Demystifying

Shareholder

DisputesA series of articles by4 New Square

September 2019

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Disclaimer: the articles in this series are not to be relied on as legal advice. The circumstances of each case differ and legal

advice specific to the individual case should always be sought.

TABLE OF CONTENTS

Introduction to “Demystifying Shareholder Disputes” | 2

Hugh Jory QC, Helen Evans and John Williams

Unfair Prejudice Petitions: what makes prejudice “unfair”? | 4

David Halpern QC and Michael Bowmer

Recent Developments in Quasi-Partnerships | 9

Thomas Ogden and John Williams

Share Valuation in Shareholder Disputes | 19

Hugh Jory QC and Matthew Bradley

Where does the law stand now on discounts for minority holdings in non quasi-

partnership companies? | 30

Hugh Jory QC and Matthew Bradley

Creative remedies in unfair prejudice petitions | 38

Helen Evans and Anthony Jones

Expert Evidence on Share Valuations: When to use hot tubbing in unfair

prejudice petitions | 42

Paul Mitchell QC and Nigel Burroughs

Shareholder Disputes in Sport | 48

Hugh Jory QC and Richard Liddell

About the authors | 62

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Hugh Jory QC, Helen Evans and John Williams | 12.09.2019

4 New Square continues to enjoy rapid growth in its profile in acting in shareholder disputes in England

& Wales and internationally, including the recent unfair prejudice petition in Edwardian Group case in

which Justin Fenwick QC and Anthony Jones acted for the successful Petitioner. Over the summer of

2019, 4 New Square produced a series of articles from specialist contributors on shareholder disputes

which are now consolidated into this pack. A number of the topics covered will be addressed on

our podcast later this year (please subscribe to our podcast on Apple Podcasts, Google

Podcasts and Android so you do not miss out on future episodes).

Shareholder litigation is very common. There are 4 million companies in England & Wales, ranging

from football clubs to corner shops. Some are formally run, with well-regulated boards and good

access to legal advice. Others are more informal, family affairs. Others still are badly run and prone to

disagreements. Minority shareholders can feel aggrieved by a wide range of conduct by the majority.

The applicable legal remedies therefore have to straddle a broad range of types of company, types of

conduct, and financial consequences. 4 New Square’s articles address this broad range of disputes and

the relevant legal principles that apply to them. They also give an experienced insight into the thorny

issues of valuation that can make or break a petition.

The series begins with a refresher from David Halpern QC and Michael Bowmer. In their article “Unfair

Prejudice Petitions: what makes prejudice unfair”, they address the ingredients of a successful s. 994

petition and key restrictions of the remedy. This article is followed by a review of “Recent

Developments in Quasi Partnerships” by Thomas Ogden and John Williams which explains how to

identify and establish that a company is in fact operating as a quasi-partnership.

The third article is by Hugh Jory QC and Matthew Bradley, it is entitled “Share Valuation in Shareholder

Disputes” and explains both the rival ways to approach valuing shares and the type of issue that are

often overlooked but can prove to be game-changers.

Two further articles stick with the valuation theme:

• One is entitled “Where does the law now stand on discounts for minority shareholdings in non-

quasi partnership companies?”. This article, by Hugh Jory QC and Matthew Bradley first

identifies the benefit of establishing a quasi-partnership and then grapples with whether it is

Introduction to “Demystifying Shareholder Disputes”

3

right that minority discounts should apply to other types of company. The article dissects the

controversial decision in Blue Index.

• The other is entitled “Creative remedies in unfair prejudice petitions”. Here, Helen

Evans and Anthony Jones consider how minority discount problems in non-quasi partnerships

can be avoided by the courts using other tools at their disposal. They also explain that share

valuation is not just the province of experts: it involves serious issues of legal principle and is

therefore a topic that repays close attention by lawyers.

Next, Paul Mitchell QC and Nigel Burroughs address expert evidence in shareholder disputes. In

“Expert Evidence on Share Valuations: When to use Hot Tubbing in Unfair Prejudice Petitions” they

explain the pros and cons of this practice. Is the loss of control worth the benefit?

Finally, Hugh Jory QC and Richard Liddell look at shareholder disputes in sport. The article is not just

of interest to sports lawyers. Since unfair prejudice petitions are prevalent in the sporting arena, the

case law has address a number of issues of wider application, including the courts’ remedial powers

and striking out petitions.

This is currently a fast-moving area of litigation. We hope that you will find the articles interesting and

informative.

© Hugh Jory QC, Helen Evans and John Williams

4

”?

David Halpern QC and Michael Bowmer | 03.07.2019

Unfairness is an essential ingredient in minority shareholder petitions. Prejudice alone is not enough.

This article explores just what it is that a petitioner needs to prove to make prejudice “unfair” in order

for a petition to succeed.

The Elements of a Section 994 Petition

Section 994 of the Companies Act 2006 permits a member of a company to petition the court for relief

on the ground that the company’s affairs are being or have been conducted in a manner that causes

unfair prejudice to the interests of members generally or of some part of its members (including at

least himself).

A petitioner under section 994 must therefore establish four elements to the satisfaction of the court:

(1) the conduct of the company’s affairs; (2) has prejudiced; (3) unfairly; (4) the petitioner’s interests

as a member of the company. In other words, the conduct must be both prejudicial and unfairly so;

conduct may be prejudicial without being unfair or unfair without being prejudicial. Both elements

need to be satisfied and, if either is not, the petition will not be well founded.1

The Company’s Affairs

So far as the first element is concerned, it will usually be clear that the conduct about which complaint

is made constitutes conduct of the company’s affairs. The expression “the company’s affairs” is of

wide ambit.2 It encompasses all matters decided by the board of directors. That does not mean that it

is not important to consider this issue, as it may be that the conduct complained of really only concerns

the activities of shareholders in their personal capacity and between themselves and not corporate

conduct.3

1 Re Saul D Harrison & Sons plc [1995] 1 BCLC 14 at 31, Neill LJ citing Peter Gibson J in Re Ringtower Holdings plc (1989) 5 BCC 82 at 90. 2 Gross v. Rackind [2005] 1 WLR 3505 [26] to [32], Sir Martin Nourse; Graham v. Every [2014] BCC 376 at [38] to [41], Arden LJ; Re Charterhouse Capital Ltd [2015] 2 BCLC 627 at [45], Etherton C. 3 Re Astec (BSR) plc [1998] 2 BCLC 556; Re Coroin Ltd [2013] 2 BCLC 583; Re Charterhouse Capital Ltd [2015] 2 BCLC 627.

Unfair Prejudice Petitions: what makes prejudice “unfair”?

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Prejudice

The second element of “prejudice” is also a very broad term. It obviously includes financial damage to

the value of the petitioner’s shares. As a general rule, therefore, where a company is insolvent, the

petitioner must show that his shares would have had a value but for the wrongdoing of the

respondent4. But it is considerably wider than this. The court takes a wide view of prejudice suffered

by a shareholder. Even if the shares are worthless, the petitioner may be held to have suffered

prejudice in some capacity connected with his shareholding, such as under a loan made as part of the

same investment as that which led to the acquisition of the shares.5 Prejudice is not even limited to

financial loss. It may include, for example, prejudice caused by disregarding the petitioner’s right to

participate in management.6

Unfairness: What Makes the Prejudice Unfair?

However, the third element of unfairness is a rather more complicated and slippery term. In O’Neill v.

Phillips7, the only case on unfair prejudice to have reached the House of Lords, Lord Hoffmann

observed that fairness depends on the context in which it is applied; conduct which might be fair

between competing businessmen might not be fair between members of a family. As he said, all is

said to be fair in love and war. This means that what is fair is heavily dependent on the background

facts and corporate setting.

This makes it difficult to predict with any certainty whether the prejudice will be held to be unfair.

Nevertheless, some broad guidance can be given, on the basis of the case law which has emerged in

the two decades since O’Neill v. Phillips.

(1) Non-Observance of the Constitution

First, a member is usually entitled to require the affairs of the company to be conducted in accordance

with the terms on which the parties, through the company, have agreed to do business together (a

company being, as Lord Hoffmann said, “an association of persons for an economic purpose”). These

terms are to be found in the company’s constitution – in other words its articles of association – but

also in any shareholder agreements. They also include any applicable rights conferred by statute, and

include by implication an agreement that any party who is to be a director will perform his director’s

duties which are now codified in sections 171 to 177 of the Companies Act 2006.8 But not every breach

4 Re Tobian Properties Ltd [2013] 2 BCLC 567 at [11], Arden LJ. 5 Gamlestaden Fastigheter AB v. Baltic Partners Ltd [2008] 1 BCLC 468. 6 Re Coroin Ltd [2013] 2 BCLC 583, David Richards J (affirmed on appeal). 7 [1999] 1 WLR 1092 at 1098F. 8 Re Tobian Properties Ltd [2013] 2 BCLC 567 at [22], Arden LJ.

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of the petitioner’s rights as a member will amount to unfairness: the breach must be sufficiently

serious.9 A mere procedural irregularity or a trivial or technical infringement of the articles would not

generally be enough to found a petition.10

(2) Non-Observance of Common Agreement or Understanding

Secondly, although the articles of association usually confer no right to be involved in management or

to be consulted on decisions which do not have to be taken by a general meeting, such additional

rights may be conferred by an agreement, or understanding, between all or some of the members, i.e.

a quasi-partnership.11 An obvious example is an agreement that the petitioner be involved in

management or be consulted before certain decisions are taken. However, not every breach of a

promise to involve the petitioner in management will amount to unfair prejudice. The Court of Appeal

has very recently confirmed that exclusion from management might not amount to unfair prejudice if

it was done openly as a result of a bona fide dispute, even though the respondents were later found

to have been in the wrong12.

(3) Abuse of the Rules

Thirdly, there may be unfairness if the majority are “using the rules in a manner which equity would

regard as contrary to good faith”.13 The conduct need not be unlawful, but it must be

inequitable.14 This is where the concept of unfairness becomes more difficult to apply. It exposes the

inherent tension between contract law and equity. Although the common law traditionally held that

parties to a contract owe no general duty of good faith, it now recognises that a party who is given a

measure of discretion under a contract may be required to exercise it in a way which is not capricious

or unreasonable: Braganza v. BP Shipping Ltd15. Equity has taken a different route, imposing

additional duties (or, more accurately, restrictions) on those who are treated as

fiduciaries. Partnership is a paradigm fiduciary relationship16, and the duty of utmost good faith

imposed on true partners has been extended to company shareholders who are in a quasi-partnership.

The test is objective: it is whether, in all the circumstances, the majority are exercising their strict legal

rights in a manner which is objectively unfair, even if they are subjectively acting in good faith.17 (This

9 Re Sunrise Radio Ltd [2010] 1 BCLC 367 at [7], HHJ Purle QC. 10 Re Saul D Harrison & Sons plc [1995] 1 BCLC 14 at 18, Hoffmann LJ. 11 Ebrahimi v. Westbourne Galleries Ltd [1973] AC 360, HL. 12 Re Sprintroom Ltd [2019] EWCA Civ 932. 13 O’Neill at 1999A-B. 14 Grace v. Biagioli [2006] 2 BCLC 70 at [61](2), CA. 15 [2015] 1 WLR 1661, Lady Hale. 16 Don King v. Warren [2000] Ch 291 at [40], CA. 17 Re Guidezone Ltd [2000] 2 BCLC 321 at [175], Jonathan Parker J.

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is analogous to the reformulated test for dishonesty.18) However, Lord Hoffmann confirmed

in O’Neill19 that there is no wider doctrine of legitimate expectation, if the petitioner cannot establish

breach of the articles or of a quasi-partnership. In such a case it is therefore necessary to find some

extra ingredient which is sufficient to render the conduct unconscionable.

The Court’s response to some commons situations of unfairness

The Court of Appeal recently said that: “The courts must act on a principled basis even though the

concept is to be approached flexibly. They cannot decide whether to grant or refuse relief from unfair

prejudice on the basis of palm-tree justice”20. Unfortunately, the courts have not succeeded in

developing a general test which would enable one to link the decided cases into a coherent doctrine

or predict how future cases will be decided.

Nevertheless, a large number of cases have come before the courts, both before and

since O’Neill. The safest course is to adopt an incremental approach, seeing whether the situation in

question is sufficiently close to a previous case, but recognising that each case will depend on its facts.

Thus:

• Failure to permit the petitioner to be involved in management or to be consulted about

decisions will prima facie amount to unfair prejudice, if (but only if) there is a quasi-

partnership which confers these rights on the member. However, this is not a rigid rule. Thus,

it is not unconscionable to exclude the petitioner from management if there has been a

breakdown of trust between the parties and the majority have offered to buy out the

petitioner at a fair price21. Similarly, it is not unconscionable to do so if the petitioner has

been guilty of gross misconduct, albeit in good faith; in such a case the majority would be

acting in good faith if they regarded him as a “bad leaver”22.

• Mismanagement of the company’s business by the board is not usually sufficient. However,

there are a few cases which this has been held to amount to unfair prejudice. In general, these

are cases where the mismanagement amounts to a breach of the directors’ duties under

ss.171-177 of the Companies Act 2006. A recent example is Edwardian Group Ltd23, where

18 Ivey v. Genting Casinos (UK) Ltd [2018] AC 391, UKSC. 19 At 1102B-F. 20 Re Tobian Properties Ltd [2013] 2 BCLC 567 at [21], Arden LJ. 21 O’Neill at 1107G. 22 Re LCM Wealth Management Ltd [2013] EWHC 3957 (Ch), Hildyard J at [55]. 23 [2019] 1 BCLC 171, Fancourt J.

8

the company’s chief executive diverted business opportunities to himself in breach of

fiduciary duty.

• Excessive remuneration or bonuses will not usually amount to unfair prejudice unless this is

contrary to the articles or to an agreement or understanding between the members. However,

if it is so high as to be unreasonable and to result in the majority shareholder receiving a

disproportionate share of the profits, then it may amount to unfair prejudice24.

• Exercise of the power to allot shares may be unfairly prejudicial, even in the absence of a

quasi-partnership, if it operates unfairly and has no commercial rationale. This could be the

case even if the rights issue was open to all shareholders, but the majority knew that the

petitioner could not afford to take up the offer and this was the reason for making it.

© David Halpern QC and Michael Bowmer

24 Re Cumana [1986] BCLC 430, CA.

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Thomas Ogden and John Williams | 08.07.2019

Applying the same set of legal rules to all companies, regardless of their individual circumstances and

characteristics, can lead to injustice. The concept of “quasi-partnership” encourages a more nuanced

approach and allows courts to recognise and enforce equitable obligations which may have arisen

between members of a company.

In this article, Thomas Ogden and John Williams of 4 New Square review key elements of the law in

this area, and consider a number of important recent decisions.

Introduction

At the end of March 2019 there were roughly 4 million companies on the register at Companies House.

Those companies vary in nature and size: from small, closely held family businesses, to large

corporations with substantial revenues and assets. In order to alleviate the potential injustice caused

by imposing a one-size-fits-all system of legal rules and principles on all companies, irrespective of

their nature and background, English law has developed the equitable concept of “quasi-partnership”.

