O'Donnell v Shanahan & Ors

The petition under Companies Act 1985 s 459 (now Companies Act 2006 s 994) alleging that the company's affairs were conducted in a manner unfairly prejudicial to the petitioner is dismissed. The court analysed the claims principally under the "no conflict" and "no profit" strands of directors' fiduciary duty and the statutory unfair prejudice jurisdiction.

Key factual findings were that the company was a quasi-partnership, that the Aria House opportunity arose in the context of company introductions but that acquisition as a property investment fell outside the company's normal business, and that the principal protagonists (petitioner and respondents) gave evidence of reconstituted recollection and required careful evaluation.

On the key pleaded heads the judge found: (i) the respondents were not in breach of the "no conflict" rule by acquiring an interest in Aria House because that opportunity was outside the scope of the company's business and there was no real sensible possibility of conflict; (ii) the circumstances of reliance on valuation, bankers' reactions and solicitors' work did not establish liability under the "no profit" rule given the scope of the company's business and the fact that the confidential information relied upon belonged to the third-party purchaser; (iii) the respondents' involvement with EHM and the Holleran group did not amount to unfairly prejudicial conduct or breaches of fiduciary duty because those businesses were outside the company's scope and, in any event, the petitioner had not earlier complained; and (iv) the GH Law arrangement, though benefitting the respondents more than the petitioner, was small in scale and the petitioner had acquiesced.

This was a first instance unfair prejudice petition under Companies Act 1985 s 459 (now Companies Act 2006 s 994) brought by Mary O'Donnell, a minority shareholder and director of Allied Business & Financial Consultants Ltd, against fellow directors and shareholders John J. Shanahan and James A. Leonard. The petitioner alleged that the respondents had conducted the company's affairs in an unfairly prejudicial manner by diverting business opportunities and benefits to themselves: principally (a) the Aria House property transaction; (b) personal involvement with Eugene Harrington Marketing Ltd (EHM); (c) services to and benefits from the Holleran group; and (d) the provision to the respondents of free legal services from GH Law in return for client referrals.

Procedural posture: Trial over multiple days in the Companies Court. The petitioner sought a buy-out valuation adjustment (relief under s 459) rather than immediate determination of valuation mechanics; liability for unfair prejudice was the primary contested issue at trial.

Issues framed:

• Whether the respondents' conduct was unfairly prejudicial to the petitioner as a member under s 459 (now s 994).
• Whether the respondents breached directors' fiduciary duties (the "no conflict" and "no profit" rules) by diverting the Aria House opportunity and by their dealings with EHM, the Holleran group and GH Law.
• Whether the petitioner had knowledge of and acquiesced in the respondents' conduct such as to bar relief.

Background and findings of fact: The company had operated as a quasi-partnership; profits were distributed rather than capitalised and the company was effectively insolvent by the time of trial. The judge made detailed factual findings: the Aria House opportunity had surfaced via introductions; the original prospective purchaser (Mr Walsh) withdrew; an alternative vehicle (Harlequin UK, later SLH) acquired Aria House with participation by the respondents and by Mr Holleran; certain aspects of the respondents' conduct involved poor disclosure and impropriety (for example, arrangements over fees and some false or forged documents) but the respondent directors did not conceal their involvement from the petitioner shortly after mid-May 1999 and the petitioner accepted cash payments totalling £9,000 in settlement of her share of a lost commission.

Reasoning on the law: The judge reviewed authorities on the two strands of fiduciary duty ("no conflict" and "no profit") and the relevance of the company's scope of business. He applied the "expanded line of business" test and held that where an opportunity or information is outside the scope of the company's business a director will not necessarily be accountable under the "no profit" rule. The judge accepted and relied on authorities distinguishing partnership cases (Aas v Benham) and trustee-type fiduciary cases (Boardman v Phipps), and on recent company law authorities (Wilkinson; Ultraframe) to conclude that the respondents' conduct did not establish unfair prejudice or breaches of fiduciary duty on the facts found. The judge also addressed acquiescence principles and the requirement for full and frank disclosure if a director is to be excused for dealing in matters that might conflict with company interests.

Subsidiary findings and context: The judge found deficiencies in disclosure and late/documentary problems by the respondents, treated the witnesses' evidence with caution because of reconstituted recollection and rancour, and found some improprieties (false documents, selective disclosure) but concluded that these did not establish unfair prejudice entitling the petitioner to relief. The judge noted that the company was insolvent and that potential third-party claims (for example by Mr Walsh or the vendors) would not produce prejudice to the petitioner as a shareholder in an insolvent company.

The petition is dismissed. The court found no unfairly prejudicial conduct by the respondents sufficient to entitle the petitioner to relief under Companies Act 1985 s 459 (now Companies Act 2006 s 994). Although some aspects of the respondents' conduct involved impropriety and deficient disclosure, the primary complained-of opportunities fell outside the company’s business and the legal requirements for liability under the "no conflict" and "no profit" rules were not met; several allegations also failed because the petitioner had knowledge and accepted compensation or otherwise acquiesced.