Morris & Ors v Hateley, Re: Legal Costs Negotiators Ltd

A petition under sections 459 and 461 of the Companies Act 1985 must concern unfairly prejudicial conduct of the company’s affairs, or an act or omission of the company. It is not enough that a shareholder’s personal affairs or investment position causes dissatisfaction.

Relief is limited to curing the matters complained of. Where majority shareholders possess and exercise the constitutional powers needed to end the prejudicial conduct, and the conduct cannot realistically recur, the petition may be struck out. Quasi-partnership expectations may inform unfairness, but they do not ordinarily entitle majority shareholders to compel a minority shareholder to sell shares.

The petitioners held 75 per cent of the shares in Legal Costs Negotiators Ltd. Mr Hateley held the remaining 25 per cent. All four had initially been directors and employees, but Mr Hateley was dismissed and later resigned as a director.

The petitioners alleged that the company was a quasi-partnership and that Mr Hateley’s conduct had breached their legitimate expectations. They sought relief requiring him to transfer or sell his shares. The Deputy Judge struck out the petition, holding that the alleged prejudice had been brought to an end and that there was no realistic prospect of an order for sale.

The central issue was whether the majority shareholders had a sustainable claim under sections 459 and 461 of the Companies Act 1985.

1. Appeal dismissed. The petitioners were not entitled to use sections 459 and 461 of the Companies Act 1985 to compel Mr Hateley, a minority shareholder, to surrender his investment.
2. Section 459 requires unfair prejudice in the conduct of the company’s affairs, or an unfairly prejudicial act or omission of the company. Conduct by a member concerning his own affairs, including retaining his shares, does not satisfy that requirement. Legitimate expectations in a quasi-partnership may affect the use or non-use of corporate powers, but the pleaded expectations did not create a power to require a share transfer.
3. Under section 461, relief must address and cure the matters complained of. Past conduct may found a petition even after it has ceased, particularly where recurrence remains possible. However, where the conduct has been remedied in a way that prevents recurrence, and the claimed relief has no realistic prospect of being granted, the petition may be struck out as hopeless.
4. The alleged mismanagement was accepted as potentially prejudicial, but it was not unfair where the petitioners could end it through their own powers and did so by dismissing Mr Hateley and procuring his resignation as director. The continuing increase in the value of his shares was not conduct of the company’s affairs and was not unfair prejudice under section 459.
5. The Court of Appeal accepted the Deputy Judge’s view that the statutory remedy is essentially directed towards abuse of corporate powers prejudicing members who lack the power to prevent it. A majority shareholder will ordinarily have that power, although voting rights may not always correspond to the nominal shareholding.

Lord Justices Henry and Roch agreed with Lord Justice Peter Gibson. The order was that the appeal be dismissed, with costs payable by the appellants, excluding the application to adduce additional evidence.

• Court of Appeal (Civil Division): Appeal from the Chancery Division dismissed. The order striking out the petition was upheld.
• Chancery Division: Mr Peter Goldsmith QC, sitting as a Deputy Judge of the High Court, dismissed the petitioners’ application and allowed Mr Hateley’s application to strike out the petition on 3 June 1998.