Strahan v Wilcock

In a quasi-partnership company, exclusion of a minority shareholder from management will ordinarily be unfair unless accompanied by a reasonable offer to purchase the shareholder’s shares. Fair value will normally represent the shareholder’s proportionate interest in the company without a minority discount. A discounted valuation requires special circumstances.

A quasi-partnership may develop after incorporation. Its existence depends on the parties’ personal relationship, mutual confidence, participation in management, restrictions on transferring shares and analogous equitable considerations. Commercial arrangements concerning the acquisition of shares do not, without more, constitute special circumstances displacing the normal valuation rule.

The respondent was the managing director of a closely held engineering company controlled by the appellant. After receiving options to acquire shares, the respondent bought a 5% holding using bonuses earned through his employment. The parties’ arrangements were informal, the respondent managed the business, and the articles restricted transfers of shares.

Following the respondent’s dismissal, the appellant declined to purchase his holding at its full, non-discounted value. The respondent successfully petitioned under section 459 of the Companies Act 1985. HHJ Howarth ordered the appellant to purchase the shares without a minority discount.

The appellant challenged the valuation basis. The central questions were whether the parties’ relationship had developed into a quasi-partnership and whether their commercial option arrangements constituted special circumstances justifying a discounted valuation.

1. Appeal dismissed. The judge was entitled to find that the parties’ relationship had developed into a quasi-partnership and to order the purchase of the respondent’s shares at their full, non-discounted value.

2. A company may acquire the characteristics of a quasi-partnership after its formation. The appropriate inquiry is whether, had the company been incorporated when the alleged quasi-partnership relationship arose, it would have satisfied the guidance in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360. Relevant considerations include a personal relationship involving mutual confidence, an understanding that members will participate in management, and restrictions on transferring their interests.

3. The relevant factors supported the judge’s conclusion. The respondent acquired a significant minority holding as a reward and incentive; managed the company while the appellant became substantially inactive; agreed the options informally; participated in arrangements governing the parties’ respective returns from the business; and could be prevented by the articles from transferring his shares. The relationship was multi-layered and could not be reduced to an arm’s-length contract between vendor and purchaser.

4. Under section 459 of the Companies Act 1985, the court asks whether equitable considerations make reliance on strict legal rights unfair. A useful cross-check is whether the conduct conflicts with the parties’ express or inferred agreements or falls outside their reasonable contemplation. When a majority shareholder removes a minority participant from management, exclusion without a reasonable purchase offer will almost always be unfair. Fair value ordinarily means a proportionate, non-discounted value; a discount requires special circumstances.

5. The respondent’s departure was involuntary and was not attributable to misconduct. His shares had been bought with earned bonuses, and his dismissal prevented further participation in management and in any future increase in the company’s value. The parties’ reasonably imputed expectation was therefore that he would receive the true value of his shares at the valuation date.

6. The option arrangements helped establish the character of the relationship but did not constitute special circumstances justifying a discount. The statutory requirement that prejudice be suffered in the petitioner’s capacity as a member was satisfied by the appellant’s failure to purchase the shares on appropriate terms.

1. Court of Appeal (Civil Division): The appeal was unanimously dismissed. The order requiring purchase of the respondent’s shares at their full, non-discounted value was upheld: [2006] EWCA Civ 13.

2. High Court, Chancery Division: HHJ Howarth, sitting as an additional judge, held that the company was a quasi-partnership and that the appellant’s failure to offer a non-discounted purchase following the respondent’s dismissal constituted unfair prejudice. On 22 March 2005 he ordered the appellant to purchase all the respondent’s ordinary shares at full value. No citation is stated.