Oak Investment Partners XII, Ltd. Partnership v Boughtwood & Ors

Unfair prejudice is assessed by reference to the parties’ legal bargain and any equitable obligations arising from their relationship. In a quasi-partnership, those obligations depend on the agreed allocation of strategic and managerial authority.

A shareholder or senior manager may conduct a company’s affairs through practical management activity without acting through a corporate organ. Serious mismanagement, improper interference with agreed management roles, an unreasonable refusal to consider essential financing, or the destruction of mutual trust may therefore engage section 994 of the Companies Act 2006.

Where the respondent’s wrongdoing destroys the joint venture, the court may order the respondent to sell his shares to the petitioner. A buy-out offer does not cure prejudice unless it fairly addresses the parties’ bargain and the harm already caused.

Oak Investment Partners and Mr Boughtwood were the principal shareholders in QED Group Ltd. Their relationship was a quasi-partnership concerning the development of electric in-wheel motor technology through QED’s subsidiary, PML Flightlink Ltd. Oak supplied venture-capital funding, while Mr Boughtwood was the inventor and chief technical officer.

Oak alleged that Mr Boughtwood repeatedly exceeded his agreed management role, obstructed necessary financing and attempted a surprise takeover of the QED and PML boards on 24 June 2008. It sought an order under section 994 of the Companies Act 2006 requiring him to sell his shares. Mr Boughtwood cross-petitioned, alleging that Oak and PML’s senior managers had excluded him, mismanaged the business and conspired to obtain it through insolvency.

The central issues were whether either party had conducted QED’s affairs unfairly, what obligations arose from the quasi-partnership, and which shareholder should be required to withdraw.

1. Oak’s petition was well founded. Mr Boughtwood had conducted QED’s affairs in a manner unfairly prejudicial to Oak. His conduct included persistent interference with areas assigned to the chief executive officer and chief operating officer, refusal to respect the agreed expenditure policy, failure to give proper consideration to available financing, the attempted takeover on 24 June 2008, and a later attempt to secure a veto over expenditure through the company’s bank mandate.

2. Section 994 of the Companies Act 2006 concerns commercial substance rather than corporate form. Conduct by a significant shareholder acting as a director or senior manager may constitute conduct of the company’s affairs even though it is not effected through the board or another corporate organ. Conduct wholly removed from carrying on the company’s affairs remains outside the provision.

3. The parties’ quasi-partnership operated principally at the strategic investment level. It did not give Mr Boughtwood a general right to control PML’s day-to-day management or require Oak to disclose every internal communication concerning his performance. The agreed division of responsibilities confined him to the chief technical officer role and left ordinary management to the management team.

4. Mr Boughtwood was nevertheless obliged to consider serious proposals for the required further investment in good faith. He could not unreasonably withhold agreement after considering PML’s needs, the availability of other finance and the dilution risk he had contractually accepted. His actions on 24 June destroyed a serious prospect of investment and irretrievably destroyed the trust required by the quasi-partnership.

5. Oak should have disclosed the Kroll report concerning the chief executive and information about an approach from Chrysler. Those failures caused no actual prejudice and were minor compared with Mr Boughtwood’s conduct. The allegations that Oak and management conspired to force PML into insolvency or acquire its business at an undervalue were rejected.

6. Mr Boughtwood’s buy-out offers did not cure the prejudice. They failed to recognise the speculative basis of Oak’s investment, did not repair the damage already caused, and would have required the innocent party to leave the venture following the respondent’s destruction of mutual trust.

7. Under section 996 of the Companies Act 2006, Mr Boughtwood was ordered to sell his QED shares to Oak. The valuation and detailed terms were reserved for further argument. Oak’s alternative winding-up claim required no determination.

• High Court, 28 November 2008: Norris J made an administration order concerning PML and established a procedure governing any disposal of its business.
• High Court, 17 October 2008: Sales J ordered Mr Boughtwood to co-operate in restoring PML’s previous bank mandate.
• High Court, 23–24 July 2008: Lindsay J granted interim relief restoring the pre-24 June management position pending trial.