Statutory Minority Protection Flashcards
Ebrahimi v Westbourne Galleries Ltd [1973] AC 360
Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 is a United Kingdom company law case on the rights of minority shareholders. The case was decided in the House of Lords.
Facts
Mr Ebrahimi and Mr Nazar were partners. They decided to incorporate as the business was highly successful, buying and selling expensive rugs. Their store was originally in Nottingham, and then moved to London at 220 Westbourne Grove.
Mr Ebrahimi and Mr Nazar were the sole shareholders in the company. All profits were paid as directorial compensation. No dividends were ever issued. A few years later, when Mr Nazar’s son came of age, he was appointed to the board of directors and Mr Ebrahimi and Mr Nazar both transferred shares to him.
After a falling out between the directors Mr Nazar and son called a company meeting, at which they passed an ordinary resolution to have Mr Ebrahimi removed as a director. Mr Ebrahimi, clearly unhappy at this, applied to the court for a remedy to have the company wound up.
Judgment
The House of Lords stated that as a company is a separate legal person, the court would not normally entertain such an application. However, they believed that as the company was so similar in its operation as it was when it was a partnership, they created what is now known as a quasi-partnership. Mr Ebrahimi had a legitimate expectation that his management function would continue and that the articles would not be used against him in this way. Based on the personal relationship between the parties it would be inequitable to allow Mr Nazar and his son to use their rights against Mr Ebrahimi so as to force him out of the company and so it was just and equitable to wind it up. The company was wound up and Mr Ebrahimi received his capital interest.
Lord Wilberforce gave the following judgment.
The real starting point is the Scottish decision in Symington v. Symington's Quarries Ltd (1905) 8 F. 121 . There had been a partnership business carried on by two brothers who decided to transfer it to a private limited company. Each brother was to hold half the shares except for a small holding for a third brother to hold balance for voting. A resolution was passed in general meeting by the votes of one brother together with other members having nominal interests that he should be sole director. The other two brothers petitioned for a winding up under the just and equitable provision and the court so ordered. The reasons for so doing, given by some of their Lordships of the First Division, are expressed in terms of lost substratum or deadlock - words clearly used in a general rather than a technical sense. The judgment of Lord M'Laren, which has proved to be the most influential as regards later cases, puts the ground more generally. He points out, at p. 130, that the company was not formed by appeal to the public: it was a domestic company, the only real partners being the three brothers:
'In such a case it is quite obvious that all the reasons that apply to the dissolution of private companies, on the grounds of incompatibility between the views or methods of the partners, would be applicable in terms to the division amongst the shareholders of this company, ...'
In England, the leading authority is the Court of Appeal's decision in In re Yenidje Tobacco Co. Ltd. [1916] 2 Ch. 426 . This was a case of two equal director shareholders, with an arbitration provision in the articles, between whom a state of deadlock came into existence. It has often been argued, and was so in this House, that its authority is limited to true deadlock cases. I could, in any case, not be persuaded that the words 'just and equitable' need or can be confined to such situations. But Lord Cozens-Hardy M.R. clearly puts his judgment on wider grounds. Whether there is deadlock or not, he says, at p. 432, the circumstances
'are such that we ought to apply, if necessary, the analogy of the partnership law and to say that this company is now in a state which could not have been contemplated by the parties when the company was formed ...'
Warrington L.J. adopts the same principle, treating deadlock as an example only of the reasons why it would be just and equitable to wind the company up.
In 1924, these authorities were reviewed, approved and extended overseas by the Judicial Committee of the Privy Council in an appeal from the West Indian Court of Appeal (Barbados), Loch v. John Blackwood Ltd [1924] A.C. 783 . The judgment of the Board delivered by Lord Shaw of Dunfermline clearly endorses, if not enlarges, the width to be given to the just and equitable clause. The case itself was one of a domestic company and was not one of deadlock. One of the directors had given grounds for loss of confidence in his probity and (a matter echoed in the present case) had shown that he regarded the business as his own. His Lordship quotes with approval from the judgments of Lord M'Laren in Symington v. Symington's Quarries Ltd, 8 F. 121 and of Lord Cozens-Hardy M.R. in In re Yenidje Tobacco Co. Ltd. [1916] 2 Ch. 426 .
I note in passing the Scottish case of Thomson v. Drysdale 1925 S.C. 311 where a winding up was ordered under the just and equitable clause at the instance of a holder of one share against the only other shareholder who held 1,501 shares, clearly not a case of deadlock, and come to In re Cuthbert Cooper & Sons Ltd [1937] Ch. 392 , a case which your Lordships must consider. The respondents relied on this case which carries the authority of Simonds J. as restricting the force of the just and equitable provision. The company was clearly a family company, the capital in which belonged to a father and his two elder sons. After the death of the father leaving his shares to his younger sons and appointing them his executors, his elder sons, exercising the powers given to directors by the articles, refused to register the executors as shareholders and dismissed them from employment. The executors' petition for winding up of the company was dismissed. My Lords, with respect for the eminent judge who decided it, I must doubt the correctness of this. Whether on the facts stated a case of justice and equity was made out is no doubt partly a question of fact on which, even though my own view is clear enough, I should respect the opinion of the trial judge; but, this matter apart, I am unable to agree as to the undue emphasis he puts on the contractual rights arising from the articles, over the equitable principles which might be derived from partnership law, for in the result the latter seem to have been entirely excluded in the former's favour. I think that the case should no longer be regarded as of authority.
There are three recent cases which I should mention since they have figured in the judgments below. In re Lundie Brothers Ltd [1965] 1 W.L.R. 1051 was, like the present, a decision of Plowman J. This was a case where the petitioner, one of three shareholders and directors, was excluded from participation in the management and from directors' remuneration. Plowman J. applying partnership principles made a winding up order under the just and equitable clause. If that decision was right it assists the present appellant. The Court of Appeal in the present case disagreed with it and overruled it, in so far as it related to a winding up. The respondent argues that this was the first case where exclusion of a working director, valid under the articles, had been treated as a ground for winding up under the just and equitable clause and that as such it was an unjustifiable innovation.
