prove the latter will equally be able to prove the former.

Question 33

What is stated in section 994 CA 2006?

Answer 33

(1) A member of a company 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 interests of its members generally or of some part of its members (including at least himself ), or (b) that any actual or proposed act or omission of the company (including an act or omission on its behalf ) is or would be so prejudicial.

Question 34

What are the elements of the unfair prejudice remedy? (2)

Answer 34

1. The company's affairs | 2. Interest as a member

Question 35

Do personal disputes fall inside the scope of s. 994? Explain based on case law.

Answer 35

In Re Coroin Ltd, McKillen v Misland (Cyprus) Investments Ltd [2012] EWHC 2343 (Ch), David Richards J emphasised that the complaint must centre on how the affairs of the company have been managed so that personal disputes per se between shareholders generally fall outside the scope of s.994.

Question 36

Explain why the petition was rejected by the court of appeal in the case of Legal Costs Negotiators?

Answer 36

the company had been incorporated by four individuals who were equal shareholders. The shareholders were also its directors and employees. Relations broke down with the fourth individual. He was dismissed as an employee and resigned from the board just before it was resolved to remove him. However, he remained as a shareholder and refused to sell his shares to the other three. The majority brought an action under s.994 seeking an order that the fourth individual should transfer his shares to them. The Court of Appeal rejected the petition on the basis that, as majority shareholders, they could prevent any prejudice being inflicted by him on the company. Simply remaining as a shareholder was not conduct relating to the company’s affairs.

Question 37

What is the scope of s. 994?

Answer 37

The Court stressed that the conduct complained of must: • relate to the affairs of the company • be acts done by the company or those authorised to act as its organs • not be the conduct of an individual shareholder acting in their private capacity.

Question 38

Name 2 cases where relief was refused where the petition relates tot he respondent's failure to honour a shareholder's agreement to transfer shares.

Answer 38

* Re Unisoft Group Ltd (No. 3) [1994] 1 BCLC 609. | * Re Leeds United Holdings plc [1996] 2 BCLC 545.

Question 39

Why do some cases fail under s. 994?

Answer 39

Section 994 is concerned with the company’s affairs rather than the affairs of individuals, and with acts done by the company or its authorised agents.

Question 40

Explain a case where a petitioner succeeded in an action under s. 994.

Answer 40

In Re Home & Office Fire Extinguishers Ltd [2012] All ER (D) 31 (May), two brothers, S and G, were directors and equal shareholders in the company. S attacked G with a hammer at the company’s premises following G’s refusal to make a salary advance; G had refused because the company was in a poor financial state. S was charged with grievous bodily harm but was acquitted. The judge held that S’s conduct related to the affairs of the company because it was a breach of the implied understanding that he and G would act properly and in good faith towards each other. It was a single event which made it impossible for them to continue their association as directors/shareholders in the company. He therefore ordered S to sell his shares to G.

Question 41

Following RE Smiths of Smithfield case what could be unfairly prejudicial conduct?

Answer 41

A special resolution to amend the articles to exclude pre-emption rights in a company could be unfairly prejudicial conduct.

Question 42

When can an order under s. 994 be made against a holding company and based on which case?

Answer 42

In Re City Branch Group Ltd, the Court of Appeal held that an order under s.994 could be made against a holding company where the affairs of a wholly-owned subsidiary have been conducted in an unfairly prejudicial manner, and the directors of the holding company are also the directors of the subsidiary.

Question 43

Explain the Ghyll Beck Driving Range case and its relevance.

Answer 43

A father and son, with two other people, incorporated a company to operate a golf range. They were each equal shareholders and directors. Within six months of the company’s existence the relationship between the parties had become acrimonious, due mainly to disagreements over business strategy, which left the petitioner feeling ‘isolated’. Following a fight between the father and the petitioner, the business was managed without consulting him. It was held that the petitioner had been unfairly excluded from the management of the company, since from the start it had been anticipated that all four would participate in managing the business. The court therefore ordered the majority to purchase the petitioner’s shares on the basis that the affairs of the company had been conducted in a manner unfairly prejudicial to his interests.

Question 44

Explain the case of Re a Company and its relevance.

