Oak Investment Partners XII, Limited Partnership v Boughtwood & Ors

This was a first instance unfair prejudice petition and cross-petition under section 994 of the Companies Act 2006 concerning the conduct of the affairs of QED and its principal trading subsidiary PML. The court held that the petition by Oak was well founded: Mr Boughtwood had acted in a manner unfairly prejudicial to Oak by repeatedly exceeding his agreed management role, obstructing and disrupting the management team, refusing reasonably to consider further financing, and by effecting a surprise board coup on 24 June 2008 which destroyed the relationship of trust and confidence in the quasi-partnership. The judge treated Oak's narrower non-disclosures (for example the Kroll report and initial contact about Chrysler) as relatively minor and not causative of Oak's loss. The primary remedy granted was an order under section 996 requiring Mr Boughtwood to sell his shares in QED to Oak.

The dispute arose after Oak invested in PML and a group restructuring created QED as holding company for PML and other subsidiaries. Oak and Mr Boughtwood were principal shareholders and had operated in a quasi-partnership with agreed management roles: Mr Boughtwood as CTO, and a CEO and COO independent of the founder to run day-to-day operations. Oak sought relief for unfair prejudice under s.994 alleging that Mr Boughtwood had sought improper managerial control, obstructed fundraising and, crucially, staged a takeover of QED's board on 24 June 2008 which prevented the acceptance of a timely financing proposal and disrupted the management team. Mr Boughtwood counter-claimed alleging conspiracy and that Oak and management had excluded him and sought to run the company into insolvency to acquire it cheaply.

The issues identified by the court were whether: (i) conduct by a shareholder/manager that exceeded agreed managerial authority could amount to conduct of the company's affairs for the purposes of s.994; (ii) on the facts Mr Boughtwood's conduct was unfairly prejudicial; (iii) Oak had itself acted in an unfair manner by withholding material information; and (iv) what relief was appropriate.

The judge analysed the legal framework (noting O'Neill v Phillips and related authorities) and accepted that managerial conduct in breach of agreed duties can, in principle, be conduct of the company's affairs under s.994. Applying the legal tests to the facts he found that: (a) the parties had agreed a demarcation of roles and that Oak was entitled to stand back from day-to-day management while retaining strategic protections (including anti-dilution); (b) Mr Boughtwood repeatedly interfered beyond his CTO role, undermining the management team; (c) he unreasonably resisted realistic fundraising options and lied about funding availability; (d) the 24 June coup destroyed the trust and deprived Oak of a real chance of timely finance (notably the Smith Family/SCDC option) and thereby prejudiced Oak; and (e) Oak's failures to disclose the Kroll report and initial Chrysler contact were not dishonest or causative of Oak's loss.

On remedy the judge concluded that, although share buyouts in favour of petitioners are atypical, this was an appropriate case to order under s.996 that Mr Boughtwood sell his QED shares to Oak. The court adjourned detailed valuation and implementation issues for further argument.

At first instance the court found Oak's petition under section 994 to be well founded and ordered relief under section 996. The judge concluded that Mr Boughtwood had acted in a manner unfairly prejudicial to Oak (by persistently exceeding his CTO role, obstructing the agreed management and fundraising strategy, effecting a surprise board coup on 24 June 2008 which destroyed trust and frustrated timely financing, and seeking inappropriate vetoes over expenditure). Oak’s partial non-disclosures were held to be minor and not causative. The court's chosen remedy was to require Mr Boughtwood to sell his shares in QED to Oak; the court reserved detailed determination of valuation and the order’s terms for further argument.