Typically, the issue of “quasi-partnership” will be raised in unfair prejudice petitions, or petitions for

winding up on the just and equitable ground. An individual may feel that his or her treatment by

members of the company is unfair, in light of the relationships, history, agreements and

understandings between members of the company (see the article by David Halpern QC and Michael

Bowmer). However, these matters may not necessarily be taken into account by the strict legal rights

and obligations contained in the Companies Act or the company’s articles of association.

The leading case of Ebrahimi is an early example of the concept of a “quasi-partnership” in practice.1 In

that case, an ex-director complained of his removal from the board by two other directors, who passed

a resolution to this effect at a general meeting. He petitioned for winding up on the just and equitable

ground, and in the alternative, pursuant to section 210 of the Companies Act 1948.2 The House of

Lords ordered the company to be wound up, and in his leading speech, Lord Wilberforce outlined the

1 Ebrahimi v Westbourne Galleries Ltd [1973] A.C. 360. 2 The predecessor to the modern unfair prejudice petition in section 994 of the Companies Act 2006.

Recent Developments in Quasi-Partnerships

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approach to identifying cases of quasi-partnership where “equitable considerations” may exist

alongside strict rules of law.3

Ebrahimi – and the subsequent House of Lords decision in O’Neill v Phillips4 – remain landmark

authorities on quasi-partnership. But this area of the law continues to provoke judicial scrutiny, and

more recent decisions have further explained and developed the principles set out in these early cases.

Read together with the leading cases, the more recent decisions provide useful guidance for

practitioners on crucial elements of the quasi-partnership analysis: in particular, what is meant by the

term “quasi-partnership”, the relevance of partnership law to identifying quasi-partnerships, and the

circumstances in which courts will be prepared to find that a quasi-partnership has come into

existence.

The meaning of “quasi-partnership”

The term “quasi-partnership” is a convenient label, but potentially a misleading one. It suggests that

there is a close similarity between quasi-partnership companies, and partnerships proper; and this has

encouraged some judges to identify quasi-partnership companies by reference to the rules and

principles of partnership law.5

It is correct that historically, partnership law played a formative role in the development of company

law.6 It is also the case that quasi-partnership companies will often meet the criteria for partnership,

were it not for their incorporation. This follows from the fact that concepts such as “good faith” and

“mutual confidence” are central to the law of partnership, and also play an important role in

identifying quasi-partnership companies.7 But notwithstanding this, it is a mistake to try to identify

quasi-partnerships by applying partnership law directly.

This point was emphasised in Strahan v Wilcock, where a minority shareholder brought an unfair

prejudice petition pursuant to section 459 of the Companies Act 1985, seeking an order that his shares

in the company be purchased by the majority shareholder at a non-discounted value. He relied on a

finding of quasi-partnership in support of his case.

At first instance, the judge approached the quasi-partnership analysis by asking whether, if the

business had been conducted in the same way, but without the formation of a limited company, it

3 See especially pp 378-380. 4 [1999] 1 W.L.R. 1092. 5 See, for example, the first instance decision discussed by the Court of Appeal in Strahan v Wilcock [2006] EWCA Civ 13 at [13]. 6 See Ebrahimi 379-80 and O’Neill v Phillips, p. 1098 (Lord Hoffmann). 7 Ibid.

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would have qualified as a partnership within the meaning of the Partnership Act 1890.8 He found that

the company would have qualified as a partnership on this basis, and therefore that it counted as a

quasi-partnership for the purposes of the unfair prejudice petition.9

The Court of Appeal held that was the wrong approach. The company law cases, in particular the

speech of Lord Wilberforce in Ebrahimi, give courts independent guidance as to how quasi—

partnerships are to be identified.10 It is this guidance which courts should apply when considering the

issue of quasi-partnership; and it is neither necessary nor sufficient that a quasi-partnership company

should meet the criteria for partnership.11

The term “quasi-partnership” is, therefore, convenient shorthand – but nothing more than this.12 In

functional terms, a quasi-partnership is simply a company where “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”.13

Identifying a quasi-partnership

The general approach

The concept of quasi-partnership is intended to bring fairness and flexibility. But there is also the risk

of unfairness and unpredictability if findings of quasi-partnership are not made by reference to clear

and established rules. There is the further tension, which exists elsewhere in private law, between law

and equity, and how readily formal legal rules should be displaced by equitable obligations.

By default, companies are governed in the first instance by their articles of association, express

agreements between shareholders, and other formal legal rules.14 These are the primary sources of

the rights and obligations which exist between members. The imposition of equitable rights is an

exception rather than the rule, one which clearly has the potential to undermine the set of legal

obligations which ordinarily govern the relationships between company members, if applied too

generously.

8 See Strahan v Wilcock at [13]. 9 Strahan v Wilcock at [14]. 10 Strahan v Wilcock at [20]-[21] and see Croly v Good [2010] EWHC 1 (Ch) at [9] (HHJ David Cooke). 11 See for example Sudicka v Morgan [2019] EWHC 311 (Ch) at [193] where a “no partnership” clause did not prevent the judge from finding that a relationship of quasi-partnership had come into existence. See also Re Sprintroom [2019] EWCA Civ 932 at [86]. 12 See Waldron v Waldron [2019] EWHC 115 (Ch) and Fisher v Cadman [2005] EWHC 377 (Ch) at [84]. 13 See Fisher v Cadman at [84]. 14 A point emphasised in O’Neill at 1098, Ebrahimi at 379, and see Strahan v Wilcock at [18].

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The courts have, nevertheless, taken a flexible and context-sensitive approach to findings of quasi-

partnership. In Ebrahimi, Lord Wilberforce expressly rejected the proposition that there could be a

defined set of circumstances in which equitable considerations would arise.15 This approach is

mirrored in more recent cases, which have disapproved of references to “tests” for quasi-partnership,

on the basis that they imply an approach which is unduly restrictive.16 In one recent High Court

decision, it has even been suggested that ultimately, a finding of quasi-partnership is simply “a matter

for the court’s overall assessment in any cases whether conduct…is to be regarded as in breach of

equitable obligations”.17

It is doubtful that such a broad approach can be justified. It would lead to circular reasoning, requiring

courts to determine when a breach of equitable considerations has occurred, without providing any

guidance on how to make such a determination. It also contradicts more authoritative dicta, which

underline the importance of a structured approach. As emphasised by Lord Hoffmann in O’Neill, courts

should make decisions about quasi partnership, “in the light of established principles rather than an

abstract notion of fairness”.18

With this in mind, the safest approach is to plead and prove quasi-partnerships by reference to

established principles and guidance, and to reason by analogy with decided cases.19 Additional

considerations may be taken into account, but are likely to carry much less weight – particularly if they

do not exist alongside the core criteria of quasi-partnership, and in particular, the factors identified by

Lord Wilberforce in Ebrahimi.20

The Ebrahimi factors

In Ebrahimi, Lord Wilberforce listed three factors which might be present in a case of quasi-

partnership. These are still referred to as the core criteria for determining whether a quasi-partnership

exist. They are as follows:

(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

15 See Fisher v Cadman at [84]. 16 See Pinfold v Ansell [2017] EWHC 889 (Ch) at [59]. 17 Ibid. 18 O’Neill. A passage cited and relied on in Waldron v Waldron at [28]. 19 See Ebrahimi at 379. 20 However, for an exceptional case, see Fisher v Cadman at [89].

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confidence is lost, or one member is removed from management, he cannot take out his stake

and go elsewhere.

His Lordship tentatively suggested that cases of quasi-partnership “typically may include one, or

probably more, of [those] elements”, and noted that “analogous factors” may also be relevant.21 But

in keeping with the desire for a rule-based approach to the imposition of equitable obligations

(discussed just above), these factors are generally accepted as being critical to the quasi-partnership

inquiry.

The third of the Ebrahimi factors is easy to understand. The other two require some further

explanation and have been elucidated in subsequent case law.

A “personal relationship, involving mutual confidence”

The first Ebrahimi factor is arguably the most important. The existence of a personal relationship with

the necessary character of confidence is the foundation for equitable obligations, and a factor which

affects the conscience of a quasi-partnership’s members, making it inequitable for them to rely on

their strict legal entitlement. This interaction between conscience and the imposition of equitable

obligations is a typical feature of the law of equity – and the requirement that there exists a

relationship of “mutual confidence” has been described as the necessary “substratum” of the

equitable considerations present in a quasi-partnership.22

The first step is to establish the existence of a “personal relationship”. This often depends on two

related factors: the number of members in a company, and the nature of their relationship.

The fact that a company has a small membership does not make it a quasi-partnership.23 However, a

small company is likely to foster the kind of intimate working environment necessary for equitable

obligations to arise.24 As for the nature of a quasi-partnership, recent cases distinguish “personal”

relationships by contrasting them with “commercial” relationships. The difference arises from the

level of formality involved in the interactions and dealings between members, and the extent to which

the affairs of the company are conducted on the basis of personal understandings rather than strict

legal entitlements – which will often be the case where business arrangements grew out of pre-

existing personal relationships, or otherwise took on a personal (rather than purely commercial)

21 Ebrahimi at 379. 22 Re Edwardian Group Limited [2018] EWHC 1715 (Ch) at [232]. 23 Ebrahimi at 379. 24 See Re Coroin Ltd [2012] EWHC 2343 (Ch) at [635].

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character.25 Courts may also be prepared to infer that formal legal transactions are non-commercial

on the basis of other relevant circumstantial factors: for example, where a reduced consideration is

paid.26

In light of this, it is not surprising that family-owned companies are commonly found to be quasi-

partnerships. They exemplify a membership which is likely to be small, close knit, and bound by non-

commercial considerations. In Fisher v Cadman for example, the importance of a “family relationship”

to the running of the company was a key factor in the decision that the company was a quasi-

partnership. This was despite the absence of some of the usual features indicating a quasi-

partnership.27

The second step is to establish that the relationship between members has the necessary character

of “mutual confidence”. This principle has been reformulated in a number of ways, but commonly, it

is taken to refer to the need for “mutual trust and reliance”.28 Again, these are elements which are

central to the operation of the general law of equity.

Reliance in this context can take a number of forms, depending on the circumstances of the case.

In Sprint Electric, 29 for example, both parties relied on the other’s diligence and technical expertise in

contributing to the success and profitability of the company – from which they both stood to gain.

In Croly v Good,30 it was held that a profit-sharing arrangement existed between the parties, which

could only work if each relied on the other to act in their shared interests. This supported a finding of

quasi-partnership – despite the judge’s conclusion that both parties may have had reservations about

the trust and confidence which could be placed in the other.31

Finally, whatever evidence is relied on to demonstrate a personal relationship of mutual confidence,

courts should focus on the substance, not the form, of the parties’ relationship. An example of this

is Croly v Good, where the judge looked through the various legal entities used by the parties to

structure their dealings, to the core elements of the underlying business relationship. It was not

necessary for there to have been an express agreement as to the existence of a relationship of trust

25 Re Coroin [636]; Strahan v Wilcock at [25]; Cool Seas (Seafoods) Ltd v Interfish Ltd [2018] EWHC 2038 (Ch) at [126]-[127]. 26 Strahan v Wilcock at [26]. Sprint Electric Ltd v Buyer’s Dream Ltd [2018] EWHC 1924 (Ch) at [352]. 27 Fisher v Cadman at [89]. 28 See Sprint Electric Ltd v Buyer’s Dream Ltd at [352]. 29 Ibid. 30 Croly v Good [2010] EWHC 1 (Ch). 31 See Croly v Good at [91].

15

and confidence – which would be highly unusual in negotiations between laypeople. It was instead for

the court to reach this view, on considering the circumstances of the case.32

“Agreement or understanding”

The second Ebrahimi factor concerns the existence of agreements and understandings, as indicators

of a relationship governed by equitable considerations. Paradoxically – and unlike when seeking to

prove the existence of a contract – the more detailed and formalised the parties’ arrangements are,

the less likely it may be that the court will find there to have been the relevant kind of agreement or

understanding.

This was the reasoning of David Richards J in the case of Re Coroin.33 The judge refused to find that

equitable obligations existed, in circumstances where “articles of association and a shareholders

agreement were negotiated and drafted, containing lengthy and complex provisions” to govern the

relationships between members. The more professionally and carefully drafted such agreements are,

the less likely that equitable considerations exist, on the basis that the parties intended solely to rely

on their strict legal rights.34

It is also likely that considerations relevant to the first Ebrahimi factor will be relevant at this stage

too. In Re Coroin, in support of his finding that there was no space for equitable considerations to

operate, the judge placed significant emphasis on the commercial nature of the relationship between

the parties. It is a natural inference from the fact that the parties are engaging with each other on an

arms-length commercial basis that they intend their relationship to be governed by legal rather than

equitable rights.

It follows that courts are prepared to be somewhat generous in identifying the relevant agreement or

understanding relied on. The assumption is that in many cases of quasi-partnership, this will be

informally expressed, and may not have been made express or written.35 These kinds of loose

understandings are typically found in cases of family companies but can exist elsewhere as well.

In Strahan v Wilcock for example, Arden LJ was prepared to infer an agreement relating to

participation in management from the surrounding facts and circumstances of the parties’ dealings.36

32 Croly v Good at [50]. 33 Re Coroin Ltd. 34 See also Wootliff v Rushton-Turner [2017] EWHC 3129 (Ch)at [73]-[78] and Cool Seas (Seafoods) Ltd v Interfish Ltd [2018] EWHC 2038 (Ch) at [129]. 35 See Strahan at [23]-[25]. 36 Ibid.

16

However, this flexibility is not unlimited. A “sufficient degree of agreement” is still required.37 What

counts will vary from case to case. But courts will, in all likelihood, be guided by general equitable

considerations – including the existence of mutuality, detrimental reliance, and whether it would be

inequitable in the circumstances for a party to resile from the alleged agreement. By their nature, such

considerations require alleged “agreements” or “understandings” to have at least a certain degree of

clarity and certainty, and to have been mutually recognised by both parties.

Complex cases

Changing relationships

As highlighted in the discussion above, a finding of quasi-partnership is based on substance, and not

form. It follows that quasi-partnerships may come into existence at some point after the moment of

incorporation. Often, a company will be formed out of a pre-existing business relationship and be a

quasi-partnership from the start. However, even if that is not the case, it is still possible to establish

that a quasi-partnership arose at some point following incorporation.

But can this work in the other direction? Is it possible for a quasi-partnership to cease to be so, if the

relevant factors no longer indicate the existence of equitable obligations?

It is certainly possible for members to renounce or repudiate the existence of a quasi-partnership. By

doing so, members are able to bring it to an end, and prevent ongoing equitable considerations from

being generated.38 Parties would then fall back on their strict legal rights. So, for example, when

members cease their involvement in the business (even if remaining as minority shareholders),39 or

where members otherwise demonstrate their repudiation of the factors inherent to the quasi-

partnership relationship,40 the quasi-partnership will end.

