Re LCM Wealth Management Ltd

The petitioner brought a section 994 Companies Act 2006 petition complaining of his removal as a director and the operation of contractual provisions requiring transfer of his shares at nominal value if he were a "Bad Leaver". The court held that the dispute turned on construction and effect of bespoke shareholders' agreements, the Articles and the service agreement and, critically, on whether the petitioner was properly characterised as a "Bad Leaver".

Applying the established equitable approach to unfair prejudice (in the light of authorities such as O'Neill v Phillips), the judge concluded that the written contractual architecture was to be given full effect unless its enforcement would be unconscionable. On the facts the petitioner had engaged in serious undisclosed outside activities (notably his involvement with RM2 and an associated fund), had sought to keep those activities secret, had misled or omitted to disclose material matters to his co-directors and had acted in a way amounting to gross misconduct. The court therefore characterised him as a "Bad Leaver" and declined to modify the contractual consequences.

The court also rejected the petitioner’s case that a 2003 "Side Agreement" or a June 2009 letter authorised his conduct: the Side Agreement was a gentleman’s arrangement not a legally enforceable Relevant Agreement, and the June letter (even if signed by one director) did not validly authorise the conflicting activities of the petitioner nor bind the other shareholders. Accordingly the petition was dismissed.

This was a first-instance Companies Court (Chancery Division) hearing of a section 994 petition brought by Richard Anthony Moxon against his co-directors and shareholders of LCM Wealth Management Ltd. The petitioner complained of his removal as a director and of the operation (or threatened operation) of contractual provisions in the Articles and the Shareholders' Agreement which would force the transfer of his shares at par if he was a "Bad Leaver".

Background and parties: LCM was founded in 2003 by the petitioner and Mr Litchfield with investment from Mr Cook and Mr Kulesza. Relations among the founders were governed by a Shareholders' Agreement (with later variations), Articles of Association (original and revised) and the petitioner's Service Agreement. The petitioner alleged an overriding equitable "quasi-partnership" understanding entitling continued management participation and urged the court to temper the contractual consequences.

Nature of application: A petition under s.994 Companies Act 2006 alleging unfairly prejudicial conduct and seeking relief under s.996; the trial was limited to liability and principally whether the petitioner properly fell to be characterised as a "Bad Leaver" under the agreements.

Issues framed:

• Interpretation and enforceability of the Shareholders' Agreement, the Articles and the Service Agreement, including the inter-relation of differing definitions of "Bad Leaver" and "Early Leaver";
• Whether the 2003 Side Agreement was legally binding or a mere gentleman's agreement;
• Whether a June 2009 letter (the "June letter") purported to authorise the petitioner’s outside activities and if so whether it was validly executed and effective;
• Whether the petitioner’s involvement in RM Squared and the proposed RM2 fund gave rise to conflicts of interest or competitive activity and whether his omissions and concealment justified summary dismissal for gross misconduct;
• Whether equity or the s.994 jurisdiction required the court to override contractual consequences.

Court’s reasoning and conclusions: The judge applied the established test that equitable restraint may moderate contractual rights where enforcement would be unconscionable, but that the court will not lightly supplant carefully drafted corporate agreements. The Side Agreement was not an enforceable Relevant Agreement but a gentleman’s statement of intent. The June letter was ineffective: even if a director’s signature appeared on a document it did not evidence the unanimous, informed consent or the procedural requirements to vary the Shareholders' Agreement or to authorise potentially conflicting directorial interests; in any event the judge found that the other shareholders had not agreed to the authorisation it purported to record.

On the central facts the petitioner repeatedly failed to disclose material outside interests, sought to advance RM2 and a related fund while holding himself out as a full-time director and using confidential contacts, and continued contacts with clients after his suspension. The judge concluded that this conduct amounted to gross misconduct and justified summary dismissal. Given that finding, the contractual "Bad Leaver" provisions operated as drafted and there was no unfairly prejudicial conduct warranting relief. The petition was dismissed. The judge noted the harsh commercial consequences for the petitioner but emphasised that they derived from provisions the petitioner had agreed.

The petition under section 994 is dismissed. The court found that the petitioner was properly characterised as a "Bad Leaver" because his undisclosed outside interests, concealment, and post-suspension conduct amounted to gross misconduct. The contractual transfer provisions in the Articles and Shareholders' Agreement were therefore enforceable and there was no basis for equitable relief to alter their consequences.