In re Expanded Plugs Ltd [1966] 1 W.L.R. 514 was, on the other hand, approved by the Court of Appeal in the present case. The case itself is a paradigm of obscure forensic tactics and, as such, of merely curious interest; its only importance lies in the statement, contained in the judgment, at p. 523, that since the relevant decisions were carried out within the framework of the articles the petitioner must show that they were not carried out bona fide in the interests of the company. I shall return, in so far as it limits the scope of the just and equitable provision, to this principle but I should say at once that I disagree with it.
In In re K/9 Meat Supplies (Guildford) Ltd [1966] 1 W.L.R. 1112 there was a company of three shareholder/directors one of whom became bankrupt; the petitioner was his trustee in bankruptcy. It was contended that the company was a quasi-partnership and that since section 33 of the Partnership Act 1890 provides for dissolution on the bankruptcy of one of the partners a winding up order on this ground should be made. Pennycuick J. rejected this argument on the ground that, since the 'partnership' had been transformed into a company and since the articles gave no automatic right to a winding up on bankruptcy, bankruptcy of one member was not a ground for winding up of itself. He then proceeded to consider whether the just and equitable provision should be applied. In my opinion, this procedure was correct and I need not express an opinion whether, on the facts, it was right to refuse an order.
Finally I should refer to the Scottish case of Lewis v. Haas, 1970 S.L.T. (Notes) 67 where the two main shareholder/directors each held 49 per cent. of the shares, the remaining 2 per cent. being held by a solicitor. Lord Fraser, in the Outer House, while accepting the principle that exclusion from management might be a ground for ordering a winding up, did not find the facts sufficient to support the use of the just and equitable clause.
This series of cases (and there are others: In re Davis & Collett Ltd [1935] Ch. 693 ; Baird v. Lees, 1924 S.C. 83 ; Elder v. Elder & Watson, 1952 S.C. 49 ; In re Swaledale Cleaners Ltd [1968] 1 W.L.R. 1710 ; In re Fildes Bros. Ltd. [1970] 1 W.L.R. 592 ; In re Leadenhall General Hardware Stores Ltd (unreported), February 4, 1971), amounts to a considerable body of authority in favour of the use of the just and equitable provision in a wide variety of situations, including those of expulsion from office. The principle has found acceptance in a number of Commonwealth jurisdictions. Though these were not cited at the Bar I refer to some of them since they usefully illustrate the principle which has been held to underlie this jurisdiction and show it applicable to exclusion cases.
In In re Straw Products Pty. Ltd [1942] V.L.R. 222 Mann C.J. said, at p. 223:
'All that Hinds has done in the past in exercise of his control has been within his legal powers. The question is whether he has used those powers in such a way as to make it just and equitable that Robertson should be allowed by the court to retire from the partnership. The analogy of a partnership seems to me to clarify discussion.'
In re Wondoflex Textiles Pty. Ltd. [1951] V.L.R. 458 was a case where again the company was held to resemble a partnership. The petitioner, owner of a quarter share, was removed from office as director by the governing director exercising powers under the articles. Thus the issue, and the argument, closely resembled those in the present case. The judgment of Smith J. contains the following passage, at p. 467:
'It is also true, I think, that, generally speaking, a petition for winding up, based upon the partnership analogy, cannot succeed if what is complained of is merely a valid exercise of powers conferred in terms by the articles: ... To hold otherwise would enable a member to be relieved from the consequences of a bargain knowingly entered into by him: ... But this, I think, is subject to an important qualification. Acts which, in law, are a valid exercise of powers conferred by the articles may nevertheless be entirely outside what can fairly be regarded as having been in the contemplation of the parties when they became members of the company; and in such cases the fact that what has been done is not in excess of power will not necessarily be an answer to a claim for winding up. Indeed, it may be said that one purpose of [the just and equitable provision] is to enable the court to relieve a party from his bargain in such cases.'
The whole judgment is of value. In New Zealand, the Court of Appeal has endorsed the potential application of the principle to exclusion cases: Tench v. Tench Bros. Ltd. [1930] N.Z.L.R. 403 ; see also In re Modern Retreading Co. Ltd. [1962] E.A. 57 , also a case of exclusion from management, and cf. In re Sydney and Whitney Pier Bus Service Ltd. [1944] 3 D.L.R. 468 and In re Concrete Column Clamps Ltd. [1953] 4 D.L.R. 60 (Quebec).
My Lords, in my opinion these authorities represent a sound and rational development of the law which should be endorsed. The foundation of it all lies in the words 'just and equitable' and, if there is any respect in which some of the cases may be open to criticism, it is that the courts may sometimes have been too timorous in giving them full force. The words are 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. That structure is defined by the Companies Act 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 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.
It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. 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 upon 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.
Significance
Soon after the remedy for unfair prejudice was introduced, which allows a court to simply order a minority shareholder to be bought out, rather than a company being wound up. This is found in the Companies Act 2006 sections 994 to 996.
Virdi v Abbey Leisure Ltd [1990] BCC 60
A minority shareholder had brought a petition to wind up the company, saying the project for which it had been created was complete. An offer was made to purchase his shares. He rejected the offer to purchase his shareholding at an accountant’s valuation. He appealed a striking out of his petition on the grounds that his rejection was unreasonable.
Held: Appeal allowed. The accountant’s offer would include some discount for the fact that the shares were in a minority shareholding, and he would achieve a better figure by the machinery available in a winding up.
[1990] BCLC 342 CA, [1990] BCC 60
Insolvency Act 1986 125(2)
England and Wales
Cited by:
Nicholas v Soundcraft Electronics Ltd [1993] BCLC 360
Nicholas v Soundcraft Electronics [1993] BCLC 360
Company Law
Nicholas v Soundcraft Electronics [1993] concerns the parent company’s acts done in the conduct of the affairs of the subsidiary company.