But if taken to its logical conclusion, this reasoning would stultify the concept of quasi-partnership. If

a breakdown in trust and confidence results in the end of a quasi-partnership and the rights associated

with it, then any subsequent exclusion from management (for example) would not take place within

a quasi-partnership company. That exclusion would therefore not appear to amount to a breach of

any existing equitable considerations.41

37 See Khoshkhou v Cooper [2014] EWHC 1087 (Ch) at [24]. 38 Shah v Shah [2010] EWHC 313 (Ch) at [103], see Re Edwardian at [231]—[242]. 39 Re D.R. Chemicals Ltd. (1989) 5 B.C.C. 39. 40 Re McCarthy Surfacing Ltd [2008] EWHC 2279 (Ch) at [96]-[99]. 41 For this point, see Shah v Shah at [104].

17

This outcome would be absurd, and does not represent the law.42 However, the point has not been

explored in detail in the cases. The best explanation, perhaps, is that equitable rights can outlive the

quasi-partnership which created them. This allows parties to bring actions to vindicate those rights for

a period after the quasi-partnership has come to an end, and where the acts complained of by a

petitioning member may have taken place after the termination of the quasi-partnership – so long as

they are found to be in breach of some persistent equitable right.

The lifespan of such equitable rights remains unclear.43 Courts will, in all likelihood, seek to achieve a

sensible and fair result based on the facts of each case, the cause of action relied on, and the remedy

sought. But parties should aim to be prompt in vindicating these equitable obligations lest they

disappear. This may be particularly important if those rights are relied on to support a share buyout

at full value.44

The involvement of third parties

A further difficult question is whether equitable considerations can arise where the criteria for quasi-

partnership are met by only some of the members of a company. Does the presence of third parties

necessarily prevent a quasi-partnership from arising?

This point was addressed in the case of Re Edwardian (which is analysed in more detail by Helen

Evans and Anthony Jones). In that case, Fancourt J expressed the obiter view that a quasi-partnership

could conceivably arise in such circumstances, but that this was likely to be exceptional. Examples

could include where the third parties represented a minority of shareholders, and where the rights of

those third parties would not be prejudiced by the enforcement of equitable obligations.

This point remains to be settled. However, a more flexible approach would fit with some of the existing

case law, which is otherwise difficult to explain. One such case is Fisher v Cadman. There, a quasi-

partnership was found to exist, despite the presence of members (holding a small minority

shareholding) who did not appear to meet the criteria for quasi-partnership. Rather than straining the

test for quasi-partnership to include those members, a more comfortable explanation is that the

existence of members who were third parties to the quasi-partnership did not prevent equitable

considerations from arising amongst the other members.

42 Ibid. 43 Re McCarthy Surfacing Ltd, [98]-[99]. 44 Ibid.

18

Conclusion

The quasi-partnership is a familiar part of the legal landscape. But as the discussion above shows,

allegations of quasi-partnership can throw up a number of complexities. The leading cases,

particularly Ebrahimi, remain important. But they have also given rise to a sizeable body of case law,

which has significantly developed the applicable principles, and which remains in a state of flux. These

developments should always be kept in mind when a petitioner seeks to establish the existence of a

quasi-partnership, as they can have a significant impact on the outcome of the underlying case on

liability and any remedy which may be awarded.

© Thomas Ogden and John Williams

19

Hugh Jory QC and Matthew Bradley | 10.07.2019

Overview

When it comes to key issues in unfair prejudice petitions, there is little which is more important to

petitioners and respondents alike than whether a buy out order is likely to be made by the court, and

if so, what price will be ordered to be paid for the shares. The issue of valuation, whether dealt with

by agreement in accordance with the principles set out in O’Neill v Phillips or determined by the court

lies at the heart of the process in almost all cases.

In this article, Hugh Jory QC and Matthew Bradley explore the art of share valuation and the different

approaches that can be taken.

Introduction

One of the wide powers of the court, once it is satisfied that unfair prejudice has been established, is

that it may “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”.1 Since this remedy provides the only chance for many minority

shareholders to realise the value of their capital and since it offers the continuing shareholder a clean

break (albeit at a cost), it is the remedy most often ordered by the court and most frequently sought

by the petitioner2.

It is therefore of considerable importance to petitioners and respondents alike in unfair prejudice

petitions to get a good grasp of the likely range of valuations of the minority shareholding in question.

Only then can they consider on an informed basis whether or not the way forward is through the out-

of-court procedure set out by Lord Hoffmann in O’Neill v Phillips [1999] 1 WLR 1092, or instead the

pursuit of the petition to a valuation by the court.

1 S.996(2)(e) Companies Act 2006 2 For a recent case where the majority was ordered to sell to the minority see, Goodchild v Taylor [2018] EWHC 2964 (Ch), Barling J.

Share Valuation in Shareholder Disputes

20

In this article we:

• Consider briefly what “fair value” means in the context of a court valuation;

• Examine some of the differing valuation approaches which may be adopted by a court (noting

here that often more than one approach is considered by way of a sense-check);

• Look a little more closely at the price/earnings multiple, an under-examined factor which is

key to the most commonly adopted earnings-based valuation approach;

• Undertake a short study of a decision in a recent case where the earnings were too uncertain

to apply a valuation based on a P/E multiple;

• Conclude by considering O’Neill v Phillips out of court offers.

Fair value

The essence of the valuation by the court is to establish a value which is fair to the parties. That value

may not be ‘market value’, a term which in any event sits uncomfortably in the context of private

companies where no market exists for their shares. That reality was reflected in Eurofinance v

Parkinson [2002] BCC 551, in which Pumfrey J pointed out that the value of the shares should be on

the basis that the sale was taking place between the actual participants (not a putative willing buyer

and seller) “since the whole purpose of the valuation is to be fair between the parties”.

The fact that it is the other shareholder who is acquiring the shares can be a very relevant

consideration affecting their value. A buyer may wish to see a lower valuation placed upon the seller’s

shares because the buyer contends that he is key to the continuing success of the company, whereas

the seller was not. However, the considerations can extend wider; in Re Edwardian Hotel Group [2018]

EWHC 1715 (Ch), Fancourt J referred to the concept of “marriage value” in uniting the shareholdings

as something which the particular shareholders involved were likely to have in contemplation, in

assessing what price would attach to the shares. This case is considered in more detail by Helen

Evans and Anthony Jones in their article in this series titled “Creative remedies in unfair prejudice

petitions”.

Typical approaches to valuation of shares

If the valuation issue comes to court for determination, then that process inevitably begins with an

assessment of the value of the company with the assistance of expert accountants/share valuers.

As Paul Mitchell QC and Nigel Burroughs explore in more detail in their article in this series titled

“Expert evidence on share valuations: When to use hot tubbing in unfair prejudice petitions” there are

different ways in which expert evidence can be given in court.

21

There are three main approaches that can be adopted to valuing businesses: assets, earnings and

cashflow. Typically, the valuation is based on earnings, and the other bases if relevant in the particular

circumstances of the case provide cross-checks against the earnings-based valuation.

Valuations other than on an earnings basis

Asset basis

Some companies are more appropriately valued by reference not to the profits they actually earn, but

to the assets they own. Typically, they may be assets such as real estate or intellectual property, from

which the business generates its earnings. The valuation of such companies will involve expert

evidence from a valuer experienced in the relevant area of property.

Discounted cash flow basis

In some situations, company valuations can be achieved by discounting cashflows going forward. The

gist of that approach is to value the company on the basis of the cash its business will generate rather

than on the basis of the assets it uses to generate it. Alternatively, valuers may try to estimate a future

maintainable dividend stream and discount that figure to arrive at a present value. That approach is

unlikely to be apt in the context of private companies which are not accountable to institutional

shareholders and where there is usually no history of paying a particular level of dividend.

The particular difficulties with applying a cashflow method to private companies are two-fold. First,

the lack of accurate profit forecasts for the forthcoming 3 to 5 years often risks making the model too

uncertain. Second is the problem of establishing an appropriate discount factor.

There are however situations in which those difficulties may be less pronounced, for example the

hotel sector where sale prices can be established on the basis of discounted cashflows as well as land

values, rather than earnings. The valuation in the claim for breach of contract in ESO Capital

Luxembourg Holdings II v GAS Invest Management SA [2017] EWHC 1351 was premised on such an

approach.

There may be other situations where a judge has recourse to a discounted cashflow valuation because

of the difficulties with other methods of valuation on the particular facts before the court. The court

may well be supported for having done that in the event of an appeal. In Chilukuri v RP Explorer

22

Master Fund [2013] EWCA Civ 13073 Briggs LJ expressed the extent of the leeway afforded to a judge

at first instance in this way:

“The valuation at a historic date of a miniorty shareholding in an overseas company, the

principal asset of which is a bare majority stake in another overseas company which owns an

unexploited mining concession in the DRC, is as obvious an example of a judicial task requiring

an assessment and weighing the competing considerations as it is possible to imagine. I

therefore approach this appeal with a ready disposition to respect the judge’s overall

conclusion unless satisfied that it lies outside the bounds within which reasonable

disagreement is possible”.

Of course, if the parties’ experts are agreed that a discounted cashflow basis is the appropriate one in

the circumstances of a particular case then that will be a powerful influence on approach the court

adopts. Blair J said of the claim and counterclaim ariding in the case of breach of warranty before him

in The Hut Group Ltd v Nobahar-Cookson [2014] EWHC 3842:

“This case is an example of two different methodologies within the same case. Both claim and

counterclaim involved shares in private companies, but in the case of the claim, the shares

comprised the whole issued capital, whereas in the case of the counterclaim, the shares

comprised a minority interest. It was common ground at the end of the trial that whereas the

quantum of the claim was to be calculated by reference to the effect of the adjustments on the

company’s EBITDA, the quantum of the counterclaim was to be calculated by applying a

discounted cash flow method.”

Such agreements aside, however, discounted cashflow valuations are unlikely to become a prominent

valuation method in the context of unfair prejudice petitions at any time soon: the typical valuation

method is likely to remain the earnings basis.

Valuation on an earnings basis

In simplistic terms, the earnings-based valuation usually involves a process along the following lines:

1. Identifying cash which is surplus to the operational needs of the company and making

allowance for those monies outside the earnings valuation process, on the hypothesis that on

3 On the facts of the case, the Court of Appeal allowed the appeal on the basis that it could not imagine any reasonable purchaser paying anything for the shares and substituted nominal damages for the judge’s award of $5.6m.

23

a putative sale the sellers would be expected to have withdrawn those monies by way of a

dividend.

2. Establishing maintainable earnings by making adjustments to stated profits, typically to

directors’ emoluments to strip out ‘lifestyle’ and other costs which would not be expected to

be faced by a purchaser.

3. Making adjustments for any payments which were not within the ordinary business of the

company (which may include those identified by the Petitioner as having been made

wrongfully so as to adjust for the unfair prejudice), or for one off costs or payments which do

not reflect the company’s usual business operation.

4. Consideration of accounting policies and realities in relation to matters such as stock and

depreciation, to test whether or not the reported figures distort the actual value that a

purchaser would pay.

5. Considering an appropriate way of averaging and weighting historic, current and predicted

further profits on that basis to arrive at a figure for maintainable earnings.

6. Considering how many times the maintainable earnings a willing buyer would pay for the

shares in that business. Once applied to the maintainable earnings, this produces the price,

hence the names for this figure – the Price Earnings Multiple or Price Earnings Ratio).

7. Cross checking the price arrived at by this method by reference to the value of the company’s

assets (e.g. land) and adjusting for any additional value which is not reflected in the earnings-

based valuation.

This sort of approach accords with the guidance set out by Nourse J, as long ago as In Re Bird Precision

Bellows [1984] Ch 419.

P/E multiples

The P/E Multiple is a vital aspect of an earnings based valuation approach but is one which receives

relatively little attention in practitioners’ works.

Experts’ reports are little different. Expert valuation reports usually consider the adjustments to the

maintainable earnings to establish the maintainable earnings very fully, but frequently the issue of the

appropriate multiple is addressed very shortly. However, the reality is that the usual “game-changer”

in determining the value of the shares is the level of the multiple, rather than that of the earnings

24

figure to which it is applied. Whilst the level of the multiple is a matter for expert evidence, in practice

cogent evidence to support the chosen multiplier is often wanting4.

What the multiple tells us

Why is it that one company in the stock market may trade on a multiple of say 30 x earnings (a P/E

multiple of 30) when another trades at 8 x earnings (a P/E multiple of 8)? At its simplest the multiple

is telling the purchaser how many years at current profit levels it will take to generate the equivalent

of his investment on a straight line basis. Straight line in this context means that its earnings remain

at the same level as they were at the time of calculating the P/E multiple. So, if investors expect the

profits to increase rapidly, they may be prepared to pay a higher P/E multiple, not because they want

to wait longer to be repaid their investment, but because they assume that there will be growth in

profit that will realise their return in a shorter time. In broad terms, the greater the confidence in

profit growth and the higher that growth is expected to be, the higher the P/E multiple that the

investor would be prepared to pay. Other factors which may have an impact on the P/E multiple of a

quoted company include matters such as dividend yield, as well as market behaviour such as following

the herd and not wanting to be left behind, which by ignoring fundamentals of the stock sometimes

lead to spectacular crashes.

Because of such factors, when considering what the appropriate multiple would be in the context of

a private company, there is often little guidance to be drawn from larger listed companies dealing in

similar business areas.

In Re Planet Organic Ltd [2000], Jacob J, in the context of a company operating a single organic

supermarket in London, referred to the PER as “the near undecidable problem”:

“[The expert] selected three companies out of the list, Budgen, Iceland and Somerfield on the

basis that their shops were much smaller than those of Sainsbury and the like and were food-

only shops. The truth is however that these companies are nothing like Planet Organic, a little

shop with a big name. These companies are what Mr Clemence described as ‘in a depressed

state in a depressed sector’, On the other hand I do not think taking the average P/E ratio of

quoted companies in the FT is any more helpful. None of the companies selected are like this

company. They are metaphorically on a different planet. I cannot imagine any potential

investor in Planet Organic considering his investment as in any shape the same sort of

investment as in one of the quoted companies.”

4 See for example Bennett v Bennett [2003] WLUK 244

25

There are indices which relate only to private companies such as the PCPI5. Such indices were

characterised by Jacob J as a “somewhat flimsy guide”, including as they do “good and bad

companies”. He nonetheless determined the appropriate multiple to be a figure which was slightly

more than the average in the PCPI, on the basis that he recognised that a buyer might pay more for a

profit-making shop with the potential to have its name exploited.

In Southern Counties Fresh Farm Foods Ltd [2010] EWHC 3334 (Ch) Warren J contrasted the PCPI with

the FTSE All Share Price Index, and notwithstanding the fact that the PCPI was not sector specific, said:

“I am persuaded that the PCPI provides a more reliable indicator, in spite of all the

shortcomings identified by Mr Joffe (not all of which I have mentioned), than the FTSE All Share

Price Index to the movement in private company shares. The market there is more stable than

in the quoted share market; and the FTSE Index is not, as I see it, at all a reliable guide to the

value of this specialist company…”

However, there can be situations where the particular business of the company may make reference

to similar quoted companies a proper starting point for valuation; see for example the stockbroking

company which the court was valuing in Blue Index Ltd [2014] EWHC 2680.

Another source of relevant multiple can be founded on an expert’s ability to point to particular deals

in the relevant sector.

