re Phoenix Contracts (Leicester) Ltd

The petitioner succeeded in a petition under section 994 of the Companies Act 2006. The court found that the company had become a quasi-partnership between the two remaining director-shareholders and that the exclusion of the petitioner from management and the contrived disciplinary/redundancy processes constituted conduct unfairly prejudicial to his interests as a member. The court held that article 8.11 of the articles, which created a fixed-price mechanism on cessation of employment or directorship, must be construed so as not to permit a shareholder to engineer an expropriation by unfairly forcing the other out. The Tribunal's factual findings on liability in relation to the petitioner’s protected disclosure were binding and supported the primary factual picture. Relief was granted in principle by ordering that the respondent buy the petitioner’s shares at a fair value to be fixed with the valuation date set at 28 November 2007.

This was a first-instance trial of a petition under section 994 Companies Act 2006 by Mr Martin Shepherd, seeking an order that his shares in Phoenix Contracts (Leicester) Limited be bought by Mr Michael Williamson at a fair value. The company was placed in administration during the proceedings.

The principal factual background was that the company was originally owned equally by four founders; after departures the business was run by Mr Williamson and Mr Shepherd as the two remaining director-shareholders. Disputes arose after an anonymous voicemail left by Mr Shepherd in November 2007 alleging collusive tendering (a protected disclosure). Mr Williamson suspended Mr Shepherd from employment, pursued a disciplinary process and then a contrived redundancy process that the court and an Employment Tribunal later found to be unfair and aimed at excluding Mr Shepherd from management. The Employment Tribunal found that Mr Shepherd had made a protected disclosure and awarded him damages and other remedies.

The court was asked to decide several issues including:

• Ownership of an extra share transferred on a predecessor's departure;
• Whether the parties' relationship amounted to a quasi-partnership;
• Construction of article 8.11 (deemed sale notice on cessation of employment or directorship);
• Whether the respondent's conduct was unfairly prejudicial to the petitioner as a member; and
• The appropriate date for valuation of the shares if a buy-out order were made.

The judge held that the extra odd share was beneficially owned jointly by the two remaining shareholders (subject to a small credit), that the company had become a quasi-partnership entitling each shareholder to participate as a working director, and that the Tribunal's findings on the protected disclosure and the contrived disciplinary/redundancy processes were binding on the respondent. Article 8.11 was construed literally but subject to the equitable limitation that it must not be used to effect an expropriation by unfairly forcing a working director out. Applying the law on unfair prejudice, the judge found that the petitioner had been unfairly prejudiced by exclusion from management and that the offers made by the respondent were not adequate under the O'Neill principles.

The court exercised its discretion under section 996 to order that the respondent purchase the petitioner's shares at a fair value, fixing the valuation date as 28 November 2007, the date of the petitioner's exclusion, as the fair date in all the circumstances.

The petition under section 994 Companies Act 2006 is allowed. The court found that the company had become a quasi-partnership and that the exclusion of the petitioner from management and the contrived disciplinary/redundancy processes amounted to conduct unfairly prejudicial to his interests as a member. Article 8.11 provides for a fixed price on cessation but cannot be used to effect an unfair expropriation by forcing a member out. The Employment Tribunal's factual findings were binding on the respondent. The court ordered that the respondent purchase the petitioner's shares at a fair value to be fixed with the valuation date set at 28 November 2007.