Keywords:
Company law – Debts – Minority shareholder – Subsidiary company – Parent company – Court of Appeal
Facts:
In the present case, the appellant, Mr Nicholas was a minority shareholder in a subsidiary company. The parent company acted as overseas agent for the subsidiary and also effectively controlled its finances. The companies were in fact treated as one single entity.
Later on, the parent company got into grave financial difficulties. It refused to pass on to the subsidiary money earned from overseas sales of the subsidiary’s products.
The first instance court held that the refusal of the parent company to pay the amounts had to be regarded as conduct that lies within the affairs of the parent company and not in that of the subsidiary.
Issue:
Whether the parent company’s control over subsidiary was such that parent company’s decisions amounted to conduct of subsidiary’s affairs?
Held:
In Nicholas v Soundcraft Electronics Ltd (1993), the Court of Appeal held that the judgment of the first instance court would have been correct if the refusal of the payment of the sums was to be considered in isolation.
However, the court considered that a parent company is in control of the financial affairs of its subsidiary. Thus, the Court of Appeal concluded that the parent company’s failure to pay debts shall be considered as acts done in the conduct of the affairs of the subsidiary company. The Court of Appeal further ruled that the directors of a subsidiary company were not in breach of their duties to the company when they failed to take action to recover debts owed to it by the parent company.
Re City Branch Group Ltd [2004] EWCA Civ 815
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Re Ghyll Beck Driving Range Ltd [1993] BCLC 1126
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Re Elgindata Ltd [1991] BCLC 959
In re Elgindata Ltd: ChD 1991
The plaintiff obtained a patent which was then to be utilised through the company, of which the plaintiff had one third shares. He later complained that the majority shareholder had acted prejudicially.
Held: Mismanagement could amount to prejudicial conduct of the business. There was no evidence of failure to consult but some evidence of misuse of assets. It would be wrong to leave the plaintiff with the shareholding, and an order was made for the purchase of the shares by the co-shareholder at a discount to reflect the minority status. Whether or not it would be fair to value as at the date of the order can depend on whether irregularities in the accounts have been corrected.
Warner J
(1991) BCLC 959
England and Wales
Cited by:
Cited – Bonham v Crow and others CA 13-Dec-2001 The petitioner complained of unfair prejudice in the way the company had been operated, and sought an order that his shares be bought out. However the judge found that the net value of the company was negative and the shares worthless. The judge had . . [2001] EWCA Civ 1931 See Also – Re Elgindata Ltd (2) CA 15-Jul-1992 A successful plaintiff who had not been shown to have behaved improperly or unreasonably was not to have his costs reduced or be ordered to pay any part of his opponents costs for having pursued some unsuccessful points. Nourse LJ said that ‘(i) . . Gazette 15-Jul-92, Times 18-Jun-92, [1992] 1 WLR 1207
Phoenix Office Supplies Ltd v Larvin [2002] EWCA Civ 1740
Phoenix Office Supplies Limited, Parish, Ogden v Larvin: CA 12 Dec 2002
The parties were members of a company which operated as a quasi-partnership. In discussions it had been agreed that the one third partners shuld be able to require the others to purchase his interest, but no contract was signed. On the claimant wanting to leave, the others appealed an order requiring them to purchase his share at full value.
Held: The Act was intended to protect shareholders from unfair treatment at the hands of other members, but it was not to be extended to require, in effect, a no-fault divorce procedure. The appeal was allowed.
Re Macro (Ipswich) Ltd [1994] 2 BCLC 354
Judgement for the case Re Macro (Ipswich)
C owned shares in two property-owning companies. These two companies had a property managing agent, the Thompsons. C believed two companies had suffered losses due to Thompsons committing various improprieties (e.g. charging excessive management charges to two companies). C therefore sued D, sole director of Thompsons, on grounds he had inadequately supervised his firm. Held:
· Case distinguished from Re Elgindata
· In Elgindata, management had simply been poor
· Whereas in present case:
Ø Were specific acts of mismanagement by Thompsons, which D failed to rectify
Ø Some acts of mismanagement were repeated over many years
· Thus on facts, acts of mismanagement were sufficiently serious to cause unfair prejudice to C.
Relevant here that D’s firm stood to gain from some the acts of mismanagement (e.g. the excessive charges).This possibly a key factor.
Re London School of Electronics Ltd [1986] Ch 211
Re London School of Electronics Ltd [1986] Ch 211 is a UK company law case concerning unfair prejudice.
Facts
Mr Charles Lytton, a teacher, director and 25 per cent shareholder in the London School of Electronics Ltd which taught electronics courses, alleged that two other directors had acted in an oppressive manner under the Companies Act 1980 section 75 (now the unfair prejudice remedy in Companies Act 2006 section 994). Mr Lytton had been dismissed as a director. He then found out that the other directors had agreed with an American university to recognise a BSc course to the other 75 per cent shareholder, a company called CTC Ltd, without any benefit to the company. Mr Lytton told his students that he would be setting up a new college. He was dismissed as a teacher. He managed to get 12 students to follow him.
Judgment
Nourse J held that although CA 1980 section 75 did not say anything about clean hands, and there was no requirement that it be just and equitable to grant relief, it could be considered in the extent of the award made. Here, the breakdown was due to CTC’s decision to take the American contract for itself and deprive Lytton of 25 per cent of the benefit, and even though he subsequently took 12 students, this did not make CTC’s actions no longer unfair. His shares should be purchased at a fair value, the date of which should be the date of the petition as if the students removed by Lytton had remained with the company.
Re Saul D Harrison & Sons plc [1995] 1 BCLC 14 CA
Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, [1994] BCC 475, is a UK company law case on an action for unfair prejudice under s.459 Companies Act 1985 (now s.994 Companies Act 2006). It was decided in the Court of Appeal and deals with the concept of members of a business having their “legitimate expectations” disappointed. Vinelott J at first instance had denied the petition, and the Hoffmann LJ, Neill LJ and Waite LJ in the Court of Appeal upheld the judgment.