The issue of the multiple is quintessentially a matter of expert evidence, which can vary significantly.

What is important is how the expert justifies the multiple to be applied by way of objective analysis,

given the lack of comparables. To that end it is always useful to bear in mind what the multiple is

actually saying, in particular as regards growth prospects and to step back and consider whether it

appears defensible in that respect.

Where maintainable earnings are too uncertain – a case study from a football club

In VB Football Assets v Blackpool Football Club (Properties) Ltd [2017] EWHC 2676 (Ch) Marcus Smith

J found that the 20% interest in Blackpool FC owned by the petitioner should be treated not as a 20%

interest but as one equivalent to that of Segesta, another shareholder (holding 76.29% of the shares)

with whom the judge held that there had been a gentleman’s agreement that they would exercise

control. That equivalence he found to be represented by a 48.145% interest, namely half of the

combined shareholdings of the petitioner and Segesta.

5 Private Company Price Index

26

Notwithstanding the fact that the shares constituted a minority holding, the judge decided that a

minority discount was not appropriate because of his finding that the petitioner had “had a legitimate

expectation to be treated as an equal partner in the governance of Blackpool FC” which expectation

the respondent had breached. He relied on what Jonathan Parker J said in Re Guidezone [2000] 2BCLC

321 to identify the situation as one of quasi-partnership namely “in the case of a quasi-partnership

company, exclusion of the minority from participation in the management of the company contrary to

the agreement or understanding on the basis of which the company was formed provides a clear

example of conduct by the majority which equity regards as contrary to good faith.”

This case therefore followed the general rule that minority discounts will not apply in cases of quasi-

partnership companies. The judge then took the conventional route to valuation, holding that “the

starting point in assessing the buy out price is to approach matters as if the Oyston Side had behaved

in a non-discriminatory way and to pay to VB Football Assets what the Oyston Side paid to itself [by

way of disguised dividends].”

However, thereafter the process he adopted was tailored to the particular features of that football

club:

“I consider the key to valuing VB Football Assets interest in Blackpool FC is to recognise that

Mr Belokon did not put money into the club as an investment, but because he wanted to

support the club. It seems to me that his aim of supporting the club having come to naught, he

would be able to unwind the transaction and receive back what he paid. I therefore consider

that Belokon should be repaid the money he paid to acquire his shareholding in Blackpool FC.”

That totalled £4.5m. He also made orders for payment of £26.77m, being the amount of the payments

wrongfully made to the respondent by way of disguised dividends, making a total of £31.27m.

The judge went on to acknowledge that whilst his approach took full account of what VB Football

Assets paid for its interest in Blackpool FC and ensured that it shared in Blackpool FC’s success in

reaching the Premier League;

“I recognise that it gives no weight to the potential for Blackpool FC’s possible future success.

That is deliberate. As I have described, the difficulty in valuation a club like Blackpool FC is that

its future is inherently improbable. It might – as it has done – achieve great success and reach

the Premier League again; or it might – as it also has – sink to League 2, or worse. It is

impossible to say what will happen: for that reason, I have declined to make any prediction at

all, and simply make provision for VB Football Assets to receive back what was paid – £4.5

million”.

27

This case illustrates how important it is to have some visibility with regard to future earnings when

applying an earnings-based valuation model, even if that visibility is less reliable than that which would

be required to justify a discounted cashflow valuation.

Along with other sports-related cases, the Blackpool FC case is considered in more detail by Hugh Jory

QC and Richard Liddell in their article in this series titled “Shareholder Disputes in Sport”.

Out of court valuations – O’Neill v Phillips offers

In O’Neill v Phillips [1999] 1 WLR 1092 Lord Hoffmann set out guidance on the sort of offer that a

respondent to a petition could make which, if the petitioner refused to accept, would enable him to

apply to court to have the petition struck out. The gist of the reasoning was that the offer would

provide the respondent with the relief which he could expect at trial if he won and would avoid the

costs and other consequences of prolonged proceedings. The essential characteristics of such an offer

are:

• An offer to purchase the shares at fair value and ordinarily without a discount for it being a

minority (i.e. at the equivalent proportion of the total value of company that the petitioner’s

shareholding constitutes of the total shareholding in the company).

• If not agreed, the value is to be determined by a competent expert (acting as expert and not

as an arbitrator, and not giving reasons for his valuation), whose identity the parties should

attempt to agree, and in default should be nominated by the President of the Institute of

Chartered Accountants. The costs of the expert should ordinarily be shared by the parties, but

the expert should have the power to decide if they should be borne in some different way.

• Equality of arms – the parties should have the same right of access to information about the

company which bears on the value of the shares and both should have the right to make

submissions to the expert, though the form of those submissions, written or oral, should be

left to the discretion of the expert.

• Costs – the mere fact that a petitioner has presented his petition should not mean that the

respondent has to offer to pay costs. The respondent must be given a reasonable time once

he is aware of the claim in unfair prejudice to make the offer.

The first point to note about the O’Neill v Phillips offer is that it was formulated in the context of a

quasi-partnership case. In O’Neill v Phillips the House of Lords rejected the submission that there was

any right to a no-fault divorce (i.e. it held that a minority shareholder had to establish unfair prejudice

and not just some breakdown in relations before he could obtain an order for the purchase of his

28

shares). In the circumstances where a company was a quasi-partnership (a concept explored in more

detail by Thomas Ogden and John Williams in their article in this series titled “Recent Developments in

Quasi Partnerships”) Lord Hoffmann said “As I have said, the unfairness does not usually consist

merely in the fact of the breakdown but in a failure to make a suitable offer, and the majority

shareholder should usually have a reasonable time to make the offer before his conduct is treated as

unfair…”.

The condition in the offer that the fair value of the shares is be determined on the basis that there is

no discount for a minority holding follows from the fact that he was dealing with a quasi-partnership

and even in those circumstances he said “This is not to say that there may not be cases in which it will

be fair to take a discounted value. But such cases will be based upon special circumstances and it will

seldom be possible for a court to say that an offer to buy on a discounted basis is plainly reasonable,

so that the petition should be struck out.”

In the non-quasi partnership situation, where the parties are likely to argue about whether to apply a

minority discount or not, there is a similar difficulty to that which Lord Hoffmann identified in the

context of the “special circumstances” cases, where a minority discount can be applied in a quasi-

partnership situation.

However, where it is likely that a minority discount should apply then it may still be appropriate for a

respondent to make an offer along the same lines as the O’Neill v Phillips offer, though leaving the

extent of the discount to the expert valuer. Whilst it will probably not justify strike-out of the petition

if it is not accepted by the petitioner, such an offer can have an impact on costs and if the respondent

wants a valuation date which is earlier than the finding of unfair prejudice, form the basis for that

submission in due course6, given that unfair prejudice petitions are as a general rule dealt with by way

of split trial with issues of valuation being reserved to the second trial, see Re Tobian Properties

Ltd [2013] 2 BCLC 567 at [27].

The reason why such an offer providing for a minority discount would probably not found a successful

application to strike out the petition but could still amount to a fair and reasonable offer was explained

in Potamianos v Prescott [2018] EWHC 1924 (Ch), in which the deputy judge said: “Lord Hoffman said

what he did in the context of discussing whether the respondent to a petition had made an offer which

was so plainly reasonable that the respondent would be entitled to have the petition struck out…” and

pointed out that “…that does not mean that any offer which does not comply with those requirements

is necessarily unfair or unreasonable…”

6 Profinance v Gladstone [2002] 1 BCLC 141, 161b

29

Whilst there are many virtues in the process of agreeing remedies out of court, there are drawbacks

too. Lord Hoffman himself pointed out that “the objective should be economy and expedition even if

this carries the possibility of a rough edge for one side of the other (and both parties in this respect

take the same risk) compared with a more elaborate procedure”. Accordingly, for example, the basis

the expert chooses to adopt is entirely a matter for that expert as is the matter of what adjustments,

if any, need to be made to a typical accountancy style valuation to make it a fair one as between the

parties.

The O’Neill v Phillips offer is a substitute for the remedy that a successful petitioner could expect to

receive where he is a quasi-partner against the fairly typical background circumstances of having been

excluded from management without a fair offer for his shares. Once other elements are introduced,

such as whether or not there have been breaches of fiduciary duties, and whether or not the company

is a quasi-partnership, it fairly soon becomes less appropriate for the value to be determined by an

expert rather than the court.

Conclusion

The question of valuation is one which parties are well advised to consider at an early stage. The

petitioner is required under the standard directions given in unfair prejudice petitions to provide a

non-binding valuation of its shares at the same time as presenting its petition, which is a useful

reminder of the importance of the issue of valuation. Whilst this helps the court to consider

proportionality in relation to costs, from the point of view of the parties, what value a court, or a single

expert would put on a minority shareholding remains at the forefront of the considerations they

should be considering when deciding what strategy to adopt in relation to a petition.

We have given consideration to the impact of minority discounts and the recent cases in that area in

a separate article in this series titled “Where does the law now stand on discounts for minority

holdings in non-quasi-partnership companies?”. Where the minority interest is less than 50% then

that issue, together with the issue of the appropriate price earnings multiple (which applies to

valuations of all sizes of shareholdings) are in the vast majority of cases key factors in determining the

value of the shareholding. Those issues are often the key determinants in the risks facing parties in

notoriously expensive proceedings, and a keen assessment of them is usually the key to giving the

best advice on how they should proceed, whether as petitioner or respondent.

© Hugh Jory QC and Matthew Bradley

30

Hugh Jory QC and Matthew Bradley | 15.07.2019

Introduction

There has been little in the area of unfair prejudice petitions that has caused more controversy in

recent years than whether successful petitioners, having established unfair prejudice against the

wrongdoers, should see the price paid for their shares reduced, possibly almost to vanishing point, to

reflect the minority status of their shareholding. This is a vexed question which has generated a wealth

of authority at first instance in the last three years alone. There are cogent points to be made on both

sides of the argument, and the results reached in a number of recent judgments reflect that fact

vividly.

In this article, Hugh Jory QC and Matthew Bradley take a closer look at the impact of the controversial

decision in Re Blue Index Ltd [2014] EWHC 2680 (Ch) on a line of recent cases, the last having been

handed down, in Dinglis v Dinglis [2019] EWHC 1664 (Ch), on 28 June 2019.

Quasi-Partnerships

Quasi-partnerships are dealt with in more detail by Thomas Ogden and John Williams in their article

in this series entitled “Recent developments in quasi-partnerships”. So far as valuation is concerned,

the starting position in respect of quasi-partnerships is well-established and without real controversy.

Where a petitioner has established unfair prejudice in the running of a quasi-partnership company,

the shares of the minority should generally not be discounted, irrespective of terms in the articles of

association that may provide for such a discount. As Lord Hoffmann contemplated in O’Neill v

Phillips [1999] 1 WLR 1092, this general rule can be departed from in “special circumstances”, a

quintessential example of which would be where the petitioner deserved to be excluded from the

running of the company. However, absent such circumstances, the usual course will for no discount

to be applied in this context.

Where does the law stand now on discounts for minority

holdings in non quasi-partnership companies?

31

The rationale for this position was explained by Nourse J in Re Bird Precision Bellows [1986] Ch 419 as

follows:

“I would expect that in a majority of cases where purchase orders are made […] in relation to

quasi-partnerships the vendor is unwilling in the sense that the sale has been forced upon him.

Usually he will be a minority shareholder whose interests have been unfairly prejudiced by the

manner in which the affairs of the company have been conducted by the majority. On the

assumption that the unfair prejudice has made it no longer tolerable for him to retain his

interest in the company, a sale of his shares will invariably be his only practical way out short

of a winding up. In that kind of case it seems to me that it would not merely not be fair, but

most unfair, that he should be bought out on the fictional basis applicable to a free election to

sell his shares in accordance with the company’s articles of association, or indeed on any other

basis which involved a discounted price. In my judgment 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, as

being the only fair method of compensating an unwilling vendor of the equivalent of a

partnership share.”

The same decision stands as authority for another general rule, namely that where a shareholder

purchases his or her shares at a discount to reflect the minority status of the shareholding, then it

would usually be appropriate to reflect that discount upon an order for sale in an unfair prejudice

petition.

Non Quasi-Partnership Companies

For a long time it had been thought that another simple rule of thumb applied in the context of non

quasi-partnership companies, namely that a discount would usually be applied to reflect a minority

shareholder’s status as such, upon a successful unfair prejudice petition.

The high watermark of this position is found in obiter comments of Arden LJ in Strahan v

Wilcock [2006] 2 BCLC 555, in which she observed that “It is difficult to conceive of circumstances in

which a non-discounted basis of valuation would be appropriate where there was unfair prejudice…but

such a [quasi-partnership] relationship did not exist. However, on this appeal I need not express a final

view on what those circumstances might be”.

Blackburne J expanded upon the rationale for such a position in Irvine v Irvine [2006] EWHC 583 (Ch),

observing that “Short of a quasi-partnership or some other exceptional circumstance, there is no

reason to accord it a quality which it lacks. [The company] is not a quasi-partnership. There are no

exceptional circumstances. The shareholdings must therefore be valued for what they are: less than

32

50% of [the company’s] issued share capital.” The discount appropriate to the 49.96 percent minority

holding was subsequently fixed by the judge at 30% in that case; i.e. the petitioner’s shares were

valued at 30% less than they would have been valued on a pro-rata basis.

The position remained relatively settled until it began to be prised open in a number of cases,

beginning with the decision of HHJ Purle QC in Re Sunrise Radio Ltd [2010] 1 BCLC 367. In that case, it

was held that “there is no inflexible rule” that a minority shareholder should see their shares subjected

to a discount in the non-quasi partnership context. Observing that in a winding-up on the “just and

equitable” ground, each shareholder would receive a rateable proportion of the realised assets and

that a minority should not ordinarily be worse off than in a winding-up upon a share purchase order,

he declined to apply a minority discount in that case.

Next came the decision in Re Blue Index Ltd [2014] EWHC 2680 (Ch), in which Mr Robin Hollington QC

re-interpreted previous authorities to reach a diametrically opposed position to that espoused by

Arden LJ in Strahan v Wilcock. He held that the only general rule in favour of ordering a share purchase

at a discounted price was where the shares had in the first instance been purchased at a discounted

price. On his analysis, absent such a starting position, the general rule is that shares should be

purchased without any discount at all, irrespective of whether the context is one of quasi-partnership.

At the risk of over-simplification, the underlying rationale for the position adopted in Re Blue

Index was that “It would substantially defeat the purpose of the […] remedy if the oppressing majority

were routinely rewarded by the application of a discount for a minority shareholding”. The essence of

the decision can perhaps be summarised as follows:

1. The whole framework of section 994 of the Companies Act 2006 is designed to confer on the

court a very wide discretion to do what is considered fair and equitable in all the

circumstances of the case, in order to put right and cure for the future the unfair prejudice

which the petitioner has suffered at the hands of the other shareholders of the company. That

discretion does not end when it comes to the terms of the order for purchase in the manner

in which the price is to be assessed.

