Shepherd v Williamson & Anor

In a quasi-partnership company, exclusion of a shareholder from management may be unfairly prejudicial even where the shareholder continues to receive salary and remains formally registered as a member. The court must examine the parties’ underlying agreement and legitimate expectations, not merely the company’s articles and formal constitution. A compulsory transfer provision cannot be engineered by unfairly forcing a shareholder out of employment. Where unfair conduct has caused the company’s value to decline, the court may select an earlier valuation date if fairness requires it. A fair buy-out offer must be unequivocal and provide the shareholder with a genuinely fair value, assessed with appropriate equality of arms.

Martin Shepherd petitioned under section 994 of the Companies Act 2006 concerning Phoenix Contracts (Leicester) Limited. He and Michael Williamson were the company’s two shareholders and directors. Following a dispute concerning alleged collusive tendering and a protected disclosure, Williamson suspended Shepherd, excluded him from management, pursued disciplinary and redundancy processes, and contemplated acquiring his shares under article 8.11 at a fixed price.

The Employment Tribunal had found that Shepherd made a protected disclosure and that the disciplinary and redundancy processes were contrived. The central issues were whether Shepherd’s interests had been unfairly prejudiced as a member, whether the company was a quasi-partnership, whether article 8.11 could be invoked, whether Williamson’s offers were sufficient, and what valuation date would produce a fair result.

1. Preliminary issues. The extra share acquired on the division of Mr Walker’s holding was beneficially owned by Shepherd and Williamson jointly. It could not be used as a side wind to give Williamson control. The parties had an understanding that they would run the company together as working directors. The company became a quasi-partnership when they became its sole shareholders and directors. The relevant features identified in Re Westbourne Galleries—mutual confidence, participation in management, and restrictions on transfer—were present.
2. Article 8.11. Properly construed, article 8.11 applied when a shareholder ceased to be an employee or ceased to be a director. But it did not permit a shareholder to engineer an expropriation at a bargain price by unfairly forcing the other shareholder out. In the circumstances, a shareholder could not retire from employment while retaining the position of director and shareholder if the other shareholder was willing to acquire the shares; he had to remain a working director or leave the company altogether.
3. Issue estoppel and facts. Williamson was bound by the Employment Tribunal’s material factual findings because the company’s defence had been conducted by him as director-shareholder. In any event, Proudman J reached the same conclusions independently. Shepherd had acted to protect the company from further collusive practices and was not motivated by bad faith or a negotiating tactic.
4. Section 994. The statutory requirements were unfairness and prejudice to interests as a member. In a quasi-partnership, exclusion from legitimate participation in management is classic prejudice. A director’s breach of duty does not automatically establish unfair prejudice, but conduct inconsistent with the parties’ underlying agreement may do so. There is no concept of no-fault divorce: a breakdown in relations alone is insufficient, although fault amounting to unfair prejudice justifies relief.
5. Unfair prejudice and relief. Williamson’s suspension, exclusion, contrived disciplinary and redundancy procedures, withholding of information, and attempted control of the company’s affairs excluded Shepherd from the participation to which he was entitled. The offers to purchase his shares were not unequivocal fair-value offers of the kind contemplated in O’Neill v Phillips. The petition was therefore well founded and Williamson was ordered in principle to buy Shepherd’s shares.
6. Valuation date. The court has a wide discretion to choose a fair valuation date. The usual starting point is the date of the order, but an earlier date may be appropriate where the company’s business or economic identity has changed, where the majority’s conduct has caused or may have caused the decline, or where fairness requires the petitioner not to bear that risk. The fair date here was 28 November 2007, when Shepherd was excluded.