Grace v Biagioli & Ors

For a petition under Companies Act 1985 s 459, unfairness is assessed objectively against the company’s articles, shareholder arrangements and established equitable principles. A shareholder’s conduct may make otherwise prejudicial removal from office fair where the majority acts to protect the company from an actual or potential conflict of interest.

Once unfair prejudice is established, the court’s remedial discretion under s 461 is broad. It must address the practical position at the hearing and future risk, rather than merely reverse the immediate wrong. A share purchase order will commonly be appropriate for a small private company where deliberate diversion of a declared dividend and the parties’ relationship show that the minority shareholder’s future rights cannot safely be protected while remaining in the company.

Grace v Biagioli & Ors concerned a petition under s 459 of the Companies Act 1985 by a 25% shareholder in Telpro UK. The four shareholders had formed related businesses in several jurisdictions. The appellant was removed as a director after secretly pursuing the possible acquisition of businesses connected with a competitor. The other shareholders also withheld a dividend previously agreed for 2002 and instead paid the distributable sum to themselves as purported management fees.

His Honour Judge Weeks Q.C., sitting as a High Court judge, held that the dividend treatment was unfairly prejudicial but that the removal as director was justified. He ordered the company to pay the unpaid £20,000 dividend with interest and refused a buy-out. The appellant challenged both the conclusion on removal and the remedy. The central issue was whether a payment order adequately relieved the established unfair prejudice or whether the respondents should purchase his shares.

1. The appeal was allowed on remedy, but dismissed on the challenge to the appellant’s removal as director. Under the approach in O’Neill v Phillips [1999]1 WLR 1092, unfairness under s 459 must be assessed against the parties’ legal and equitable rights. The majority’s use of powers under the articles was not contrary to good faith where it protected the company from conduct detrimental to its interests.

   The appellant had secretly negotiated about acquiring a related business, thereby creating an actual or potential conflict with his duties to Telpro UK. His failure to disclose, and later to correct misleading denials of, those negotiations destroyed trust. His removal was therefore a proportionate and justified response, not unfair prejudice.

2. The deliberate non-payment of the declared 2002 dividend was plainly unfairly prejudicial. A shareholder is entitled to the proportionate dividend once a board has determined that distributable profits permit its payment. The appellant owed no debt to Telpro UK capable of set-off. The respondents instead paid themselves the whole £80,000 as fees to which they had no contractual entitlement, thereby misstating the accounts.

3. Under Companies Act 1985 s 461, relief is not confined to correcting the immediate wrong. Following Re Bird Precision Bellows [1986]Ch.658, the court must select a remedy that cures the prejudice for the future, considering the reality of the parties’ past, present and prospective relationship at the hearing.

4. The judge had approached the discretion too narrowly. The parties’ mutual grievances did not justify denying an otherwise appropriate buy-out after unfair prejudice had been found. Nor did the international nature of their wider venture, the appellant’s non-executive role, or his being locked into the company. The respondents’ conduct, including revised inter-company trading arrangements which could reduce future distributable profits, showed a real risk of further dispute and prejudice. A clean break was the sure and fair remedy.

The respondents were ordered to purchase the appellant’s shares at a price to be determined by the court. The case was remitted to a judge of the Chancery Division to determine that price. The court added, obiter, that a payment order for the dividend should in any event have been made against the respondents who received it, rather than against the company.

• Court of Appeal (Civil Division): in Grace v Biagioli & Ors [2005] EWCA Civ 1222, allowed the appeal on remedy, upheld the finding that removal as director was not unfairly prejudicial, and remitted the valuation of the appellant’s shares.
• High Court, Chancery Division, Companies Court, Bristol District Registry: His Honour Judge Weeks Q.C. found unfair prejudice in the withholding of the 2002 dividend, rejected the complaint about removal as director, and ordered payment of £20,000 with interest rather than a share purchase order.