2. The reality is that a minority shareholding in a private company has very little value because

there is virtually no market for such a thing. If a shareholding in a private company is to be

subjected to a discount to truly reflect those facts, a shareholder who has been the subject of

wrongdoing within section 994 will never be able to achieve fair compensation.

The decision was followed by Mr Edward Bartley Jones QC (sitting as a Deputy Judge) in Re Addbins

Ltd [2015] EWHC 3161(Ch).

33

However, the existence of a new “general rule”, in polar opposition to that espoused in Strahan v

Wilcock and Irvine v Irvine, left many uneasy. Whilst the objections to the old orthodoxy in Re Blue

Index come from a recognised expert and textbook writer in this area of law sitting as a deputy High

Court Judge, in so far as Re Blue Index sought to overturn the orthodox view expressed by experienced

company law judges such as Arden LJ and Blackburn J, it is controversial. In particular:

1. In a simplistic case where, say, a 60% shareholder acquires the remaining 40% from the

minority who has been unfairly prejudiced he will have 100% of the shareholding and could

theoretically sell the company on that basis immediately and make a tidy margin from having

bought 40% at a discount. The assumption behind the reasoning espoused in Re Blue

Index that the respondent should not be “rewarded” appears to assume that he wishes to buy

the minority holding and is therefore pleased that he has forced the respondent into a position

where has to sell it. In practice that is an uncommon scenario. There may well be no advantage

to the respondent in having to fund the purchase of the shares from petitioner. Obviously in

a case where he was trying to obtain the minority shareholding in order to trade it on as part

of a sale of the company for example that would be a relevant factor in determining the fair

price. However, that would be an unusual case.

2. Whilst it is undoubtedly the case that most minority holdings are completely unmarketable

and therefore of no real value at all unless the other shareholders actively wish to purchase

them, the flipside of that fact is that a minority shareholder is only able to realise a value for

his shares if he is able to say he has been unfairly prejudiced and can compel the majority

shareholder to purchase those shares off him. The fact that no principle of no-fault divorce

applies in this context only underlines that position. So, in many cases, the opportunity arising

from being unfairly prejudiced is one of being able to realise a value for a shareholding which

is otherwise nothing more than capital tied up in a company over which, outside a quasi-

partnership situation, the shareholder is likely to have little or no influence. He may well be

delighted to have the opportunity to employ that capital in something else of more immediate

benefit to him.

It might be said, however, that those latter observations rather overlook the fact that even a minority

shareholder in a non-quasi partnership situation has a basic right not to see the affairs of the company

run in a way that is unfairly prejudicial to his interests. In reality, a 4% shareholders’ shares are unlikely

to be worth much, if anything, if a realistic discount is applied to reflect the marginal status of such a

shareholding. Should such a shareholder be deprived of a meaningful remedy by reference to a judge-

made “general rule”, when the statutory wording of section 994 permits a far less fettered approach?

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Subsequent decisions have given voice, whether implicitly or expressly, to the fact that there exists

something of a “via media” between the two diametrically opposed “general rules” espoused

in Strahan v Wilcock and Re Blue Index.

In Re C F Booth Ltd [2017] EWHC 457 (Ch), in which Re Blue Index appears not to have been cited,

Mark Anderson QC sitting as a Deputy High Court Judge summarised the Court’s task as follows:

“The task is to find a fair price. That may require no discount, it may require the full discount

which would expected in an arm’s length sale, or it may require something in between”.

Whilst he again gave voice to the view that the starting point was that minority holdings generally

attract less than a full pro rata value, and held that a discount should be applied, he also made clear

that a “fully discounted” valuation, i.e. one which reflected only the price which could be achieved by

selling the shares on the open market, was not the approach ineluctably to be followed. He distilled

the following principles as providing useful guidance:

“i. The discount is usually applied to reflect the simple truth summarised by Blackburne J in

Irvine v Irvine (no 2) [2007] 1 BCLC 445, “A minority shareholding . . . is to be valued for what

it is, a minority shareholding, unless there is some good reason to attribute to it a pro rata

share of the overall value of the company. Short of a quasi-partnership or some other

exceptional circumstances, there is no reason to accord to it a quality which it lacks.”

ii. However valuing shares for the purposes of fashioning a remedy under section 996 is not

the same as ascertaining the value they would achieve in a sale in the open market.

iii. In some cases it may be unfair to treat the petitioner as a willing seller because he may only

be selling because of unfair prejudice which has left him with no alternative. That consideration

may apply outside the context of a quasi-partnership.

iv. Consideration only of the value which the petitioner could achieve by selling his shares

elsewhere may be unfair without considering the value of the shares to the respondent,

especially if the conduct giving rise to the petition was influenced by a desire to buy the shares.

v. A relevant factor may be the amount which the petitioner would receive if the company were

wound up. If the conduct complained of would justify a winding up on the “just and equitable”

ground, the petitioners should not ordinarily be in a worse position by invoking section 994

than they would have been if they had petitioned to wind it up.”

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A not dissimilar approach was adopted by Fancourt J in Estera Trust (Jersey) Ltd v Singh [2018] EWHC

1715 (Ch), which is dealt with in more detail by Helen Evans and Anthony Jones in their article in this

series entitled “Creative remedies in unfair prejudice petitions”. Whilst rejecting the existence of a

presumption in favour of a non-discounted share price in the non quasi-partnership context (and so

not following Re Blue Index), Fancourt J stressed that “Any basis of valuation selected must be fair in

all the circumstances. It must also provide a remedy that is proportionate to the unfair prejudice

suffered by the Petitioners.” What he had to determine was “a basis for a fair price for JS (or the

Company) to pay HS and Estera for their shares, in circumstances where a share purchase is

appropriate and necessary to relieve HS/Estera against unfair prejudicial conduct that they have

suffered as shareholders. That question is not, in my judgment, a simple choice between a pro rata

share of the Company’s overall value and the market value of the shares. Those are, as it were, the two

extremes of price that could be ordered to be paid, but between them there are various possibilities

for specifying a basis of valuation that results in a fair price as between these minority shareholders

and the Respondents against whom relief is granted.”

In Re AMT Coffee [2019] EWHC 46 (Ch) HHJ Matthews considered all of the above authorities and

followed Re Blue Index, in the result, by declining to make any discount on the price to be paid for

shares, in a non quasi partnership context. He declined to express a view on whether or not a general

rule did or did not exist which pointed to such a result, holding:

“So far as concerns the debate between the contrasting views […] it is not necessary for me to

express any concluded view, but it is at least clear that the weight of authority is that there is

a discretion to be exercised.”

In that regard, the decision is on all fours with the dicta in both Re C F Booth Ltd and Estera Trust

(Jersey) Ltd.

The final authority in which Re Blue Index has been considered is the very recent decision of Adam

Johnson QC in Dinglis v Dinglis [2019] EWHC 1664 (Ch).

In that case, the Respondent mounted a sustained attack on Re Blue Index. The Petitioner did not

argue vigorously against what was characterised as the “conventional conceptual justification” for

applying a minority discount, namely that a minority shareholding does not confer any control over

the relevant company and so in purely commercial terms is disproportionately less valuable than a

majority shareholding, which does confer such control. The essential counter-submission against the

attack on Re Blue Index was that, properly understood, the broad point for which the decision stands

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is that it may not always be fair to apply a discount to reflect a commercial market value (i.e. “open

market value”), in all non-quasi-partnership cases. The argument advanced was that:

• Applying an “open market discount” will almost certainly not be fair in a quasi-partnership

case, because it is obviously unfair to apply a commercial market analysis to someone who is

being forced against their will to exit what is in substance a partnership.

• Applying an “open market discount” might, however, also be unfair in other cases, depending

on the facts, and therefore the proper approach was for the court to ask itself in the round

whether it is fair to apply a discount which flows from a commercial market analysis to the

Petitioner’s exit from the company, given the history.

The court accepted that the latter “broad approach” was the correct one, given the breadth of section

996. However, it also assumed “as a working hypothesis” that, outside the quasi-partnership scenario,

it will be a very unusual case which calls for no discount to be applied at all. That observation jars a

little with the approach adopted and the results reached in Re AMT Coffee and Estera Trust (Jersey)

Ltd.

The result ultimately reached on the facts in Dinglis v Dinglis was that, even adopting the “broad

approach”, a “commercial market discount” fell to be applied in that case.

Where does that all leave us? What is now abundantly clear is that, if it had been thought, post Strahan

v Wilcockand Irvine v Irvine that a minority shareholding would always be valued at a discount by

reference to its nominal “open market value”, which in many cases could be very low, the law as it

stands today is not so simple.

Conclusion

It may be that in time, Re Blue Index will be held not to be an accurate statement of the law. However,

it has undoubtedly given it a shake and encouraged judicial thinking away from a doctrinal application

of the comments in Strahan v Wilcock and Irvine v Irvine, in a way which may have risked depriving

the s.994 remedy of any real meaning in many non quasi-partnership cases, particularly where

shareholdings were below 25% (and therefore unable even to block special resolutions) or where the

value of the company compared unfavourably to the cost of presenting a s.994 petition if a minority

discount was factored into the equation.

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There is no doubt that advising respondents and petitioners as to what they may expect in terms of

share price upon a successful petition in the non-quasi partnership context is a more fact sensitive and

uncertain task than ever before. To the extent that a “general rule”, per Strahan v Wilcock, continues

to live on at all, whether not it actually applies calls for careful inquiry on the facts of each individual

case and for the identification of factors militating against it by potential non quasi-partnership

petitioners. A heightened need for detailed, bespoke and careful scrutiny of an individual client’s case

may, however, be a fair price to pay to ensure the s.994 remedy is not side-lined in non quasi-

partnership cases in a way which the wording of the section does not justify. However, as the cases

following Blue Index illustrate, the risk for such petitioners that a discount will be applied is one which

they will continue to run in addition to the other risks inherent in s.994 proceedings unless and until

there is clear guidance from the Court of Appeal on the point, to build on or qualify what was said by

Arden LJ in Strahan v Wilcock.

© Hugh Jory QC and Matthew Bradley

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Helen Evans and Anthony Jones | 17.07.2019

Just as there is an infinite variety of ways in which majority shareholders in a company can mistreat a

minority shareholder, the court also has creativity at its disposal when determining the appropriate

remedy. It is tempting to dismiss share valuation as the province of expert valuers. However, this is to

under-estimate the important questions of legal principle which can have a large bearing on the

outcome of the dispute.

In this article, prompted by the recent quantum decision in Re Edwardian Group Ltd [2019] EWHC 873

(Ch), Helen Evans and Anthony Jones of 4 New Square consider the range of valuation approaches

available to a judge when ordering a share purchase.

Where does the court’s power to order a share purchase come from and what does it comprise?

Given the range of conduct giving rise to unfair prejudice petitions, the court’s power to grant an

appropriate remedy is suitably broad. S. 996 of the Companies Act 2006 (“the 2006 Act”) permits a

court that has found for the minority shareholder to “make such order as it thinks fit for giving relief

in respect of the matters complained of”. In Re Bird Precision Bellows Ltd [1986] Ch 658, Oliver LJ

pointed out that the aim of s. 996 is to “confer on the court a very wide discretion to do what is

considered fair and equitable in all the circumstances of the case, in order to put right and cure for

the future the unfair prejudice which the petitioner has suffered at the hands of the other

shareholders of the company”.

The most common order is a share purchase at a fair value, and this remedy is expressly listed at

s. 996(2)(e) of the 2006 Act. However, even when making this order, the court has to ensure that it

appropriately marks the wrongdoers’ conduct and compensates the petitioner. The main way in which

it does this is by tailoring the value attributed to the shares.

Aren’t petitioners always hit with a minority discount?

One of the main problems with s. 996 from a petitioner’s perspective is that a minority discount is

usually applied to the value of the shares. The extent to which this is a general rule is a matter of

controversy (see article by Hugh Jory QC and Matthew Bradley on Re Blue Index Ltd [2014] EWHC

2680 (Ch)).

Creative remedies in unfair prejudice petitions

39

A “minority discount” basis of valuation is shorthand for the market value of the minority

shareholding, valued separately. This is generally less (and sometimes significantly less) than a pro

rata percentage of the total value of the shares to reflect the size of the minority shareholding. A “non-

discounted” basis of valuation is shorthand for a valuation of the entirety of the company, which is

then apportioned pro rata between the shareholders.

Minority discounts can be an appropriate way to reflect a range of matters which disadvantage

minority shareholders, including their lack of control over the strategy of the company (and its

dividend policy) and the difficulty in marketing a small stake, particularly if the remainder of the

shareholding is largely retained by a single “camp”. However, experts frequently disagree as to how

to weigh these factors and what discount should result (see the recent quantum judgment in the Re

Edwardian case [2019] EWHC 873 (Ch) at p. 94 ff).

Minority shareholders often feel unduly penalised by the discounts applied to their shareholding. It

should be plain that a minority discount can make a large difference to the outcome (particularly in

small companies with no realistic market for the shares). It is for this reason that minority shareholders

are often keen to argue that the company was a quasi-partnership (see article by Thomas

Ogden and John Williams). The general rule in such cases is that no minority discount is imposed on

the petitioner (unless, for instance, he has acted in such a way to deserve being excluded from the

company).

However, the inability to persuade the court that the petitioner should be treated as a quasi-partner

does not deprive the court of ways in which it can adjust the valuation of the shares in order to

compensate him more fairly.

Re Edwardian Group Ltd [2019] 1 B.C.L.C. 171 is a case where the petitioners were unable to prove

that what had started out as a family hotel company but expanded significantly over the years was a

quasi-partnership. However, Fancourt J identified a variety of methods to adjust the valuation of the

shares to reflect more accurately the unfairness they had suffered.

What valuation approaches can the court use to assist petitioners?

Below- and inspired by Re Edwardian- we give two examples of ways in which courts can adjust the

valuation basis in order to ensure a fair outcome.

“Marriage value”

The starting point is that the court can order wrongdoers to pay (or repay) sums to the company to

mitigate the effect of their misconduct. In the liability decision in Re Edwardian, Fancourt J found that

40

the majority shareholder had wrongfully derived profits from other companies and received excessive

pay. He concluded that requiring these sums to be repaid would undo the particular prejudice caused

by those breaches of duty. However, this would not wholly compensate the petitioners because the

value of the shares would still be affected by the fact that the company had proved itself willing to

engage in prejudicial conduct and lacked appropriate restraints on pay. Indeed, Fancourt J concluded

that the “cumulative effect of the unfairly prejudicial conduct means that the shares must effectively

be unsaleable in the open market.”

Against this backdrop, the petitioners in Re Edwardian sought to persuade Fancourt J to proceed on

the basis of a non-discounted valuation (i.e. applying a pro rata share of the overall value of the

company rather than by applying a minority discount). He declined to do so but focused instead on

the particular value that the minority shareholding had to the particular respondents. He found that

it was wrong to proceed on the basis that the shares were being sold on the open market when in fact

they were being acquired by the majority shareholder or the company itself. The shares were very

much more valuable to those potential purchasers than they would be to an ordinary investor.

