Boughtwood v Oak Investment Partners XII, Ltd Partnership

In a quasi-partnership company, the parties’ mutual rights and obligations depend on the particular arrangements by which their joint venture was established and operated. Constitutional provisions governing management remain central, even where equitable duties of good faith, trust, disclosure and co-operation arise. A shareholder’s status as a quasi-partner does not entitle him to override those arrangements or to interfere destructively in responsibilities assigned to other managers. Such conduct may constitute conduct of the company’s affairs and unfair prejudice under Companies Act 2006, section 994. The court’s jurisdiction under section 996 is discretionary and permits a balancing of cross-allegations. A valuation of shares should reflect constitutional rights attaching to them, including a liquidation preference. But the valuer should retain expertise to determine whether ordinary shares have any value; the court should not impose a mandatory nil valuation merely because the company’s overall value falls below the preferred shareholders’ priority entitlement.

Oak Investment Partners XII, Limited Partnership and Martin Boughtwood were quasi-partners in QED Group Limited, whose business was conducted through PML Flightlink Limited and related subsidiaries. Oak petitioned under section 994 of the Companies Act 2006, alleging unfairly prejudicial conduct by Mr Boughtwood. Mr Boughtwood cross-petitioned, alleging unfair prejudice by Oak.

Sales J found that Mr Boughtwood had interfered with management responsibilities assigned to others, failed properly to consider necessary further investment, and seized practical control of the group. He dismissed Mr Boughtwood’s cross-petition and ordered him to sell his shares to Oak: [2009] EWHC 176 (Ch). The appeal concerned both that order and valuation instructions made subsequently. The central issues were the parties’ mutual obligations in a quasi-partnership, the significance of the agreed corporate structure, and the proper valuation of Mr Boughtwood’s ordinary shares.

1. Appeal against the buy-out order dismissed. Lord Justice Rimer held that the House of Lords’ guidance in O’Neill and Another v Phillips and Others provided the necessary general framework for unfair-prejudice petitions, although the result in each quasi-partnership case must turn on its particular facts and agreed arrangements. The quasi-partnership did not displace the constitutional structure of QED and PML. It supported mutual duties of good faith, trust, disclosure and co-operation in the strategic operation of the group, but Mr Boughtwood remained bound by the agreed allocation of management responsibilities.
2. Mr Boughtwood’s persistent interference outside his CTO role, including second-guessing the CEO and trespassing on other managers’ responsibilities, was capable of being conduct of the company’s affairs for the purposes of section 994 of the Companies Act 2006. In the circumstances it was unfairly prejudicial. The availability in theory of disciplinary or corporate steps against him did not undermine that conclusion.
3. A quasi-partner who has agreed that further financing is required to carry out the joint venture may not frustrate a serious available investment proposal merely to protect his personal shareholding. Mr Boughtwood’s refusal to accept the SCDC investment promoted his personal interests over those of the group and probably caused PML’s subsequent collapse. His secret seizure of control on 24 June 2008 was underhanded, unconstitutional and damaging, and destroyed the remaining trust and confidence between the quasi-partners. That misconduct alone justified Oak’s buy-out order. The judge was nevertheless entitled to consider Oak’s breaches of disclosure obligations concerning the Kroll and Chrysler matters, which caused Mr Boughtwood no prejudice, and to balance all the conduct.
4. Valuation instructions. The appeal against paragraph 4 was dismissed. The liquidation preference in article 8 of QED’s Articles of Association was integral to the rights attaching to the preferred and ordinary shares and had to be reflected in a willing-seller/willing-buyer valuation. The court could, in an appropriate case, direct that such a preference be disregarded, but this was not such a case because Mr Boughtwood was the wrongdoer.
5. The appeal against paragraph 14 was allowed. Even if QED’s value were below £10,299,930, the valuer had to decide whether the ordinary shares had any value. The instruction mandating a nil valuation improperly circumscribed the valuer’s expertise and was varied accordingly.

1. Court of Appeal (Civil Division) — the appeal against Sales J’s order of 6 February 2009 was dismissed. Permission was granted to challenge paragraphs 4 and 14 of the valuation instructions. The challenge to paragraph 4 was dismissed, and the challenge to paragraph 14 was allowed.
2. High Court of Justice, Chancery Division, Companies Court — Sales J dismissed Mr Boughtwood’s cross-petition and ordered him to sell his QED shares to Oak following his judgment on the petitions: [2009] EWHC 176 (Ch). His later valuation instructions were challenged on appeal.