Rock Nominees Ltd. v RCO (Holdings) Plc & Ors

Directors selling company assets to a controlling shareholder must obtain the best price reasonably obtainable and exercise their powers bona fide for the company’s proper purposes. A majority shareholder approval cannot validate a transaction that prejudices the minority through fraud, an undervalue or improper conduct. A transaction may be challenged under section 459 where directors use their powers to harm or exclude minority shareholders or expropriate value belonging to them. The court will assess value by the evidence available, including contemporary market evidence and expert valuation evidence. A petitioner bears the burden of proving both the relevant breach and resulting unfair prejudice.

Rock Nominees Ltd., holding 2.48% of the shares in RCO (Holdings) Plc as nominee for two overseas companies, petitioned under section 459 of the Companies Act 1985. RCO’s operating subsidiaries had been sold to ISS (UK) Ltd., a company within the majority shareholder’s group, after ISS failed to acquire sufficient shares to exercise the statutory squeeze-out provisions. RCO then entered members’ voluntary liquidation.

Rock alleged that the sale was at an undervalue because ISS alone could exploit substantial synergies from acquiring the business. It also alleged breaches of fiduciary duty arising from common directors acting for RCO and ISS. The central issues were whether the directors had acted improperly and whether the sale caused unfair prejudice through loss of value.

1. Petition dismissed. Rock failed to prove that the sale was at an undervalue or that it had suffered unfair prejudice.
2. Directors owed RCO a duty to obtain the best price reasonably obtainable for its assets. That duty was analogous to the duty owed by trustees. A transaction made bona fide for a proper purpose would ordinarily be respected, but an exercise of power intended to harm the minority, expropriate their value or wrongfully exclude them could support relief under section 459.
3. The common directors were in a position of serious conflict because, as RCO directors, they had to seek the best price, while as ISS directors and employees they had an interest in paying as little as possible. The transaction was therefore procedurally defective and involved a breach of fiduciary duty.
4. Majority approval did not cure that breach. The principle that shareholders may ratify defective acts does not authorise a fraud on the minority or prevent a minority challenge where company assets are transferred at a substantial undervalue.
5. The relevant loss was not established. The February report was a speculative assessment of possible synergies, not a valuation. Contemporary evidence, including the offer price and market conduct, supported £2.80 per share as a fair price incorporating a premium for the synergies. The respondent’s expert valuation also supported that conclusion. Rock’s expert had not been asked to value the assets and accepted that the alternative courses proposed would not have produced a better result.
6. The petitioner bore the burden of proof. The absence of Lord Ashcroft, without adequate explanation, justified adverse inferences concerning the purpose of the share acquisitions and the alleged bargaining value. Those inferences further undermined the petition.