Fancourt J therefore found that the appropriate remedy lay in recognising the “marriage value” or

“control premium” of the shares (by which he meant “the additional value created by putting two

interests, properties or shareholdings together, rather than valuing them individually as separate

holdings”). The consequence of this type of approach is to add a premium on top of the value of the

minority shares. Indeed, the formula applied by Fancourt J expressly recognised that the aggregate

value of the shares after the minority shareholding was acquired by the respondent was worth more

than simply the sum of the majority and minority shareholdings pre-purchase.

However, there are restraints on the latitude allowed to minority shareholders in setting the formula

for marriage value. In his quantum judgment in Re Edwardian, Fancourt J rejected a suggestion from

the petitioner that a chance of achieving above-market prices should also be taken into account,

rejecting the application of “loss of a chance” often found in professional negligence claims. He also

rejected an attempt by the respondents, made after the quantum judgment had been handed down,

to persuade the court that the petitioners should sell them the shares in the most tax-efficient way

(see his judgment at [2019] EWHC 2039). Fancourt J held that although there were circumstances in

which a court would order deal to be structure in a way designed to save tax:

• The petitioners’ proposed scheme could be regarded by HMRC as aggressive tax avoidance,

prompting the risk that they would wish to scrutinise both the petitioners’ and the

respondents’ tax affairs;

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• The court should not, without very good reason, order reluctant parties to enter into tax

saving schemes which, although not unlawful, were a “social evil”.

Date of valuation

The date at which the shares are to be valued is another variable that can be used to achieve a fair

result. The starting point is that shares are usually valued as at the date of judgment, being the date

on which the shares are ordered to be purchased: Profinance Trust SA v Gladstone [2002] 1 WLR 2014.

However, the court is able to substitute a different date where that is more appropriate.

There are cases in which petitioners are able to persuade the court that by the time of the hearing,

the value of the company has been significantly eroded by the wrongdoers (and an earlier valuation

date should therefore be used). It is not difficult to imagine how wrongdoers might achieve their aims:

diverting the company’s business or overpaying directors are just two methods that spring to mind.

Although Profinance makes clear that a court will not choose an earlier date just to give the petitioner

“the most advantageous exit from the company” it explains that adjusting the date of valuation may

even be necessary if there has been a fall in the market (particularly if the wrongdoers’ conduct has

been egregious).

What about respondents?

So far, we have been considering the position of petitioners. The flexibility in the approach to valuation

described above is not however a one-way street. Otherwise, it would prove tempting to petitioners

to hold back commencing proceedings where a company is thriving and its value likely to rise.

Indeed, in Re Edwardian Fancourt J chose the date of valuation to suit the respondents rather than

the petitioners. Although most of his criticism was focused at the main petitioner’s brother (the

majority shareholder and one of the respondents), Fancourt J found that the petitioner had

unreasonably delayed in bringing his petition. Such delay was “calculated” and “tactical”. The

petitioners could and should have brought his case sooner, and the shares were accordingly valued at

a date some 4 years earlier than the judgment.

We note in passing that the ability to adjust the valuation date to protect respondents is a powerful

reason for respondents to consider making a suitable offer to buy out the shares at an independently

valued sum (O’Neill v Phillips [1999] 1 WLR 1092 and Profinance).

What does all of this tell us?

The different approaches set out above are but some examples of the ways in which a court can adjust

the approach to valuing the shares in order to ensure fair recompense for a petitioner. They

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demonstrate that valuation is not merely a matter for expert witnesses, but an essential part of the

case strategy that must be identified and pursued by the legal team. Lawyers fail to spend sufficient

time on the legal principles underpinning valuation (or the most tax-efficient yet acceptable ways of

structuring deals) at their peril.

© Helen Evans and Anthony Jones

42

Paul Mitchell QC and Nigel Burroughs | 22.07.2019

A critical part of any unfair prejudice petition is the valuation of the minority shareholding. Paul

Mitchell QC and Nigel Burroughs of 4 New Square were counsel on different sides in Swain v Swains

Plc, a case in which the expert share valuation evidence was taken concurrently. They look at the pros

and cons of hot tubbing and offer practical advice on how to approach the way experts should give

their evidence.

What is hot tubbing?

Hot tubbing, or the process of giving evidence concurrently, was formalised by the Jackson reforms in

April 2013. Prior to the amendments to the Civil Procedure Rules in 2013, the process of experts giving

evidence concurrently was managed on an ad hoc basis by agreement between the parties, their

counsel and the judge. This typically happened in the construction cases where highly technical

evidence was often required. In this article, we consider the use of hot tubbing to receive expert

accountancy evidence regarding share valuations in unfair prejudice petitions pursuant to Section 994

of the Companies Act 2006.

The procedure for giving evidence concurrently is set out in paragraph 11 of the Practice Direction to

CPR Part 35. If the court decides that it is appropriate for expert evidence to be given concurrently, it

may direct that the parties agree an agenda based on the areas of disagreement identified in the

experts’ joint statement. The trial judge will then lead the process by asking the experts, in turn, for

their views on each agenda item. He may then ask follow up questions. It is a flexible procedure, and

at any time the judge can ask another expert to comment on the other’s evidence, and even pose

questions.

The judge will then invite the parties’ representatives to ask questions. This is not intended to be a

cross-examination (or re-examination) of the witnesses, and the questions are to test an expert’s

views and elicit clarification of it. The Practice Direction expressly provides that the representatives

should not cover ground which has already been fully explored.

Once the parties’ representatives have completed their questioning, the judge will summarise the

experts’ views on the issue and ask them to confirm or correct his summary.

Expert Evidence on Share Valuations: When to use hot tubbing

in unfair prejudice petitions

44

The first case after the formalisation of the process in which the evidence of valuation experts was

heard concurrently was Swain v Swains Plc, a case which produced three judgments: [2015] EWHC

660 (Ch), [2015] EWHC 1183 (Ch) and [2015] EWHC 2585 (Ch) in which each author of this article

represented one of the defendants. Some years prior to his unexpected death during a routine heart

procedure in Thailand, Christopher Swain had distributed shares in his company Swains Plc to his

daughters. His intention was to provide his children with an income in a tax-efficient way through

dividend payments. However, he wished to retain a degree of control over the shares, and transferred

them subject to option agreements granted in favour of the Swain Employers’ Trust under which the

trustees could purchase the shares at a ‘fair value’ such value to be ‘determined by the auditors for

the time being of the company acting as experts not arbitrators having regard to all the circumstances’.

The trustees of the trust were his long-standing accountant, Neil Kirby, and his solicitor, David

Berry. Mr Kirby and Mr Berry were also appointed as executors of Mr Swain’s estate, and after his

death made a distribution of the shares held by Mr Swain to his daughters. At the time, the estate

was involved in proceedings against Mr Swain’s former solicitors, Mills & Reeve (which resulted in the

well-known judgment in Swain Mason v Mills & Reeve [2011] EWCA Civ 14), and the executors were

concerned about their ability to meet any costs order made against them in that litigation. They,

therefore, distributed the shares to the children subject to further option agreements on similar

terms.

In 2012 Mr Kirby and Mr Berry exercised the options over the shares at the same price they had agreed

to accept from the purchaser from them. Three of Mr Swain’s daughters brought proceedings against

Mr Kirby and Mr Berry for conspiracy. The claimants were successful in having the valuation of the

auditors set aside, and the court had to determine the ‘fair value’ of the shares.

Although the valuation in Swain was not taking place within unfair prejudice proceedings, the court

adopted the same approach as it would do in a claim pursuant to Section 994 of the Companies Act

2006. The court was seeking to determine the fair value of the shares, and had to consider what

discount, if any, should be applied to the shareholdings, and whether the sisters’ respective

shareholdings should be aggregated for valuation purposes so that together they held a majority stake

in the company.

Advantages for the parties of hot tubbing

In our view, there are two potential advantages for the parties in having expert evidence received in

the hot tubbing format.

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• First, the process can save appreciable amounts of court time.

o The agreed agenda continues the process of clarifying the issues remaining in dispute

between the experts into the way in which those disputes are going to be explored in

oral evidence at trial.

o Furthermore, the questions arising from the agenda come principally from a single

source, the judge, and he or she asks open questions: there is less time spent on

getting to the nub of the issues. Given the focus of the agenda on particular issues,

the scope for general cross-examination going to credit is also cut down (although it

is of course still possible). In the Swain’s case, receiving expert evidence from three

experts via hot-tubbing saved at least two days of court time and probably more.

• Second, the open questioning format can really permit an expert to shine and gain the trust

of the judge. The judge’s questions take the form of a seminar, with each expert answering

the initial question sequentially, and then the judge seeking clarification from the experts as

his or her understanding of the point develops. The really competent expert can give the

court a great deal of assistance in a format such as this; and the format also gives the judge

the opportunity to form a view of the credibility and reliability of the experts based on the

way they handle nuances arising from the seminar format of questioning.

Disadvantages for the parties of hot tubbing

The principal disadvantages of the process are closely allied to the advantages we have identified

above.

• In hot tubbing, counsel has far less control over the expert witness than in the traditional

format; there is reduced scope for a flexible cross-examination (particularly as to credibility)

that creates opportunities to undermine the expert’s evidence, because so much more of the

questioning comes from the judge. The scope for the advocate to respond creatively to

blunders made by an expert is reduced (although not entirely removed).

• Hot tubbing creates the opportunity for a variety of group think among the experts and the

judge as they explore issues together. A bad expert with a bad point can adjust his or her views

as he or she sees which way the judicial wind is blowing, preserving credibility generally which

might, in the traditional format, have been badly damaged as a poor point was

exposed. There is also probably an increased likelihood the judicial instinct to find a middle

ground between extreme positions will be exacerbated by the hot tubbing method, as judges

seek to persuade experts to coalesce around a sensible compromise view.

46

• Perhaps most significantly, you cannot talk to your expert about the other parties’ expert

evidence as it is given. This inability to check points with one’s own expert before putting them

to the opposing experts in the limited window for cross-examination means that advocates

have to be confident that they have mastered the issues arising within the expert evidence

before the hot tubbing itself commences.

When to start thinking about hot tubbing

It is best to start thinking about hot tubbing as early as possible in the litigation process and should be

something that is considered at the time of appointing an expert. The process of giving evidence

concurrently is so different from the more normal situation where an expert is cross-examined that

different considerations apply. It is a more consensual process, and it is vital that the expert is seen

to participate fully with the procedure rather than stubbornly repeating the views set out in their

report.

Having said that, it is also important that the expert should not fall into agreeing with the judge and

the other experts. The process is designed to help build a consensus rather than testing opposing

views by cross-examination. It can affect the evidence given by an expert who might be more willing

to disagree with a party’s representative than the judge. In the more antagonistic atmosphere of a

cross-examination, an expert is more likely to defend their position than if they are being asked to

express their opinion by the judge.

Although consideration should be given to the possibility of hot tubbing when choosing an expert, no

final decision can be able to be made until the expert evidence has been exchanged and a statement

of issues on which they agree and disagree has been produced. It is at that stage that the areas of

dispute can be identified and the nature and extent of the disagreement between the experts

determined. Only then can an informed decision be made as to the appropriateness, or otherwise, of

the experts giving their evidence concurrently.

Making an application for evidence to be heard by hot tubbing

An application for a direction that the experts give their evidence concurrently can be made at any

stage of the proceedings. It is unlikely, however, that a judge will make such an order before the pre-

trial review. Just as the parties will not be able to make a fully informed decision about hot tubbing

until there has been a discussion between the experts and they have produced a joint statement of

issues on which they agree and disagree, the Court will not be in a position to make a decision until it

is in possession of all the facts.

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Even at the pre-trial review, there will be a reluctance to bind the hands of the trial judge (unless they

are hearing the PTR themselves). More often than not, the judge will only direct that the parties agree

an agenda for the taking of evidence concurrently and leave it to the trial judge to make the final

decision.

The trial judge will, then, often be the one to make a decision on hot tubbing at the beginning of the

trial itself. However, he can do so at any time, even whilst the trial is continuing. Prior to the

amendments to the CPR it was possible for the parties to agree that some of the experts’ evidence

should be given conventionally with them being cross-examined, and part of it concurrently:

see Harrison v Shepherd Homes Ltd [2011] EWHC 1811 (TCC) at [26]. There seems no reason why the

court could not adopt a similarly flexible approach now.

There is no need to make a formal application for evidence to be heard concurrently, and there will

rarely be a need to file evidence in support of such an order. It will, however, be necessary to persuade

the court that such a direction is appropriate and furthers the overriding objective. This is likely to be

the case where the evidence is lengthy and technical, and there is a real prospect of saving court time.

In Swain the Claimants’ expert report ran to nearly 300 pages (including appendices), and if the

experts were cross-examined, their evidence was estimated to take 3 days. On the basis that the

experts’ evidence could be concluded in a day if they gave evidence concurrently, the trial judge made

the direction.

Three points to take away about hot tubbing

From our experience in Swain, the take home points about hot tubbing are these.

• First, remember that hot tubbing is always a potential method by which your expert’s

evidence is going to be received. When selecting an expert, bear in mind that he or she might

have to give what is effectively evidence in chief to the judge. A good expert (i.e., one that is

intelligent, expert, sensible and good natured) will have no difficulty with this; but the more

peppery sort of expert could come badly unstuck.

• Second, if hot tubbing looks possible, be prepared to invest a lot of time into preparing the

agenda for the session, seeking to help get the judge to the point where he or she appreciates

the failings of the other side’s expert(s).

• Third, during the hot tubbing questioning itself, pay close attention to the way the evidence

is emerging and how the judge’s understanding appears to be forming. The rather limited

scope for cross-examination or re-examination of experts after judicial questioning on an

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agreed agenda – and the fact that you cannot check any points with your own experts – means

that your questions must be extremely well thought-through in order to be effective.

© Paul Mitchell QC and Nigel Burroughs

48

Hugh Jory QC and Richard Liddell | 24.07.2019

Introduction

As the law of unfair prejudice in the conduct of companies’ affairs has developed, sports clubs

(particularly football and rugby clubs) have proved to be fertile sources of disputes between

shareholders. In this article, we examine unfair prejudice petitions which have concerned the sports

sector to look at the effects of those decisions and at what we can learn not just about the sorts of

shareholder disputes which arise in sports clubs but also what we can learn from those decisions and

apply to shareholder disputes in other contexts.

Nuneaton Borough AFC: what remedial powers does the Court have in its locker?

It was shortly after s.459 Companies Act 1985 came into force (now replaced by s.994 Companies Act

20061) that football began to play its part in the development of law on the applicability of that section.

The shareholders in Nuneaton Borough Association Football Club Ltd had a spectacular fall out when

the chairman, who was also a shareholder, interpreted the conduct of another shareholder director

(who subsequently became the petitioner) in trying to acquire further shares as an attempt to gain

board control and thereby oust him2. The case came about in circumstances where there had been

failures to comply with rotation and re-election provisions in the Articles of Association, and as the

judge described it:

“This present case is of repeated failure – year over year over year – to hold annual general

meetings or to lay accounts before members, so that members were wholly deprived of any

opportunity to consider the affairs of the company, to vote upon the election or re-election of

directors, or in any other way to know what was going on. As it seems to me, that conduct –

not the absence of filing but the conduct in depriving members of their right to know and

consider the state of the company and its directorships, and to ask questions of the directors

– is conduct which, inevitably, must be prejudicial to the interests of members.”3

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 that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or (b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.” 2 Re a Company No. 00789 of 1987 (Nuneaton Borough A.F.C. Ltd (1989) 5 BCC 792 Ch D (Companies Court) 3 Page 800, E per Harman J.