Facts
Saul D Harrison & Sons plc ran a business that was established in 1891 by the petitioner’s great grandfather. It made industrial cleaning and wiping cloths, made from waste textiles. It operated from West Ham and after 1989 from Hackney. The petitioner had “class C” shares, which gave her rights to dividends and capital distribution in a liquidation. But she had no entitlement to vote, and the company had been running at a loss. She alleged that the directors (who were her cousins) had unfairly kept running the business just so they could pay themselves cushy salaries. Instead, she said, they should have closed down the business and distributed the assets to the shareholders.
Judgment
On the facts, there was no unfairly prejudicial conduct. The board of directors were bound to manage the company in accordance with their fiduciary obligations, the articles of association and the Companies Act. The unfair prejudice action does protect certain legitimate expectations, akin to those which may affect one’s conscience in equity, from being disappointed. But here there was no legitimate expectation for more than the duties discharged, and so no obligations had been breached.
O’Neill v Phillips [1999] 1 WLR 1092
O’Neill v Phillips [1999] UKHL 24 is a UK company law case on an action for unfair prejudice under s.459 Companies Act 1985 (now s.994 Companies Act 2006). It is the only case thus far in the House of Lords on the provision and it deals with the concept of members of a business having their “legitimate expectations” disappointed.
Facts
Mr Phillips owned a company called Pectel Ltd. It specialised in stripping asbestos from buildings. Mr O’Neill started to work for the company in 1983. In 1985, Phillips was so impressed with O’Neill’s work that he made him a director and gave him 25% of the shares. They had an informal chat in May 1985, and Mr Phillips said that one day, he hoped Mr O’Neill could take over the whole management, and would then be allowed to draw 50% of the company’s profits. This happened, Phillips retired and O’Neill took over management. There were further talks about increasing O’Neill’s actual shareholding to 50%, but this did not happen. After five years the construction industry went into decline, and so did the company. Phillips came back in and took business control. He demoted O’Neill to be a branch manager of the German operations and withdrew O’Neill’s share of the profits. O’Neill was miffed. He started up his own competing company in Germany in 1990 and then he filed a petition for unfairly prejudicial conduct against Phillips, firstly, for the termination of equal profit-sharing and, secondly, for repudiating the alleged agreement for the allotment of more shares.
The judge rejected the petition on both grounds. There had been no firm agreement for an increase in shareholding, and it was not unfair for Phillips to keep a majority of company shares. Also, it was held that O’Neill suffered nothing in his capacity as a member of the company. His shares were unaffected. It was merely a dispute about his status as an employee. He had been well rewarded. In the Court of Appeal, Nourse LJ (with whom Potter and Mummery LJJ agreed) O’Neill won his appeal. Nourse LJ said that in fact Phillips had created a legitimate expectation for the shares in future. Moreover, a global view of the relationship should be taken, and so O’Neill did suffer as a member. On further appeal to the House of Lords, the Court of Appeal was overturned, and Phillips won.
Judgment
Lord Hoffmann gave the leading judgment, with which Lords Jauncey, Clyde, Hutton and Hobhouse concurred. The most important feature of the case was that Mr Phillips had never actually agreed to transfer Mr O’Neill the shares of the company, so it could not be unfair that he had decided not to, because he had never decided to actually do so. Lord Hoffmann also recanted on his previous use of the terminology of “legitimate expectations”. “I meant that it could exist only when equitable principles… would make it unfair for a party to exercise rights under the articles.” As to capacity, although irrelevant after deciding that there had been no agreement, disagreeing with the first instance judge, Lord Hoffmann pointed out that O’Neill may have had a claim in his capacity of shareholder (rather than just an employee) because he had invested his money and his time into the company.
5. "Unfairly prejudicial"
In section 459 Parliament has chosen fairness as the criterion by which the court must decide whether it has jurisdiction to grant relief. It is clear from the legislative history (which I discussed in In re Saul D. Harrison & Sons Plc. [1995] 1 B.C.L.C. 14, 17-20) that it chose this concept to free the court from technical considerations of legal right and to confer a wide power to do what appeared just and equitable. But this does not mean that the court can do whatever the individual judge happens to think fair. The concept of fairness must be applied judicially and the content which it is given by the courts must be based upon rational principles. As Warner J. said in In re J. E. Cade & Son Ltd. [1992] B.C.L.C. 213, 227: "The court . . . has a very wide discretion, but it does not sit under a palm tree."
Although fairness is a notion which can be applied to all kinds of activities, its content will depend upon the context in which it is being used. Conduct which is perfectly fair between competing businessmen may not be fair between members of a family. In some sports it may require, at best, observance of the rules, in others ("it's not cricket") it may be unfair in some circumstances to take advantage of them. All is said to be fair in love and war. So the context and background are very important.
In the case of section 459, the background has the following two features. First, a company is an association of persons for an economic purpose, usually entered into with legal advice and some degree of formality. The terms of the association are contained in the articles of association and sometimes in collateral agreements between the shareholders. Thus the manner in which the affairs of the company may be conducted is closely regulated by rules to which the shareholders have agreed. Secondly, company law has developed seamlessly from the law of partnership, which was treated by equity, like the Roman societas, as a contract of good faith. One of the traditional roles of equity, as a separate jurisdiction, was to restrain the exercise of strict legal rights in certain relationships in which it considered that this would be contrary to good faith. These principles have, with appropriate modification, been carried over into company law.
The first of these two features leads to the conclusion that a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. But the second leads to the conclusion that there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers. Thus unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith.
This approach to the concept of unfairness in section 459 runs parallel to that which your Lordships' House, in In re Westbourne Galleries Ltd. [1973] A.C. 360, adopted in giving content to the concept of "just and equitable" as a ground for winding up. After referring to cases on the equitable jurisdiction to require partners to exercise their powers in good faith, Lord Wilberforce said, at p. 379:
"The words ['just and equitable'] are 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. 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 [the company] suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It 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."
