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

Under the unfair-prejudice jurisdiction in section 459(1) of the Companies Act 1985, a member must show unfair prejudice, not merely a breach of duty. A sale of company assets to a majority shareholder is not at an undervalue where the evidence establishes that the price was the best reasonably obtainable. Purchaser-specific synergies do not automatically create a ransom value, particularly where no alternative purchaser exists. An internal synergy report is not necessarily a valuation. A fiduciary breach should not be found in the abstract where no harm or remedy results. Lawful commercial tactics and pursuit of profit should not be condemned in extreme language.

Rock, a minority shareholder in RCO Holdings Ltd, petitioned under section 459 of the Companies Act 1985. It alleged that the company had sold its operating subsidiaries to ISS UK at an undervalue and that directors who served both the company and ISS UK had breached their fiduciary duties. Rock sought an order requiring the purchase of its shareholding.

The High Court, before Peter Smith J, found a hopeless conflict and breach of fiduciary duty but held that the sale price was not an undervalue and that Rock had suffered no unfair prejudice. The petition was dismissed. Rock appealed on valuation, while the respondents cross-appealed against the finding of breach. The central issues were whether the price was the best reasonably obtainable and whether the directors’ conduct justified a finding of breach despite the absence of loss or prejudice.

The Court of Appeal, with Lord Justice Jonathan Parker giving the leading judgment and Sir Swinton Thomas and Lord Justice Potter agreeing, dismissed Rock’s appeal and allowed the cross-appeal in relation to the finding of breach of fiduciary duty.

1. Rock’s case depended on establishing an undervalue. If the sale was not at an undervalue, the absence of unfair prejudice meant that no relief was available under section 459(1) of the Companies Act 1985.
2. The alleged ransom value was misconceived. ISS would not have paid more than 280p per share. It also had sufficient voting control to place the company into members’ voluntary liquidation, leaving the assets to be realised on the open market. Since no other purchaser was realistically interested, neither the company nor a liquidator had effective bargaining power to demand more.
3. The company’s knowledge of ISS’s February report did not improve its negotiating position. The report assessed prospective and speculative synergies and recommended a bid range; it was not a valuation of the assets. The judge was entitled to accept the conventional expert valuation evidence and to rely on the contemporary evidence corroborating a price of 280p per share.
4. The directors were plainly conflicted and would have been well advised to obtain an independent valuation. However, the sale caused no harm, loss or prejudice, and no remedy or personal accountability was required. It was therefore inappropriate to find a breach of fiduciary duty in the abstract. A clumsy sale process alone was insufficient.
5. The judge’s extreme language about Lord Ashcroft’s strategy was unnecessary and inappropriate because the strategy was lawful and commercial gain was legitimate. It did not affect the correct valuation conclusion. The court also observed that using the section 459 jurisdiction as a tactical weapon might be an abuse of process, but expressly declined to decide that issue. The lower court’s reliance on Re Ring Tower (no. 2) [1989] BCLC 427 was therefore not adopted as a separate basis for decision.

• Court of Appeal (Civil Division): In [2004] EWCA Civ 118, Rock’s appeal was dismissed. The respondents’ cross-appeal was allowed on the finding of breach of fiduciary duty.
• High Court (Chancery Division): Peter Smith J dismissed Rock’s petition on 29 April 2003. He found a breach of fiduciary duty but held that the sale was not at an undervalue and that Rock had suffered no unfair prejudice.