Shareholder Disputes in Sport

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The judge held that the petitioning shareholder was entitled to a remedy and he approved the

submission made to him that “nothing could be more undesirable for this football club than to have its

board of directors in open dissention” (though as a matter of law he went on to hold on the facts and

law that there was no properly constituted board at all).

That was all back in 1987, a time when many sports clubs and those managing them did not have the

sort of legal resources at their disposal that some clubs do today, and it is to be hoped that no

chairman of such a club would now have it said of them what the judge said of the chairman in that

case:

“[The chairman] who I entirely accept has no business to be learned in company law, was so

unlearned in company law that he did not even realise that his holding of the majority of the

shares of the company would provide him with ordinary control in all circumstances…”.

The remedy, which the judge ordered under s.459 Companies Act 1985 (now s.996 Companies Act

20064), was the purchase of shares, though not the purchase of the minority shareholders shares as is

the usual case where buy-out orders are made, but the forced sale of the other shares in the company

to the minority shareholder who had presented the petition. In an important statement on the width

of discretion that a court has in formulating appropriate relief when unfair prejudice has been

established, the judge said:

“In my view, there is power here to make such orders as I consider will enable the company, for the

future, to be properly run, and for its affairs to be under the conduct of somebody in whom the

shareholders generally can have confidence that the company will be properly conducted” and ordered

that the chairman who had “demonstrated, regrettably, that he is unfit to exercise such control in law,

although not for any reasons of bad faith” to sell his shares to the petitioner.

4 (1) If the court is satisfied that a petition under this Part is well founded, it may make such order as it thinks fit for giving relief in respect of the matters complained of. (2) Without prejudice to the generality of subsection (1), the court’s order may—

(a)regulate the conduct of the company’s affairs in the 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; (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.

51

The important question which followed from the share purchase order made by the judge was how

to value the shares in a football club. The judge noted that in ordering the chairman to sell his shares

“if he was ordered to sell them at commercial value, [his shares] would fetch almost nothing but,

nonetheless, undoubtedly [the shares] have a real value to people who want them, far beyond their

commercial value”. Unlike the vast majority of private companies which come before the court to

determine the value of their shares, the judge said in this case (and bearing in mind this was 30 years

ago):

“…shares in a football club cannot be properly valued by the application of accountants’

techniques. Shares in football club companies have a value which has nothing to do with

commerce…they are not valued on dividend stream, and they are not valued on asset values.

They are only to be valued for reasons of the prestige, I think this is the proper word, in the

eyes of the local community which chairmanship or membership of a board of directors of a

well-known football club does, in fact, confer.”5

The judge also identified that he needed to ensure that his order was “fair” to the chairman, and that

the terms must enable him (and a company owned by him) to recover the very substantial sums of

money which they had advanced. When the matter came back to the court for determination of the

price to be paid for the shares6, the judge went further, stating that “it seems to me that it would be

a grave injustice in the ordinary sense of the word to force [the chairman] to give up his interest in the

company but allow the company to keep monies paid to it by [the chairman] because of that interest”.

When it came to fixing the price to be paid for the shares in the football club, the judge did not find

any assistance in the points made by the chairman about alleged transactions of which he could give

no direct evidence “at Newcastle FC, which I think I am allowed to know was at one time a leading

first division club though not at present, and an abortive alleged offer for shares in Manchester United

FC, a very famous name in football” any more than he did in the submissions that there was “a

possibility of a redevelopment of the company’s ground and the chances of a substantial value being

realised.” In an article in this series entitled “Share Valuation in Shareholder Disputes”, Hugh Jory

QC and Matthew Bradley consider the art of share valuation in more detail.

5 Page 802, E-F. 6 Re Nuneaton Borough Association Football Club Ltd (No.2) [1991] BCC 44

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Leeds United: what constitutes unfair prejudice and are there grounds for striking out unfair

prejudice petitions?

It was not long (at least in company law terms) before another football club company was the subject

of an unfair prejudice petition, Leeds United7. The brief background to that case was that three long-

standing supporters of the club had been directors since around 1980, they managed various aspects

of the club as a private company and two of them guaranteed its bank overdraft. As part of a

restructuring a new public company, Leeds United Holdings Plc was set up in 1995 to acquire the club,

and its shares were held by those individuals and companies controlled by each of them respectively.

The intention behind the public company was to improve its creditworthiness and to facilitate a

possible flotation to attract further investment. As part of the restructuring there had been talk of

including pre-emption rights, but nothing in that regard found its way into the documentation.

It was not long before one of the director/shareholders (Mr Gilman) complained that decisions about

negotiation of the manager’s contract and terms for the acquisition of new players were being

conducted without reference to him; and he also objected to the fact that one of the other directors

had stood down as chairman in favour of appointing the other to that role without Mr Gilman being

consulted. He also discovered that one of the other shareholders had been negotiating with Caspian

Plc (“Caspian”) to give that company an option to acquire his shares in Leeds United Holdings Plc,

which Mr Gilman considered to breach the understanding, albeit not enshrined in a written

shareholders’ agreement, that the shareholders would enjoy pre-emption rights in respect of the

other shareholders’ shares.

Mr Gilman’s company, which owned shares in Leeds United, presented a petition claiming unfair

prejudice in the management of the affairs of the company; and when the proceedings came before

the judge he referred to them as arising from “an unfortunate dispute between directors of the

company…which is causing considerable damage to the morale of the Club”.

The judge was quick to identify the motive for Mr Gilman’s petition, namely a potential acquisition by

Caspian, which the judge said, “it is clearly Mr Gilman’s object, by this petition, to prevent coming to

fruition.” There were two potential purchasers for the shares: Conrad Plc, which made an offer to

purchase all of the shares in the company at £1 each, and Caspian which made a more complex offer

on two alternative bases. Both offers were considered by the board along with a third offer. Whilst

Mr Gilman favoured the Conrad Plc offer, the other directors/shareholders preferred that from

Caspian and accordingly the majority of the board voted to recommend that Caspian’s offer be

7 Re Leeds United Holdings Plc [1997] BCC 131

53

accepted. Mr Gilman sought an injunction to stop the others from selling their shares to Caspian and

to stop the company from allotting any shares to Caspian. The other shareholders applied to strike

out his petition altogether and so defeat any grounds for an interim injunction.

As for the petitioner’s complaints about the buying of players and renegotiation of the manager’s

contract without consultation with Mr Gilman, the judge held that “those complaints relate to acts

carried out, not in the management of the company at all, but in relation to the management of the

Club”. Whether that sort of distinction would survive today seems rather doubtful. The terms on which

the company engages players and managers are very important considerations; and it is also now

established for example that a company’s affairs can include the management of its subsidiary

companies (see the Neath Rugby Club case dealt with below). Be that as it may, the real issue before

the judge concerned the assertion that the company was a quasi-partnership and whether there was

a “legitimate expectation” which could give rise to the creation of rights of pre-emption in relation to

the shares in the company (there having been no express agreement to such rights between the

shareholders in this case). In an article in this series entitled “Recent Developments in Quasi-

Partnerships” Thomas Ogden and John Williams look in more detail at that area of law.

The judge was concerned with pre-emption rights in the context of a public company and may in fact

have been overstating the chances of pre-emption rights arising outside a company’s constitution in

such situations, when he described them as “rare”. As he noted, if some legitimate expectation that

the shareholders would not sell their shares without the petitioner’s consent were to have existed,

then they would have given rise to disclosure obligations, including in the offer documents; and the

fact that they were not would of itself have, in his judgment, have justified dismissal of the petition.

However, his further reason for striking out the petition is of more general importance to this area of

the law:

“An expectation that a shareholder will not sell his shares without the consent of some other

or other shareholders does not relate in any way to the conduct of the company’s affairs and

therefore, cannot, in my judgment, fall to be protected by the court under s. [994 Companies

Act 2006].”8

8 Page 143, per Rattee J.

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This is a crucial consideration when considering any case for unfair prejudice, namely, the distinction

between:

• the conduct of the company’s affairs, which can give rise to unfair prejudice within s.994 CA

2006; and

• the agreements or understandings between the shareholders themselves in relation to their

individual shareholdings, which cannot give rise to unfair prejudice within s.994 CA 2006.

Put simply, who owns the shares in the company itself is not within the scope of management of its

affairs. Rather, those are the personal affairs of the shareholders concerned9.

As for the gist of Mr Gilman’s complaint, namely that the board had recommended Caspian’s offer

rather than Conrad Plc’s, the judge concluded that:

“It cannot be said that the board is conducting the company’s affairs in a manner unfairly

prejudicial to the petitioner by exercising judgment as to which of two offers for the company’s

shares should be recommended to shareholders”

This is an important distinction, which requires to be analysed when considering whether there has

been unfair prejudice, between:

• matters of commercial judgment, which are for the directors to exercise in good faith to

promote the interests of the company accordance with the duties of care and skill, but which

they can and will get wrong from time to time (for example, when markets move differently

to the way they anticipated); and

• the actions by the directors, which are tainted by or with some breach of duty to the company

on their part, such as conflicts of interest/abuse of fiduciary position.

Cases involving matters of commercial judgment falling within the first category are unlikely to give a

disgruntled shareholder a remedy for unfair prejudice as it is very difficult to say that what transpires

to be an error of judgment in good faith is ‘unfair’ to a shareholder. One of the risks shareholders take

in investing in a company relates to the ability of the management to get their judgments right – and

directors do not warrant to shareholders that they will always do so.

By contrast, cases falling within the latter category (where there has been a breach of the

understanding that the directors will conduct the affairs of the company lawfully in accordance with

their duties) are likely to be more straightforward for the petitioner and are likely to give a disgruntled

9 See also Re Coroin Ltd [2012] EWHC 2343 (Ch) per David Richards J

55

shareholder a remedy for unfair prejudice as can be seen, for example, in a recent unfair prejudice

petition concerning Blackpool FC (another football club) discussed in more detail below.

The final reason why the petition in the Leeds United case was struck out by the judge is also important

in the development of the law in this area, namely abuse of process. The judge was satisfied that Mr

Gilman was not in fact pursuing the petition to protect himself (as the petitioner) against any unfair

prejudice as contemplated by the relevant section of statute (then s.459 CA 1985), but to make the

Caspian bid impossible. The judge ordered that it was accordingly “an abuse of process of the court

and [the petition] should be struck out now so as to limit the most unfortunate damage that this has

already caused to the welfare of Leeds United Football Club, and therefore, the company.” Despite that

noble aim of the judge, and for reasons he would not have been able to foresee, history tells us now

that the fortunes of that great club were in for a turbulent time over the coming years.

Blackpool FC: disguised dividends and unfair prejudice

Staying with football clubs for now, it has been Blackpool FC which has recently found itself the subject

of an unfair prejudice petition10. In short, the relevant background to this unfortunate case was

disharmony connected with what the judge described as “this vast influx of cash”. This influx of cash

referred to payments of just under £123 million, including £42 million received during one season in

the Premier League (2010-2011) together with parachute payments in respect of the seasons 2011-

2012 to 2014-2015 (to cushion difficulties that clubs experience when relegated from the Premier

League).

The petitioning shareholder, VB Football Assets, which had acquired a 20% stake in the company under

its subscription agreement, complained of unfair prejudice in three particular respects:

• That substantial payments made out of Blackpool FC had been for improper purposes, namely

for the personal benefit of Mr Owen Oyston and/or his son Mr Karl Oyston (director and

chairman of Blackpool FC) who controlled a company owning just over 76% of the shares of

Blackpool FC following its subscription agreement (the judge referred to those interests as

“the Oyston Side”) and without the petitioner’s consent; and closely related to that, there had

been a failure to pay dividends; and

• That VB Football Assets was excluded from management of Blackpool FC because although

certain individuals connected with VB Football Assets were directors of Blackpool FC, they

were excluded from receiving material information about the company including information

10 VB Football Assets v Blackpool Football Club (Properties) Ltd [2017] EWHC 2767 (Ch)

56

needed for board meetings; and that decisions which ought to have been made at board

meetings were being made outside them; and

• Blackpool FC had adopted new articles of association unfairly prejudicial to them.

The significance of a finding of disguised or concealed dividends arises from the fact that absent a

lawful return of capital, payments to a shareholder other than properly arising from approved

remuneration for actual services as a director/employee will be unlawful unless they are properly

declared dividends in accordance with company law; and properly declared dividends entitle

shareholders of the same class of shares to the same dividend per share. The disguised or concealed

dividend is where there has been in effect a return of capital, but outside the proper process for

declaring dividends and probably to benefit one shareholder at the expense of another (who would

have been entitled to be treated equally had a lawful dividend been declared).

The Blackpool FC case illustrates how understandings arising outside documented agreements can

adversely affect the relationship between the shareholders and breaches of such understandings can

give rise to unfairly prejudicial conduct. In this case, whereas the petitioner’s holding was 20% of the

shares in the company, because of what the petitioner described as a ‘gentleman’s agreement’ that

the petitioner would have equal control over the company, the petitioner valued that shareholding

as if it constituted 48.145% (i.e. so that the Oyston Side and the petitioner each held a notional equal

share of the Oyston Side holding (76.29%) plus the petitioner’s holding (20%) i.e. half of 96.29%). There

is more detailed analysis of the particular approach to valuation of this football club an article in this

series by Hugh Jory QC and Matthew Bradley entitled “Where does the law stand now on discounts for

minority holdings in non quasi-partnership companies?”

The judge identified the sum of £2.5m, which he found to be a disguised dividend to Mr Owen Oyston

rather than loans because they were repayments to companies under his control and in which he was

beneficially interested, with no particular obligation to repay. As Mr Owen Oyston himself noted,

whether repayment occurred or not was a matter within his discretion. That was prejudicial because

“paying away significant monies to no benefit to Blackpool FC detrimentally affects the company’s

value. The £2.5 million could have been used to provide a return to Blackpool FC or it could have been

spent on football-related matters, like a new training pitch or new players”. The judge held that it was

unfairly prejudicial because it was “clear discrimination between the interests of [the Oyston’s

company, Segesta] and those of the other members of the club. That discrimination – which benefited

Segesta and disadvantaged the other members – was plainly unfair”.

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The judge found there to have been other disguised dividends too, in the sums of £4.2m and just under

£1m in respect of debts owed by Segesta not Blackpool FC, and in the sum of just over £8m in the

form of ‘uncommercial’ loans to Travelodge for the benefit of the Oyston Side, as well as a payment

of an “essentially gratuitous” £11m as to which the judge noted “the nature of the payment was

translated from director’s remuneration to Mr Owen Oyston for past services to indemnification of [Z]

in relation to past costs incurred by it on behalf of Blackpool FC”.

