In re A Company (No 00709 of 1992) (O’Neill v Phillips)

Unfair prejudice under section 459 of the Companies Act 1985 is not a free-standing appeal to subjective fairness. A member will ordinarily need to show either a breach of the agreed basis on which the company’s affairs were to be conducted or circumstances in which established equitable principles restrain reliance on strict legal rights.

A legitimate expectation is the consequence of such an equitable restraint, not an independent source of rights. Breakdown of trust in a quasi-partnership company does not itself confer a right to withdraw at fair value. Exclusion from agreed participation may be unfair, particularly if no reasonable offer is made for the excluded member’s shares.

Mr O’Neill held 25 per cent of Pectel Ltd and had managed its business under arrangements for equal profit-sharing. Negotiations also contemplated increasing his shareholding, but the trial judge found that no unconditional profit-sharing promise or concluded share-transfer agreement had been made. When trading deteriorated, Mr Phillips resumed control and ended equal profit-sharing. Mr O’Neill remained a director and manager of the German business.

Judge Paul Baker Q.C. dismissed Mr O’Neill’s section 459 petition. The Court of Appeal allowed his appeal and ordered Mr Phillips to purchase his shares, holding that his legitimate expectations had been defeated and that he had effectively been forced out. The central issue before the House was whether those events constituted unfairly prejudicial conduct under section 459 of the Companies Act 1985.

1. Appeal allowed unanimously; petition dismissed. Lord Hoffmann delivered the leading speech. Lord Jauncey of Tullichettle, Lord Clyde, Lord Hutton and Lord Hobhouse of Woodborough agreed with it. The Court of Appeal had treated reasonable expectations as independently capable of creating equitable obligations. On the trial judge’s findings, however, Mr Phillips had neither promised additional shares nor undertaken to continue equal profit-sharing after Mr O’Neill ceased to manage the company.
2. Per Lord Hoffmann, fairness under section 459 of the Companies Act 1985 must be applied judicially through rational principles. The agreed constitutional and contractual arrangements ordinarily define the members’ rights. Established equitable principles may nevertheless restrain the exercise of strict legal powers where reliance on them would be contrary to good faith. The reasoning in In re Westbourne Galleries Ltd. [1973] A.C. 360 applied by analogy, although section 459 does not require conduct sufficient to justify winding up.
3. Per Lord Hoffmann, a legitimate expectation describes the correlative right produced by an equitable restraint. It is a consequence of that restraint and cannot generate one independently. A useful inquiry is whether the exercise of legal power conflicts with promises or understandings arising from the parties’ words or conduct. Such a promise need not always be contractually enforceable. Negotiations conducted on the express basis that no obligation would arise before execution of a formal document could not, however, create an earlier equitable obligation.
4. Per Lord Hoffmann, the relationship had acquired characteristics commonly associated with a quasi-partnership: mutual confidence, an understanding of participation in management and restrictions on share transfers. Exclusion from management without an opportunity to realise the member’s investment at a fair price could therefore have been unfair. Mr O’Neill was not excluded: he remained a director and salaried manager. Nor did the breakdown of trust itself confer a unilateral right to require purchase of his shares. The issue whether any prejudice would have been suffered in his capacity as a member did not arise because no legal or equitable entitlement had been established.
5. Guidance on purchase offers. Although unnecessary to the decision, Lord Hoffmann stated that a plainly reasonable offer may prevent exclusion from being unfair and justify striking out a petition. Ordinarily the offer should provide for a pro rata valuation without a minority discount, determination by a competent independent expert, equality of access to information and submissions, and an appropriate allocation of costs. A late offer made after substantial litigation will generally be inadequate if it does not address the petitioner’s costs.

1. House of Lords: In [1999] UKHL 24, unanimously allowed Mr Phillips’s appeal, set aside the Court of Appeal’s order and dismissed the section 459 petition.
2. Court of Appeal: Nourse, Potter and Mummery L.JJ. allowed Mr O’Neill’s appeal and ordered Mr Phillips to purchase his shares. The court held that legitimate expectations concerning profit-sharing and additional shares had been unfairly defeated and treated Mr O’Neill as having been forced out.
3. First instance: Judge Paul Baker Q.C. dismissed the petition because no relevant promise or concluded agreement had been made and because the alleged prejudice was not suffered in Mr O’Neill’s capacity as a member. He also dismissed the associated damages claim, subject to a consent order for an account of undrawn profits.