I would apply the same reasoning to the concept of unfairness in section 459. The Law Commission, in its report on Shareholder Remedies (Law Com. No. 246) (1997) (Cm. 3769), para. 4.11, p. 43 expresses some concern that defining the content of the unfairness concept in the way I have suggested might unduly limit its scope and that "conduct which would appear to be deserving of a remedy may be left unremedied. . ." In my view, a balance has to be struck between the breadth of the discretion given to the court and the principle of legal certainty. Petitions under section 459 are often lengthy and expensive. It is highly desirable that lawyers should be able to advise their clients whether or not a petition is likely to succeed. Lord Wilberforce, after the passage which I have quoted, said that it would be impossible "and wholly undesirable" to define the circumstances in which the application of equitable principles might make it unjust, or inequitable (or unfair) for a party to insist on legal rights or to exercise them in particular way. This of course is right. But that does not mean that there are no principles by which those circumstances may be identified. The way in which such equitable principles operate is tolerably well settled and in my view it would be wrong to abandon them in favour of some wholly indefinite notion of fairness.
...
19th century English law, with its division between law and equity, traditionally took the view that while literal meanings might prevail in a court of law, equity could give effect to what it considered to have been the true intentions of the parties by preventing or restraining the exercise of legal rights. So Smith J. speaks of the exercise of the power being valid "in law" but its exercise not being just and equitable because contrary to the contemplation of the parties. This way of looking at the matter is a product of English legal history which has survived the amalgamation of the courts of law and equity. But another approach, in a different legal culture, might be simply to take a less literal view of "legal" construction and interpret the articles themselves in accordance with what Page-Wood V.-C. called "the plain general meaning of the deed." Or one might, as in Continental systems, achieve the same result by introducing a general requirement of good faith into contractual performance. These are all different ways of doing the same thing. I do not suggest there is any advantage in abandoning the traditional English theory, even though it is derived from arrangements for the administration of justice which were abandoned over a century ago. On the contrary, a new and unfamiliar approach could only cause uncertainty. So I agree with Jonathan Parker J. when he said in In re Astec (B.S.R.) Plc. [1998] 2 B.C.L.C. 556, 588:
"in order to give rise to an equitable constraint based on 'legitimate expectation' what is required is a personal relationship or personal dealings of some kind between the party seeking to exercise the legal right and the party seeking to restrain such exercise, such as will affect the conscience of the former."
This is putting the matter in very traditional language, reflecting in the word "conscience" the ecclesiastical origins of the long-departed Court of Chancery. As I have said, I have no difficulty with this formulation. But I think that one useful cross-check in a case like this is to ask whether the exercise of the power in question would be contrary to what the parties, by words or conduct, have actually agreed. Would it conflict with the promises which they appear to have exchanged? In Blisset v. Daniel the limits were found in the "general meaning" of the partnership articles themselves. In a quasi-partnership company, they will usually be found in the understandings between the members at the time they entered into association. But there may be later promises, by words or conduct, which it would be unfair to allow a member to ignore. Nor is it necessary that such promises should be independently enforceable as a matter of contract. A promise may be binding as a matter of justice and equity although for one reason or another (for example, because in favour of a third party) it would not be enforceable in law.
I do not suggest that exercising rights in breach of some promise or undertaking is the only form of conduct which will be regarded as unfair for the purposes of section 459. For example, there may be some event which puts an end to the basis upon which the parties entered into association with each other, making it unfair that one shareholder should insist upon the continuance of the association. The analogy of contractual frustration suggests itself. The unfairness may arise not from what the parties have positively agreed but from a majority using its legal powers to maintain the association in circumstances to which the minority can reasonably say it did not agree: non haec in foedera veni. It is well recognised that in such a case there would be power to wind up the company on the just and equitable ground (see Virdi v. Abbey Leisure Ltd. [1990] B.C.L.C. 342) and it seems to me that, in the absence of a winding up, it could equally be said to come within section 459. But this form of unfairness is also based upon established equitable principles and it does not arise in this case.
6. Legitimate expectations.
In In re Saul D. Harrison & Sons Plc. [1995] 1 B.C.L.C. 14, 19, I used the term "legitimate expectation," borrowed from public law, as a label for the "correlative right" to which a relationship between company members may give rise in a case when, on equitable principles, it would be regarded as unfair for a majority to exercise a power conferred upon them by the articles to the prejudice of another member. I gave as an example the standard case in which shareholders have entered into association upon the understanding that each of them who has ventured his capital will also participate in the management of the company. In such a case it will usually be considered unjust, inequitable or unfair for a majority to use their voting power to exclude a member from participation in the management without giving him the opportunity to remove his capital upon reasonable terms. The aggrieved member could be said to have had a "legitimate expectation" that he would be able to participate in the management or withdraw from the company.
It was probably a mistake to use this term, as it usually is when one introduces a new label to describe a concept which is already sufficiently defined in other terms. In saying that it was "correlative" to the equitable restraint, I meant that it could exist only when equitable principles of the kind I have been describing would make it unfair for a party to exercise rights under the articles. It is a consequence, not a cause, of the equitable restraint. The concept of a legitimate expectation should not be allowed to lead a life of its own, capable of giving rise to equitable restraints in circumstances to which the traditional equitable principles have no application. That is what seems to have happened in this case.
7. Was Mr. Phillips unfair?
The Court of Appeal found that by 1991 the company had the characteristics identified by Lord Wilberforce in In re Westbourne Galleries Ltd. [1973] A.C. 360 as commonly giving rise to equitable restraints upon the exercise of powers under the articles. They were (1) an association formed or continued on the basis of a personal relationship involving mutual confidence, (2) an understanding that all, or some, of the shareholders shall participate in the conduct of the business and (3) restrictions on the transfer of shares, so that a member cannot take out his stake and go elsewhere. I agree. It follows that it would have been unfair of Mr. Phillips to use his voting powers under the articles to remove Mr. O'Neill from participation in the conduct of the business without giving him the opportunity to sell his interest in the company at a fair price. Although it does not matter, I should say that I do not think that this was the position when Mr. O'Neill first acquired his shares in 1985. He received them as a gift and an incentive and I do not think that in making that gift Mr. Phillips could be taken to have surrendered his right to dismiss Mr. O'Neill from the management without making him an offer for the shares. Mr. O'Neill was simply an employee who happened to have been given some shares. But over the following years the relationship changed. Mr. O'Neill invested his own profits in the company by leaving some on loan account and agreeing to part being capitalised as shares. He worked to build up the company's business. He guaranteed its bank account and mortgaged his house in support. In re H. R. Harmer [1959] 1 W.L.R. 62 shows that shareholders who receive their shares as a gift but afterwards work in the business may become entitled to enforce equitable restraints upon the conduct of the majority shareholder.
