Re Bateson's Hotels (1958) Limited

This appeal concerned a strike-out application against parts of a petition under section 994 of the Companies Act 2006 alleging unfairly prejudicial conduct. The court held that a member who acquires shares after the events complained of cannot normally challenge transactions which were validly authorised or unanimously ratified by the registered shareholders at the time, applying the Duomatic principle and the principles in O’Neill v Phillips and Lloyd v Casey. Absent a pleaded and evidenced pre-existing agreement or legitimate expectation that would override the legal effect of unanimous shareholder consent, the petitioner had no real prospect of establishing unfair prejudice. The judge therefore dismissed the appeal against the district judge’s order striking out those parts of the petition.

Background and parties:

• The petitioner, Mr William Brian Bateson, held 32.8% of the shares and alleged unfair prejudice under section 994 arising from transactions in 2001 and 2008.
• The principal respondent was Mr David Brunton Bateson (holding 67.2%); the company was a passive respondent.

Procedural posture:

• The district judge (Obodai) heard an application to strike out parts of the petition and on 13 February 2013 struck out paragraphs relating to the 2001 and 2008 transactions and consequential relief on the basis they disclosed no reasonable grounds. The petitioner appealed to the High Court; permission to appeal was sought and the appeal was heard on 12 June 2013.

Nature of the claim/application:

• The petitioner sought relief under section 994 of the Companies Act 2006 on grounds that certain historic buybacks, transfers and borrowing arrangements were unfairly prejudicial to his interests as a member.

Issues framed by the court:

Whether a member who only became registered after the challenged transactions can complain of unfair prejudice in respect of transactions that were unanimously authorised or ratified by the registered shareholders at the time;

Whether the petitioner relied on a pre-existing agreement or legitimate expectation (equitable duties) which would render unanimous ratification ineffective; and

Whether the district judge erred in law or in the exercise of her discretion in striking out parts of the petition.

Court’s reasoning and disposition:

• The judge reviewed the statutory test under section 994 and leading authority (O’Neill v Phillips and Lloyd v Casey). He accepted that complaints may be brought about past conduct, but emphasised that a petitioner must show either a breach of the rules on which membership was agreed or that the rules were used contrary to good faith (legitimate expectation).
• On the facts, the impugned 2001 and 2008 transactions had been formally recorded and unanimously authorised or ratified by the shareholders and advisers at the time, including the trustees who were registered members holding the petitioner’s beneficial interest. The Duomatic principle prevents the court from looking behind unanimous shareholder consent except in special circumstances (for example, fraud, illegality or an equitable agreement inconsistent with the consent).
• The petitioner had not pleaded or adduced evidential support for any specific pre-existing agreement or legitimate expectation that would counteract the unanimous ratification, nor did he show loss to the company or other special circumstances such as illegality. The district judge therefore correctly concluded there was no real prospect of success on those parts of the petition and properly struck them out. The High Court granted permission to appeal but dismissed the appeal.

Appeal dismissed. The court held that parts of the unfair prejudice petition were correctly struck out because the impugned transactions had been validly authorised or unanimously ratified by the registered shareholders at the time and the petitioner had not pleaded or evidenced any pre-existing agreement or legitimate expectation that would defeat the effect of unanimous shareholder consent under the Duomatic principle; accordingly the petitioner had no real prospect of establishing unfair prejudice in respect of those matters.

The district judge (Obodai) heard the respondent’s strike‑out application and handed down a reserved judgment on 13 February 2013, striking out specified parts of the petition. The petitioner filed an appellant’s notice on 6 March 2013. The paper application for permission to appeal was listed by His Honour Judge Pelling QC on 28 March 2013 and the appeal was heard before His Honour Judge Hodge QC on 12 June 2013, who granted permission but dismissed the appeal. Neutral citation: [2013] EWHC 2530 (Ch).