Graham v Every

This appeal concerned a petition under section 994 of the Companies Act 2006 for relief from unfair prejudice by a former director and shareholder who alleged, among other things, a collateral "understanding" (partly recorded in Heads of Agreement), maladministration of the fitting-out contracts, exclusion from management and a "non-compliant" share purchase that denied him pre-emption rights.

The Court of Appeal held that the deputy judge was wrong to strike out whole parts of the petition: the pleaded "understanding" (including particular clauses about quarterly financial review, participation in major decisions and fitting-out at cost) was sufficiently pleaded to survive strike-out and could be proved by evidence beyond the written Heads of Agreement; and the allegation about the non-compliant share purchase should not have been struck out because, properly particularised, it could amount to conduct of the company’s affairs unfairly prejudicial to the petitioner under section 994(1).

The court also held that the buy-out offer made to the petitioner did not make it unreasonable for him to pursue the petition because the offer did not comply with the procedural and informational safeguards described in O'Neill v Phillips (notably lack of access to the valuer and no offer of costs). The court required the petitioner to provide fuller particulars and refused to disturb the deputy judge's costs decision.

Background and parties: The parties were present or former shareholders and directors in Below Zero London Ltd, an operator of an "ice bar" and restaurant. The petitioner, Mr Graham, was removed as a director in 2009 and presented a petition under section 994 alleging unfairly prejudicial conduct arising from, inter alia, an agreed understanding recorded partly in Heads of Agreement, alleged overpayment/poor management of fitting-out by associated companies, exclusion from management, alleged extortionate loan arrangements, and a sale of other shareholders' shares to Mr Every in breach of a pre-emption term.

Procedural posture: This is an appeal from an order of Mr Stuart Isaacs QC (deputy judge, Chancery Division) dated 18 January 2013 which had struck out parts of the petition. The petition had been presented 16 March 2012, amended 12 June 2012; orders for standard disclosure were made by registrars; points of defence and requests for further information were exchanged; and the respondents applied to strike out in October 2012. The respondents had not complied with some disclosure orders and their attempts to appeal registry orders were unsuccessful.

Relief sought: The petitioner sought relief for unfair prejudice under section 994 of the Companies Act 2006, effectively a buy-out of his shareholding and valuation on the basis that he ought to have been able to acquire additional shares.

Issues framed by the court:

• whether subparagraphs of the "understanding" allegation (including quarterly financial review, participation rights and fitting-out at cost) were properly pleaded and capable of supporting a s.994 petition;
• whether the "non-compliant share purchase" allegation (failure to offer pre-emption rights) could amount to unfairly prejudicial conduct under s.994 or was merely a personal breach of contract/remedy in damages;
• whether the buy-out offer made to the petitioner was a reasonable offer such that the petition should be struck out as an abuse of process; and
• whether the petition was so lacking in particularity as to justify strike-out.

Court's reasoning and conclusions: The court stressed that strike-out should be used only where an allegation inevitably fails. On the "understanding" points the court held that the agreement relied on was not confined to the written Heads of Agreement and could be proved by conduct or other evidence; therefore the relevant subparagraphs were sufficiently pleaded. On the non-compliant share purchase, the court accepted that a mere private sale in breach of a pre-emption clause will often fall outside the "act or omission of the company" limb, but held that where the pre-emption term forms part of the parties' agreed framework for how the company's affairs are to be run (in particular where director remuneration and distribution arrangements mean shareholding affects remuneration and influence) denial of pre-emption can, properly particularised, amount to unfairly prejudicial conduct under the first limb of s.994. The court found the buy-out offer deficient under the principles in O'Neill v Phillips because the petitioner lacked access to the valuation process and was not offered costs, so refusal to accept the offer was not unreasonable. Because the petition lacked many particulars the court allowed the appeal in part, reinstated the struck-out allegations, ordered the petitioner to provide fuller particulars within an agreed period and left the respondents free to apply further below; it refused permission to appeal the costs order.

Procedural consequence: The petition was to be amended to reflect the court's order, particulars provided, and the case managed below with a view to economical resolution.

Appeal allowed in part. The Court of Appeal set aside the deputy judge’s order insofar as it struck out subparagraphs of the "understanding" allegation (including clauses about quarterly review, participation in significant decisions and fitting-out at cost) and paragraphs 24 to 26 dealing with the non-compliant share purchase. The court held those allegations were not bound to fail at strike-out: the agreement could be proved by conduct or evidence beyond the written Heads of Agreement, and denial of pre-emption might, if particularised and linked to how the company’s affairs were conducted (including remuneration/distribution arrangements), amount to unfairly prejudicial conduct under section 994. The petitioner was ordered to provide fuller particulars; the cross-appeal and application to vary the costs order were dismissed.

Appeal to the Court of Appeal from an order of Mr Stuart Isaacs QC sitting as a deputy judge of the Chancery Division (Chancery Division, case no. 2012/2460). The petition had been presented 16 March 2012 and amended 12 June 2012; orders for standard disclosure were made by registrars (Mrs Registrar Derrett on 1 June 2012; Mr Registrar Nicholls confirmed the order on 1 November 2012). Attempts by the respondents to challenge a registrar's disclosure order in the High Court were refused (permission refused by Proudman J). The Court of Appeal delivered judgment on 27 February 2014 ([2014] EWCA Civ 191).