O'Neill and Another v. Phillips and Others

The House of Lords considered the scope of the remedy under Part XVII (sections 459–461) of the Companies Act 1985 for conduct which is "unfairly prejudicial" to the interests of company members. The court explained that the concept of unfairness must be applied by reference to established equitable principles: unfairness may arise from breach of agreed terms on which members associated, or from using legal powers contrary to good faith, but it will not be stretched to create obligations where no promise or agreement existed. The court rejected an expansive use of the label "legitimate expectation" as an independent source of equitable restraint and held that a minority shareholder cannot claim a buy-out simply because trust and confidence has broken down absent wrongful exclusion or an equitable basis for relief. The court also held that a reasonable offer to purchase shares at a fair value can, if properly framed and timely, defeat a petition under section 459.

This appeal arose from a petition under section 459 of the Companies Act 1985 by Mr O'Neill, a minority shareholder and director, who alleged that the conduct of the majority shareholder, Mr Phillips, was unfairly prejudicial. The petitioner sought relief under Part XVII, mainly a purchase of his shares, and issued a separate writ claiming damages for anticipatory breach of an alleged oral agreement.

The facts: Mr O'Neill started as an employee, was given shares and made a director and effectively managing director. Over time he worked to build the business, guaranteed banking facilities and allowed retained profits to be capitalised as shares. Negotiations took place for an increase to a 50 per cent. shareholding and for equal profit sharing but no formal agreement was concluded. During a downturn Mr Phillips resumed control, reduced Mr O'Neill's profit-share and repudiated the alleged promise to allot further shares; a dispute followed and Mr O'Neill presented a petition under section 459.

The issues framed by the court were: (i) whether Mr Phillips's conduct was "unfairly prejudicial" within the meaning of section 459; (ii) whether the prejudice, if any, was suffered in Mr O'Neill's capacity as a member; (iii) the proper role of the concept of "legitimate expectation" in company equity; and (iv) whether an offer to buy the minority shares could answer a petition under section 459.

The House of Lords held that because the trial judge found there was no concluded promise to allot further shares and no unconditional promise to share profits on the footing asserted, equity did not require restraining the majority from withdrawing from negotiations or redrawing managerial arrangements. The court emphasised that equitable restraints arise where parties have agreed, expressly or by the nature of their association, to a different regime or where conscience requires it; "legitimate expectation" is a descriptive label not an independent source of relief. The Lords also explained that a properly framed and timely offer to purchase shares at a fair (typically pro rata) value is a material answer to a petition and that the adequacy of an offer may affect costs. Accordingly the appeal was allowed and the petition dismissed.

Appeal allowed. The House of Lords held that there was no unfairly prejudicial conduct under section 459 because the judge's findings established that no binding promise had been made to allot further shares or to maintain equal profit distribution; equitable restraint cannot be founded on a mere "legitimate expectation" where there was no agreement. The petition was therefore dismissed. The court also clarified that a reasonable, timely offer to buy the minority shares may be an effective answer to a petition under section 459.

Trial: petition heard by Judge Paul Baker Q.C., who dismissed the petition. Court of Appeal (Nourse, Potter and Mummery L.JJ) allowed the appeal and ordered purchase of the petitioner's shares. Final appeal to the House of Lords ([1999] UKHL 24; [1999] 1 WLR 1092) allowed the respondent's appeal and dismissed the petition.