Answer 44

the majority, including the petitioner, voted for a special resolution to amend the company’s articles so as to provide that a member, on ceasing to be an employee or director of the company, would be required to transfer their shares to the company. To remedy a situation of management deadlock, the petitioner was dismissed as director and offered £900 per share. When he declined this offer, the company’s auditors valued his shares in accordance with the pre-emption clauses. He petitioned the court under s.994 to restrain the compulsory acquisition of his shares, arguing that he had a legitimate expectation that he would continue to participate in the management of the company. Hoffmann J held that there could be no expectation on the part of the petitioner that, should relations break down, the article would not be followed. The judge stressed that s.994 could not be used by the petitioner to relieve him from the bargain he had made.

Question 45

Where are the limits of so-called legitimate expectations most apparent?

Answer 45

The limits of so-called legitimate expectations are most apparent in large private or public companies which have comprehensively-drafted articles of association. In such companies there is little scope for a minority shareholder to expect to participate in management.

Question 46

Where are the interests of members rights derived from?

Answer 46

The interests of members include rights derived from: • the articles of association • statute • a shareholders’ agreement • some general equitable duty owed by the directors to the company. • A member will also have an interest in maintaining the value of their shares (Re Bovey Hotel Ventures Ltd 31 July 1981, unreported, cited by Nourse J in Re RA Noble & Sons (Clothing) Ltd [1983] BCLC 273). • Further, as seen in Re Ghyll Beck Driving Range Ltd, a member’s ‘interests’ may also encompass the expectation that they will continue to participate in management. See also: • Re a Company (No. 003160 of 1986) [1986] BCLC 391. • Re a Company (No. 004475 of 1982) [1983] Ch 178.

Question 47

In Saul V Harrisson & Sons the guidelines for determining unfairness where laid down, explain.

Answer 47

• fairness for the purposes of s.994 must be viewed in the context of a commercial relationship • the articles of association are the contractual terms that govern the relationships of the shareholders with the company and each other. The first question to ask, therefore, is whether the conduct of which the shareholder complains was in accordance with the articles of association.

Question 48

Explain the leading case of O'neill v Philips.

Answer 48

In O’Neill v Phillips [1999] WLR 1092, the only House of Lords decision on s.994 so far, Lord Hoffmann held that fairness was to be determined by reference to ‘traditional’ or ‘general’ equitable principles. He stressed that company law had developed from the law of partnership – which was treated by equity as a contract of good faith.

Question 49

What was the reasoning of the court to reject an action under s. 994 in O'neill v Philips?

Answer 49

The House of Lords found that P’s conduct would have been unfair if he had used his majority voting power to exclude O from the business. He had not done this, but had simply revised the terms of O’s remuneration. P’s refusal to allot additional shares as part of the proposed incentive scheme was not unfair as the negotiations were not completed and no contractual undertaking had been entered into by the parties. Nor was P’s decision to revise O’s profit-sharing arrangement unfair conduct. O’s entitlement to 50 per cent of the company’s profits was never formalised. It was, in any case, conditional upon O running the business. That condition was no longer fulfilled as P had to assume control over the running of the business. Although O argued that he had lost trust in P, that alone could not form the basis for a petition under the unfairly prejudicial conduct provision. To hold otherwise would be to confer a unilateral right to withdraw his capital on a minority shareholder. O’s petition therefore failed. He did not prove that P’s conduct was both unfair and prejudicial.

Question 50

Give 2 examples examples of conduct that does amount to unfair prejudice based on exclusion from management.

Answer 50

Ghyll Beck Driving Range | Abbington Hotel

Question 51

Give two examples of conduct that does amount to unfair prejudice based on serious mismagenement.

Answer 51

Edwardian Group | Elgindata

Question 52

Give 2 examples of conduct that does amount to unfair prejudice based on breach of fiduciary duties.

Answer 52

Edwardian Group | Baumler

Question 53

Give 2 examples of conduct that does amount to unfair prejudice based on Excessive remuneration.

Answer 53

Re A Company | Sikorski v Sikoriski

Question 54

Give an example of Breach of a shareholder's agreement that includes a requirement for all parties to act in good faith in their dealings with each other.

Answer 54

Faulkner v. Vollin Holdings.