The Blackpool FC case raised another important theme, which recurs in unfair prejudice petitions,

namely the complaint that a company has not paid dividends. The judge reminded himself that “it is

trite that the declaration of dividends is a matter within the discretion of the directors of a company

and that if the directors, in their discretion, consider that no dividends should be paid, a court should

be slow to question that discretion and slow to substitute its decision for that of the directors.”. He

noted that the present case was not one where no dividends had been paid given the findings he had

made about payments being disguised dividends. He concluded “A failure to pay dividends can only

be regarded as unfair prejudice if there is some inconsistency in the way the company behaves as

regards different members. Thus, if a divided, or something which is in substance a dividend, even if

dressed up as something different – is paid to one member and not another that is an indicator of

unfair prejudice.” Accordingly, the judge held that there had been unfair prejudice in that case by

reason of the disguised dividend payments.

Blackpool FC: what happens if the petitioner does not have clean hands?

The Blackpool FC case also provides confirmation of the distinction between petitioners for just and

equitable winding up, where a petitioner must come to court with clean hands, and section 994

petitions where no such doctrine applies to the petitioner. However, as the judge pointed out by

reference to re London School of Electronics [1985] BCLC 273, if a s.994 petitioner comes to court

without clean hands, this may render conduct on the other side not unfair, even if prejudicial (in which

case there is no remedy for the petitioner at all) or if it does not go that far, may still affect the relief

that the court thinks fit.

The judge held that there was no such conduct of the petitioner in this case. However, it is a matter

of record that the judge was prevented from advancing his bespoke remedial ‘solution’, which would

have kept both the petitioner and the respondent at the club (following the same sort of solution

advanced in the Neath Rugby case dealt with below). The reason for this was because after the

conclusion of the trial the judge was informed that Mr Belokon11 had given notice of his resignation

11 A company known as BFFH was the sole shareholder of VB Football Assets. The former was 50% owned by Mr Belokon.

58

from the board following discussions with the Football League concerning his ability to continue as a

director of a football club playing in the English Football League following recent convictions (not on

the merits but based on non-attendance by Mr Belokon) for money laundering and fraud in

Kyrgyzstan.

Neath Rugby Ltd: how wide is the Court’s discretion when it comes to giving relief?

In his reasoning as to what relief he should grant having found the necessary unfair prejudice to confer

that jurisdiction on him (which evidently he formulated before finding out about Mr Belokon’s

resignation from the board), the judge in the Blackpool FC case made extensive reference to another

sports case which is an important feature on the landscape of unfair prejudice petitions, which this

time concerns the rugby club, Ospreys12.

Neath Rugby Ltd (“Neath”) was one of two equal shareholders in Neath-Swansea Ospreys Ltd

(“Ospreys”), owner of the Ospreys regional rugby team. Two individuals owned one share each in

Neath. The thrust of the petitioning shareholder’s (Mr Hawkes’) complaint was that his co-shareholder

in Neath, Mr Cuddy (who was also a director of Ospreys as the nominee of Neath) had not only failed

to represent the interests of Neath but had acted against them. Included amongst the complaints in

the petition was that Mr Cuddy had failed to cause more Osprey matches to be played at the Gnoll

sports ground; the withdrawal of Osprey players from Neath; and the fact that Ospreys had

commenced trademark proceedings against Neath alleging that Mr Hawkes had caused it to sell goods

bearing Ospreys’ trademarked logo without its consent. Whereas he was unsuccessful on those

grounds, Mr Hawkes also complained that Neath’s confidential information was used in furtherance

of Ospreys’ cause by Mr Cuddy, and the court upheld that complaint as conduct that was unfairly

prejudicial conduct of Neath’s affairs as was the breach of the agreement between them that Mr

Cuddy would consult Mr Hawkes.

The Court of Appeal in Neath subsequently provided helpful guidance to directors who are nominated

to the boards of companies by particular shareholders, in relation to the balancing of the interests

between their duties to the nominator and to the company to whose directorship they have been

nominated:

“the fact that a director of a company has been nominated to that office by a shareholder does

not, of itself, impose any duty on the director owed to his nominator. The director may owe

duties to his nominator if he is an employee or officer of the nominator, but such duties do not

12 Hawkes v Cuddy, in the matter of Neath Rugby Ltd [2007] EWHC 2999 (Ch), [2008] EWHC 210 (Ch) and in the Court of Appeal [2009] EWCA Civ 291

59

arise out of his nomination, but out of a separate agreement or office. Such duties cannot

however, detract from his duty to the company of which he is a director when he is acting as

such…”13.

Proceeding on that basis, namely that the director owed a duty to act in the best interests of Ospreys

and having found on the facts of the case that there was nothing to suggest that there was any

agreement that he had authority to act otherwise than as a director of that company (he did not for

example have authority to act as agent for Neath for the purposes of negotiations with the other

owner of the shares in Osprey), Stanley Burnton LJ said: “I do not see how it is possible to establish

that in making a decision for Osprey[s] Mr Cuddy was acting in a manner that was unfairly prejudicial

to Mr Hawkes if Mr Cuddy’s only legal duty was to act in the best interests of Osprey. On the other

hand, I understand it to be accepted by Mr Cuddy that a failure to consult Mr Hawkes in relation to a

matter to be decided by Osprey[s] affecting Neath would constitute conduct in relation to the affairs

of Neath that could be unfairly prejudicial to Mr Hawkes”.

The Court of Appeal also considered what constituted ‘the affairs of the company’ and like the judge

at first instance, rejected the argument that the affairs of Neath and of Ospreys were so intermingled

that all of the affairs of the latter were affairs of the former. It also approved the propositions that:

• ‘the affairs of the company’ are extremely wide and should be construed liberally;

• in determining the affairs of a parent company, the court looks at the business realities of a

situation and does not confine them to a narrow legalistic view;

• ‘affairs’ encompasses all matters which may come before the company’s board for

consideration (which may include matters which do not actually come before the board); and

• the conduct of ‘affairs’ of a parent company includes refraining from procuring a subsidiary to

do something or condoning by inaction an act of a subsidiary, particularly when the directors

of the parent and the subsidiary are the same.

On the facts of that case, the Court of Appeal supported the judge’s conclusion that Ospreys’

participation along with three other regional sides, in discussions with the Welsh Rugby Union could

not be described as conduct of the affairs of Neath. What was unfairly prejudicial because of the

agreement between them was the failure of Mr Cuddy to consult with Mr Hawkes.

When it came to devising a remedy for the unfair prejudice that he found to be made out, this case

illustrates the width of the court’s discretion under s.996 Companies Act 2006 to make whatever order

13 Paragraph 32, Stanley Burton LJ.

60

it sees fit. In fact, the case is authority for the proposition that the width of that discretion includes

making an order that the petitioner does not seek or want, particularly where the prayer to the

petition incudes “the all-but-universal” wording “that such other order may be made as the court

thinks fit”. At trial, Lewison J had found a solution in an offer made jointly to Mr Hawkes by Mr Cuddy

and the other shareholder in Ospreys, which amongst other things left both Mr Hawkes and Mr Cuddy

having continuing involvement, the former having effective control of Neath and the latter having a

position on the board of Ospreys. Stanley Burnton LJ commented on the judge’s remedy that:

“This was a not untypical case of businessmen falling out. As found by the judge, Mr Cuddy’s

conduct did not justify his exclusion from Osprey, and he could not continue as a director of

Osprey if he or his wife did not retain a share in Neath. A perfect solution to the problems

caused by the hostility between Mr Hawkes and Mr Cuddy could not be devised. In this area,

the perfect may well be the enemy of the good. The judge’s order represents a, and probably

the, least bad solution.”

Arbitration or Court room?

As the judge pointed out in the Nuneaton Borough FC case referred to above, divisions in the board

room are particularly unwelcome in the context of sports clubs, and well publicised ones including

with up-to-the-minute tweets from the courtroom of what has just been said over the course of the

proceedings makes it even more so. One potential solution to ensuring that dirty laundry is kept in

private is to opt for arbitration clauses in shareholder agreements, to ensure that the allegations,

proceedings and evidence are conducted in private.

Here too, the jurisprudence on whether arbitration clauses can prevent proceedings in court for unfair

prejudice arises from cases involving sports clubs. In Exeter City AFC Ltd v Football Conference

Ltd [2004] EWHC 831 (Ch), it was held that the shareholder’s right to petition the court for unfair

prejudice could not be diminished or removed for example by an arbitration clause requiring a petition

to be stayed. That is no longer good law. In Fulham Football Club (1987) Ltd v Richards [2012] Ch 333

that case was overruled and the Court of Appeal14 confirmed that there was no reason of public policy

why arbitration clauses should not bind claims for unfair prejudice.

14 [2011] EWCA Civ 855

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Conclusion

At almost all levels, sport is powerful drama. It engenders passionate reactions, both on and off the

pitch. Sport can also be frustrating, not just for the fans, but for those behind the scenes in the board

room and/or minority shareholders. Success in sport generates investment by both corporate

investors, high net worth individuals and fans alike and there is a lot of money to be made in certain

sports, particularly in football. All of this makes sport a ripe arena for shareholder disputes and it is

likely that we will see an increase in sporting battles being refereed and determined in court and

arbitration proceedings.

It is no coincidence, therefore, that some of the main jurisprudence on petitions for unfair prejudice

stems from or is cemented by cases involving shareholders in the sports sector. Anyone pursuing or

defending such petitions will need to pay careful regard to such jurisprudence, not least the fact that

when it comes to evaluating the likely remedy to be ordered by the Court. The Court has a wide

discretion and has shown itself not minded simply to rubber-stamp the typically proposed order (that

the successful petitioner’s shares be purchased by the respondent) without first considering whether

a bespoke ‘solution’ is more appropriate.

The context of the dispute when it comes to the Court’s consideration of fairness is also

paramount. As Lord Hoffmann noted in O’Neill v Phillips15:

“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.”

Finally, litigation is expensive and petitions for unfair prejudice can be a real drain on resources –

financial, staff and emotional – for all involved. Furthermore, such disputes in the sports sector can

lead to parties taking their eyes off the ball in so far as the continued success and reputation of the

company are concerned (both on and off the pitch). In those circumstances, many shareholder

disputes cry out for alternative dispute resolution such as mediation, which if successful, will save the

parties from the stresses, strains and costs of litigation. However, a successful mediation obviously

requires engagement from all relevant parties and recent reports suggest that this was not the case

15 [1999] UKHL 24

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in the recently publicised dispute between Swansea City FC’s Supporters Trust with those who sold

their shares during the Swans’ American takeover in 201616.

Parties in the sports sector might also find that compromising disputes and avoiding litigation will have

a positive impact both on the sports field and in the company’s ability to react when it needs to do so,

e.g. raising finance immediately prior to the transfer window.

© Hugh Jory QC and Richard Liddell

16 https://www.bbc.co.uk/sport/football/47223722

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David Halpern QC Call: 1978 Silk: 2006

David has a broad Chancery commercial practice. His work in relation to

company law includes litigation between shareholders in the form of s.

994 petitions and derivative claims, claims against directors, and litigation

relating to debentures, as well as insolvency law. He also specialises in

professional liability claims arising out of company and insolvency

disputes. David took Silk in 2006 and sits part-time as a deputy High Court

judge in the Chancery Division.

Hugh Jory QC Call: 1992 Silk: 2014

Hugh Jory QC specialises in commercial and commercial chancery

litigation and company and insolvency law. He is ranked in the legal

directories as a leading silk and has acted in shareholder disputes for over

20 years. Prior to that he worked as an investment analyst with an

investment bank in the City focussing on the valuation of shares. He has

been involved in shareholder disputes ranging from companies which are

listed to those which are private including those which are family run, and he has acted for and against

shareholders ranging from private equity funds to private individuals.

Paul Mitchell QC Call: 1999 Silk: 2016

Paul Mitchell QC specialises in commercial litigation arising from the

negligence of people holding themselves out as skilled (lawyers,

accountants, fund managers, taxation advisers, company directors, etc);

claims arising from earlier litigation (including in particular claims for

malicious prosecution of earlier claims or seeking damages for abuse of

process); claims involving jurisdictional issues; and in particular claims

where the examination of expert witnesses is central to a client’s prospects of success. He has been

highly ranked in the directories for many years in the field of professional liability claims, and regularly

acts in disputes between family members regarding the management, control and ownership of

private limited companies in various sectors.

About the authors

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Nigel Burroughs Call: 1991

Nigel Burroughs is an experienced commercial litigator, with particular

expertise in company and insolvency matters. He has conducted

contested share valuations before courts and expert arbitrators, often

dealing with the impact of breaches of fiduciary duty and misfeasance on

the valuation exercise. Nigel has been described in the directories as

‘great fun to work with, offers commercial and pragmatic advice’ and as

someone who ‘can hold his own against QCs’.

Michael Bowmer

Call: 1997

Michael Bowmer is a chancery barrister specialising in all aspects of

chancery commercial litigation including company law, personal and

corporate insolvency, contentious trusts, real estate disputes and in

related professional negligence claims against lawyers, professional

trustees, accountants, insolvency practitioners and other financial

professionals. Michael has a strong interest in and particular experience of

company law having undertaken pupillage at Erskine Chambers and spent several years at a chancery

set before joining 4 New Square in 2005. Michael regulary advises and acts in relation to disputes

concerning directors’ duties and issues such as the diversion of corporate opportunities and conflicts

of interest, disputes between shareholders and unfair prejudice petitions as well as internal corporate

procedure and decision-making and compliance with articles of association and shareholder

agreements.

Richard Liddell Call: 1999

Richard Liddell is a barrister at 4 New Square and his practice primarily

covers four areas: commercial disputes (including shareholder disputes

and international arbitration), sports law, professional liability claims and

construction and engineering litigation. The legal directories describe him

as “a superb advocate”, “very good on dispute strategy and tactics”, “very

well liked and has a very amicable manner” and “good at cutting through

the noise to get at the points that matter”.

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Helen Evans Call: 2001

Helen Evans is recognised in the directories as a leading junior in

professional negligence, professional discipline and insurance. In May 2019

she was named by Who’s Who Legal as one of the two most highly regarded

juniors in the professional negligence field. She has a particular interest in

cases involving directors, shareholders and valuation. She is the co-author

of the solicitors and barristers negligence chapters in Jackson & Powell on

Professional Liability.

Matthew Bradley Call: 2004

Matthew Bradley specialises in commercial and commercial chancery

litigation & arbitration. He is ranked by the legal directories as a leading

junior in the fields of commercial disputes and company law and regularly

acts and advises on unfair prejudice petitions and related company law

matters.

Thomas Ogden Call: 2008

Thomas Ogden specialises in commercial litigation and arbitration.

66

Anthony Jones Call: 2011

Anthony Jones practises across a broad range of commercial litigation, with

a particular focus on company disputes and investment claims. He was

recently junior counsel in the seven-week Re Edwardian unfair prejudice

petition.

John Williams Call: 2017

John Williams has a broad commercial practice, including professional

liability and arbitration work, and disputes involving elements of company

law and corporate insolvency.

For more information about 4 New Square and the work we do, please visit our website.

4 New Square’s barristers are regularly invited to speak at external events and provide in-house

training on recent legal developments to clients.

Please contact events@4newsquare.com for more information.