Re Coroin Limited (No 2)

The Court of Appeal dismissed Mr McKillen's appeal from David Richards J's order refusing relief under section 994(1) of the Companies Act 2006. The court held that the events and arrangements by which control over Mr Quinlan's Coroin shares came to be exercised by the Barclay interests did not amount to an act or omission of Coroin that was unfairly prejudicial to Mr McKillen.

Key legal findings were:

• Pre-emption rights in clause 6 (and the equivalent articles) require either a proprietary interest or the specific triggering events identified in clause 6; a mere practical change of control does not suffice.
• The February 2011 sale agreement was conditional on compliance with the pre-emption provisions and did not transfer a proprietary interest in the shares while the condition remained unperformed.
• The "good faith" clause (clause 8.5) did not operate to override or supplement clause 6 so as to require the court to enforce the "spirit" of the agreement beyond its express terms.
• On the two charges over Quinlan's shares: the 2004 charge did not become "enforceable" for clause 6.6 purposes without the bank's formal declaration under the incorporated conditions; the 2005 charge had become enforceable (by 9 November 2009) but the directors did not become aware within the one-month period in clause 6.6 and no implied term extended that period.

Background and procedural posture: Mr Patrick McKillen (36.2% shareholder) petitioned under section 994 CA 2006 alleging that Coroin Limited's affairs had been conducted in a manner unfairly prejudicial to his interests because pre-emption rights had been circumvented when Mr Quinlan's (35.4%) holding came under the practical control of the Barclay interests. David Richards J dismissed the petition ([2012] EWHC 2343 (Ch)). This is Mr McKillen's appeal to the Court of Appeal.

Nature of the claim / relief sought: A section 994 petition seeking relief to vindicate Mr McKillen's pre-emption rights, effectively to obtain an order enabling him to acquire the Quinlan holding or otherwise remedy the alleged circumvention of the shareholders' agreement.

Issues framed by the court:

• whether the Arrangements produced the practical effect of transferring an interest in Quinlan's shares so as to trigger clause 6 pre-emption rights;
• whether a proprietary (including contingent) interest passed under the February 2011 agreement;
• whether clause 8.5 (good faith / "spirit and intention") required a different outcome;
• whether the two charges over Quinlan's shares (2004 and 2005) had "become enforceable" so as to engage clause 6.6, and if so whether directors' failure to act within the one-month period was unfairly prejudicial; and whether any term should be implied to require notification or to extend the one-month period.

Court's reasoning (concise):

• Statutory threshold: section 994(1) requires an act or omission of the company which is unfairly prejudicial. "Unfairness" must be linked to breach of a legal right under the articles or the shareholders' agreement (O'Neill v Phillips applied).
• Practical-effect argument: the court adopted the position that clause 6.17 (and prior authority in Re Coroin (No 1)) confines "interest" to proprietary interests; informal arrangements producing practical control without transfer of legal or equitable proprietary rights do not trigger clause 6.
• Proprietary-interest argument: the February agreement was conditional on compliance with pre-emption provisions (a true condition precedent) so no proprietary interest passed until the condition was satisfied; the agreement therefore did not fall outside clause 6.17.
• Good-faith argument: clause 8.5 was analysed into limited duties (honesty / acting reasonably) and a clause (8.5.4) about giving effect to the "spirit and intention." The court held that the clause could not be used to impose obligations beyond identifiable contractual content; it did not alter the construction of clause 6 so as to produce unfair prejudice by Coroin.
• Charges: the 2004 charge was read with the bank's general conditions (including a tailpiece): on a strict construction the security did not "become enforceable" for clause 6.6 purposes until the bank made the formal declaration required by the tailpiece; by contrast the 2005 charge did become enforceable (at the latest by 9 November 2009) but the directors did not know within the one-month period in clause 6.6, there was no implied term extending that period, and the board had not evinced deliberate wrongful refusal to convene or act (and a single director could requisition a meeting under the articles).

Conclusion and wider remarks: The court dismissed the appeal. The judgment also comments on case management of complex unfair-prejudice proceedings and the need for focused written material in appeals (CPR Practice Direction 52C).

Appeal dismissed. The court held that (1) the arrangements by which practical control of Quinlan's shares came to the Barclay interests did not amount to a transfer of a proprietary interest and did not trigger the pre-emption provisions in clause 6; (2) the February 2011 sale agreement was conditional on compliance with the pre-emption mechanics and did not transfer an equitable proprietary interest while that condition remained unperformed; (3) the good faith clause did not extend clause 6 or require relief beyond its express terms; (4) the 2004 charge was not "enforceable" for clause 6.6 purposes absent the bank's formal declaration under its conditions, while the 2005 charge had become enforceable but the directors were unaware within the one-month window and no implied term extended that window; consequently there was no act or omission of Coroin that was unfairly prejudicial under section 994(1) CA 2006.

Appeal from David Richards J, Chancery Division (Companies Court): [2012] EWHC 2343 (Ch). This Court considered earlier related appellate authority in these proceedings, McKillen v Misland Investments Ltd [2012] EWCA Civ 179 (reported as Re Coroin Ltd [2012] 2 BCLC 611), as a binding precedent on the meaning of "interest" in the pre-emption clause.