Question 55

In order to succeed under s.994 the petitioner needs to prove what? (2)

Answer 55

In order to succeed under s.994, a petitioner will need to prove either a breach of contract (including the statutory contract contract) or breach of a fundamental understanding which, although lacking contractual force, makes it inequitable for the majority to go back on the ‘promise’.

Question 56

What remedies are available under s. 996?

Answer 56

Without prejudice to the generality of subsection (1), the court’s order may – (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 which 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 specified, alterations in its articles without the leave of the court; (e) provide for the purchase of the shares of any members of the company by other members or by the company itself and, in the case of a purchase by the company itself, the reduction of the company’s capital accordingly.

Question 57

Explain the scope of the court's discretion under s. 996 based on Macom v Bozeat.

Answer 57

the unfair prejudice related to the governance and management of the company, an order regulating the future conduct of the company’s affairs was the more appropriate remedy despite the fact that the petitioner’s primary remedy sought was a buy-out of its shares. The judge observed, in amusing terms, that: ‘where both children have started throwing their toys out of their prams (as has been the case here), nanny may sometimes have to impose order upon them’. Section 996(1) gives the court the power to fashion a remedy to the wrong done. See Re a Company ex p Estate Acquisition & Development Ltd [1991] BCLC 154. Indeed, in Re Brightview Ltd [2004] BCC 542 the judge could see no reason why an award of damages could not be ordered. In Apex Global Management Ltd v FI Call Ltd [2015] EWHC 3269 (Ch), Hildyard J stated that s.996 could be used to award equitable compensation (see also Thomas v Dawson [2015] EWCA Civ 706). Section 996(2) specifies certain remedies that may be awarded. The most common remedy sought is that under s.996(2)(e), purchase of shares. See the approach taken by the court in Grace v Biagioli.

Question 58

Explain how shares are valued based on the case of Bird Precision Bellows.

Answer 58

In Re Bird Precision Bellows Ltd, affirmed by the Court of Appeal, the court reviewed the approach to be adopted towards valuing shares. It was stressed that the overriding objective was to achieve a fair price and that normally no discount would be applied, given that the petitioner is an unwilling vendor of what is, in effect, a partnership share (i.e. the shares will be valued on a pro rata basis according to the value of all the issued share capital)

Question 59

When may a discount on shares be given? Also explain the case relating to this topic.

Answer 59

If, however, the shareholding is acquired by way of an investment, a discount may in the circumstances be fair so as to reflect the fact that the petitioner has little control over the company’s management. Thus in Elliott v Planet Organic Ltd [2000] 1 BCLC 366 the court took the view that in valuing preference shares for the purposes of a purchase order, account should be taken of the fact that they were investors who took a passive role in the company’s affairs. They were therefore valued at a discount. See also the speech of Lord Hoffmann in O’Neill v Phillips, discussed above.

Question 60

Explain based on the case London School of electronics that a valuation date may also be the a date before the petition.

Answer 60

‘If there were to be such a thing as a general rule, I myself would think that the date of the order or the actual valuation would be more appropriate than the date of the presentation of the petition or the unfair prejudice. Prima facie an interest in a going concern ought to be valued at the date on which it is ordered to be purchased.

Question 61

Explain the rival consideration regarding the valuating date in Venelott.

Answer 61

I would respectfully agree with Nourse J that there is no rigid rule applicable to all circumstances, though I would at least incline to the view that the date of the petition is the correct starting point, the valuation of course being adjusted to take account of unfair conduct which has depreciated the value of the shares … and that a departure from this date must be justified on the ground of some special circumstance. The date of the petition is the date on which the petitioner elects to treat the unfair conduct of the majority as in effect destroying the basis on which he agreed to continue to be a shareholder, and to look to his shares for his proper reward from participation in a joint undertaking

Question 62

What is the clearest reason for selecting an early evaluation date?

Answer 62

The clearest reason for selecting an early valuation date is that there has been a major change (whether for the better or for the worse) in a company’s capital structure and business.

Question 63

In which situation can the company recover for the costs made by the petitioner for a personal claim under s. 994?

Answer 63

It therefore seems that if the company benefits from the remedy sought it may be ordered to pay the petitioner’s costs. The point was also made that when considering the range of remedies available under s.996, the court can have recourse to those available on a derivative action.