The difficulty for Mr. O'Neill is that Mr. Phillips did not remove him from participation in the management of the business. After the meeting on 4 November 1991 he remained a director and continued to earn his salary as manager of the business in Germany. The Court of Appeal held that he had been constructively removed by the behaviour of Mr. Phillips in the matter of equality of profits and shareholdings. So the question then becomes whether Mr. Phillips acted unfairly in respect of these matters.
To take the shareholdings first, the Court of Appeal said that Mr. O'Neill had a legitimate expectation of being allotted more shares when the targets were met. No doubt he did have such an expectation before 4 November and no doubt it was legitimate, or reasonable, in the sense that it reasonably appeared likely to happen. Mr. Phillips had agreed in principle, subject to the execution of a suitable document. But this is where I think that the Court of Appeal may have been misled by the expression "legitimate expectation." The real question is whether in fairness or equity Mr. O'Neill had a right to the shares. On this point, one runs up against what seems to me the insuperable obstacle of the judge's finding that Mr. Phillips never agreed to give them. He made no promise on the point. From which it seems to me to follow that there is no basis, consistent with established principles of equity, for a court to hold that Mr. Phillips was behaving unfairly in withdrawing from the negotiation. This would not be restraining the exercise of legal rights. It would be imposing upon Mr. Phillips an obligation to which he never agreed. Where, as here, parties enter into negotiations with a view to a transfer of shares on professional advice and subject to a condition that they are not to be bound until a formal document has been executed, I do not think it is possible to say that an obligation has arisen in fairness or equity at an earlier stage.
The same reasoning applies to the sharing of profits. The judge found as a fact that Mr. Phillips made no unconditional promise about the sharing of profits. He had said informally that he would share the profits equally while Mr. O'Neill managed the company and he himself did not have to be involved in day-to-day business. He deliberately retained control of the company and with it, as the judge said, the right to redraw Mr. O'Neill's responsibilities. This he did without objection in August 1991. The consequence was that he came back to running the business and Mr. O'Neill was no longer managing director. He had made no promise to share the profits equally in such circumstances and it was therefore not inequitable or unfair for him to refuse to carry on doing so.
...
9. Capacity in which prejudice suffered
The judge, it will be recalled, gave as one of his reasons for dismissing the petition the fact that any prejudice suffered by Mr. O'Neill was in his capacity as an employee rather than as a shareholder. The Court of Appeal's rejection of this reason was, I think, influenced by its view that Mr. O'Neill had been constructively expelled. In a case of expulsion, where the equitable restraint on the exercise of the power is based upon the terms upon which the petitioner became or continued as a member of the company, the prejudice will be suffered in the capacity of a member. It is the terms, agreement, or understanding on which he became associated as a member which generates the restraint on the power of expulsion. But the judge was considering only the prejudice suffered through not getting a half-share in the profits or the additional shares. It is somewhat unreal to deal with the capacity in which prejudice was suffered in these respects when there was no entitlement in law or equity in the first place. But assuming there had been a contractual obligation, I would not exclude the possibility that prejudice suffered from the breach of that obligation could be suffered in the capacity of shareholder. As I have said, the initial gift of 25 shares in 1985 did not in my view change the essential relationship between the parties. Mr. Phillips remained controlling shareholder and Mr. O'Neill remained an employee who had some shares. If at that stage Mr. Phillips had promised another 25 shares and then broken his promise, I do not think that Mr. O'Neill would have suffered prejudice in his capacity as an existing shareholder. I agree with the judge that the case would have been no different if Mr. O'Neill had had no shares and Mr. Phillips had broken a promise to give him 50. On the other hand, once Mr. O'Neill had invested his own money and effort in the company, the situation may have changed. A promise to give Mr. O'Neill more shares or a larger share in the profits may well have been based not merely upon his position as an employee but on the fact that he already had a stake in the company. As cases like R. & H. Electrical Ltd. v. Haden Bill Electrical Ltd. [1995] 2 B.C.L.C. 280 show, the requirement that prejudice must be suffered as a member should not be too narrowly or technically construed. But the point does not arise because no promise was made.
Re Sam Weller & Sons Ltd [1989] 5 BCC 810
Non-payment of dividends or the payment of very low dividends: Re Sam Weller & Sons Ltd [1990] Ch 682
Re Sam Weller [1990]
Uncategorized Legal Case Notes August 20, 2018
Non-payment of dividends capable of constituting unfairly prejudicial behaviour. Petitioners held minority shareholding in family company controlled by uncle. Main complaint of petitioners was that company had not increased its dividend in 37 years. Court held non-payment of dividends capable of constituting unfairly prejudicial behaviour. Does not mean that shareholder entitled to complain in every case where shareholder only receives income by dividend, person in control of company receives direct income and profits are not fully distributed by dividend. Court will always view with great caution allegations of unfair prejudice on this ground. But case was mere application to strike out, and could not be said with certainty petition could not succeed on this ground.
Anderson v Hogg [2002] BCC 923
Anderson v Hogg: IHCS 14 Dec 2001
The appellant sought an order under the section for repayment to the company of sums paid to a director by way of extra redundancy payments. He said the payments were improper. His application had been refused, in part because he had not chosen the more direct method of asking the company to seek repayment directly, and also because the applicant had not shown the necessary element of unfairness, over and above unlawfulness.
Held: The existence of the alternate and more straightforward method of recouping the payment did not invalidate the request for this order. It was clear that the action was not unavailable, and that the payment had not been approved by the company as a whole. Nevertheless the jurisdiction should be exercised only on established principles of equity. Here the order should be granted.
Judges:
Lord Coulsfield, Lord Hamilton and Lord Prosser
Citations:
Times 22-Jan-2002
Unfair prejudice: directors’ duties
by PLC Corporate
Law stated as at 15 May 2008 • England, Scotland, Wales
In West Coast Capital (Lios) Limited the Court of Session considered a motion for interim interdict under section 994 of the Companies Act 2006 in which the petitioner sought to prevent the board of an AIM listed company in which it was a substantial minority shareholder from putting to a vote at the AGM a resolution to increase the company’s authorised share capital, authorise the directors to allot shares and approve the terms of an open offer. The court refused the motion, holding that, on the material before it, the petitioner had not established a prima facie case that the board was acting in an improper manner towards it or that the conduct of the company’s affairs was, or threatened to be, unfairly prejudicial to the petitioner’s interests. In reaching its conclusion the court considered sections 171 (Duty to act within powers) and 172 (Duty to promote the success of the company) of the 2006 Act, expressing the view that the sections appeared to do little more than set out the pre-existing law on the subject. The sections do not, however, seem to have been the subject of legal argument or detailed consideration by the court. Decisions of the Court of Session are persuasive but not binding on courts in England and Wales.
Re OC (Transport) Services Ltd [1984] BCLC 251
A classic example of backdating valuation is the case of Re OC (Transport) Services Ltd.[8] The valuation was held to be on the date where the shares were allotted because the subsequent participation of another company as a shareholder may have affected the value of the shares. Similarly, in the Federal Court of Australia, in Dynasty v Coombs, the valuation was ordered at the date of the oppression. [9]
Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 855
Court of Appeal upholds decision that unfair prejudice allegations may be arbitrable
by PLC Arbitration
In Fulham Football Club (1987) Ltd v Richards and another [2011] EWCA Civ 855, the Court of Appeal upheld a decision that a claim based on an unfair prejudice petition under section 994 of the Companies Act 2006 was capable of being referred to arbitration.
Note: Leave to appeal this decision to the Supreme Court was refused on 22 February 2012, see Legal update, Unfair prejudice: arbitration agreements between shareholders (Supreme Court)
Facts
For a summary of the facts underlying the appeal, see Legal update, Unfair prejudice allegations may be referred to arbitration (High Court).
In brief, Fulham Football Club presented an unfair prejudice petition under section 994 of the CA 2006 regarding allegations that the chairman of the Football Association Premier League (FAPL) had interfered with negotiations concerning the transfer of a Premier League footballer.
At first instance, Vos J followed the decision in Vocam in preference to that in Exeter City and granted a stay of the proceedings under section 9 of the AA 1996.
Fulham appealed against the first instance decision on the following grounds:
Arbitrability. The claim was not arbitrable as Exeter was correctly decided and should have been followed by Vos J. Construction. The arbitration clauses contained in the FAPL and Football Association Rules (FA Rules) should be construed to exclude a dispute about unfair prejudice.
Decision
The Court of Appeal unanimously dismissed Fulham’s appeal, holding that unfair prejudice claims under section 994 of the CA 2006 are capable of being arbitrated, provided they do not involve the making of any winding-up order. Patten LJ delivered the leading judgment.
Arbitrability
The starting point is to identify a statutory provision or a rule of public policy which has the effect of rendering the arbitration agreement either void or unenforceable insofar as it purports to submit unfair prejudice issues to binding arbitration. There is no express provision in either the AA 1996 nor the CA 2006 that excludes arbitration as a possible means of determining disputes of this kind. In Patten LJ’s view, section 1(b) of the AA 1996 (which embodies the principle of party autonomy, subject only to the safeguards necessary in the public interest) simply affirms the right of parties to determine the method of dispute resolution of their arbitrable disputes. It was doubtful whether that provision is really concerned with the over-arching question of arbitrability.
Patten LJ considered that the wording of section 9(4) of the AA 1996 leaves open the possibility of a challenge to an application for a stay on the grounds of arbitrability, but does little to identify the basis of any challenge. Having considered academic commentary on arbitrability, Patten LJ concluded that the question of whether an issue is arbitrable is not necessarily determined by the limitations on the tribunal’s powers to make orders affecting non-parties (which is derived from the contractual basis of arbitration). The fact that an arbitrator cannot make a winding-up order affecting third parties does not mean that it is impossible for the members and a company to agree to submit their disputes, inter se as shareholders, to arbitration.
The source of restrictions on arbitrabilty cannot be found in the AA 1996 or the “law of arbitration” itself. Commentators and academics simply recognise that the scope of even the most widely drafted arbitration agreement must yield to restrictions derived from other areas of the law. There are statutory provisions that preserve a right of access to the courts (for example certain areas of matrimonial and employment law). These provisions are inconsistent with an agreement to submit certain disputes to binding arbitration and would, therefore, defeat any application for a stay, either under section 9 of the AA 1996 or under the court’s inherent jurisdiction.
However, there was no statutory restriction or rule of public policy in this case that prevented the parties agreeing to submit their disputes to arbitration. The combined effect of an arbitration agreement that covers the dispute in question and section 9(4) of the AA 1996, is that the agreement to refer the dispute to arbitration will exclude the parties’ right to bring or continue legal proceedings covering the same subject matter, unless one of the exceptions in section 9(4) is established.
Unfair prejudice
In view of Patten LJ’s conclusion that there are no provisions in the CA 2006 that prevent an unfair prejudice claim from being arbitrated, Fulham would have to identify either an implied restriction in the statute or some equivalent rule of public policy to demonstrate that the matter was not arbitrable.
If a petitioner establishes unfair prejudice, the court has wide powers under section 996 to make the order it thinks fit. However, the types of disputes that are likely to occur in the conduct of the affairs of the FAPL and the scope of any relief sought are likely to be limited.
If an arbitrator considered that the proper solution to a dispute between a shareholder and the company was to give directions for the conduct of the company’s affairs, he could authorise the shareholder to seek relief from the court under section 994.
In practice, these cases are likely to be rare. If the relief sought may affect other members who are not parties to the arbitration, the arbitrator could seek their views and the scope of the relief available could be limited by the extent of any third-party opposition. Similarly, if the order sought is one which cannot take effect without the consent of third parties, the arbitrators’ hands will be tied.
Fulham had contended that a section 994 claim is not arbitrable because the petition
alleges unfair prejudice to the company's members as a whole (or, at least, some section of the membership of the company) and that it requires the court, in granting relief, to have regard to the interests of members and other interested parties, such as creditors (who, in this case, would be strangers to the arbitration agreement).
The questions that the court must resolve do not, therefore, turn on the nature of the company in the present case or the nature of this particular dispute. In the view of Patten LJ, if section 994 preserves a right of access to the court, it must do so for any petition brought under that provision.
Patten LJ considered the analogy that Fulham sought to draw between an unfair prejudice petition under section 994 and a winding-up petition on just and equitable grounds under section 122 of the Insolvency Act 1986, which Fulham contended provided a basis for a restriction on arbitrability. However, this analogy did not assist in providing a basis for a restriction on the arbitrability of section 994 claims. It was necessary to look at section 994 itself and also the cases in which the court has had to consider the grant of a stay under section 9 of the AA 1996 in the context of an unfair prejudice petition.
Patten LJ commented, obiter, that a dispute that forms the grounds of a petition under section 122(1)(g) is also probably capable of being arbitrated. In those cases, the arbitration agreement would operate as an agreement not to present a winding-up petition unless and until the underlying dispute had been determined in the arbitration. The question of whether the complaint of unfair prejudice was made out and a winding-up order should be made, would remain a matter for the court in any subsequent proceedings. Once the arbitrator had concluded that winding-up proceedings would be justified, a shareholder would then be entitled to present a petition under section 122(1)(g) and the court could be invited to lift any stay imposed under section 9(4).
Patten LJ concluded that Vos J had been right to refuse to follow Exeter City. He considered that much of the reasoning in Best Floor Sanding was uncontroversial and Warren J, in that case, had been right to regard the arbitration clause as unenforceable, insofar as it included within its scope the question of whether the company should be wound up. However, Patten LJ did not agree with the conclusion in Best Floor Sanding that there can be no resort to arbitration in respect of a dispute between the shareholders of the company which forms the grounds on which such relief may be sought. Weeks J (in Exeter City) was, therefore, wrong to extend the reasoning of Warren J (in Best Floor Sanding) to an unfair prejudice petition.
The determination of whether there has been unfair prejudice is plainly capable of being decided by an arbitrator and it was common ground that an arbitral tribunal constituted under the FAPL or the FA Rules would have the power to grant the specific relief sought by Fulham in its petition. The court was not, therefore, concerned with a case in which the arbitrator was being asked to grant relief of a kind that lies outside his powers or forms part of the exclusive jurisdiction of the court. Nor did the determination of issues of this kind call for some kind of state intervention in the affairs of the company, which only a court can sanction.
A dispute between members of a company, or between shareholders and the board about alleged breaches of the articles of association or a shareholders’ agreement, is an essentially contractual dispute, which does not necessarily engage the rights of creditors or impinge on any statutory safeguards imposed for the benefit of third parties. In this case, the only issue between the parties was whether the chairman acted in breach of the FA and FAPL Rules in relation to the transfer of a Premier League player.
Construction of the arbitration agreement
The argument about construction turned on the issues already considered about the effectiveness of any agreement to refer questions of unfair prejudice to arbitration. Given Patten LJ’s conclusion that there is no statutory restriction or rule of public policy that prevents the parties from agreeing to submit such disputes to arbitration, it was not possible to read into the language of the arbitration agreement the limitations contended for by Fulham.
Comment
The decision provides a robust endorsement of the first instance decision of Vos J regarding the arbitrability of unfair prejudice petitions. Patten LJ provided a thorough and careful analysis of the authorities on this issue and was clear in his views that Vos J had been correct in concluding that Exeter City was wrongly decided.
The judgment reinforces the primacy of party autonomy concerning arbitrability. Indeed, Longmore and Rix LJJ went further than Patten LJ in expressing the view that the effect of section 1(b) of the AA 1996 is that the autonomy of the parties extends to the choice to arbitrate their disputes (as well as the conduct of the arbitration) and can encompass disputes about the internal management of a company.
On the facts of this case, given the unusual structure of FAPL, the nature of the disputes which would arise and the scope of appropriate relief was limited. However, the court held that, even in cases where the necessary relief would go beyond what the arbitrators could grant or may affect third parties, such relief would not form part of the “matter” to be referred to arbitration. The limitations on what an arbitration can achieve do not dictate whether the subject matter of the dispute is arbitrable.
In practice, as explained by Patten LJ, where the arbitrator has determined the substantive issues underlying the unfair prejudice claim, he could then authorise a shareholder to seek any necessary relief from the court. This two-stage process may be a little more cumbersome, but it does, at least, preserve the right to resolve by arbitration what is essentially a contractual dispute between members of a company and its shareholders.
The obiter comments regarding the arbitrability of disputes that form the grounds of a petition under section 122(1)(g) of the Insolvency Act 1986 are also of interest. Although the parties cannot oust the jurisdiction of the court to grant a winding-up petition, the decision indicates that an arbitrator could (subject to the terms of the arbitration agreement) decide whether the underlying complaint of unfair prejudice was made out, whether the complainant should be limited to some lesser remedy or whether winding-up proceedings before the court would be justified.
Case
Fulham Football Club (1987) Ltd v Richards and another [2011] EWCA Civ 855 (21 July 2011).
