Graham v Every & Ors

A shareholder’s breach of a share pre-emption agreement does not, by itself, constitute an act or omission of the company or conduct of its affairs for the purposes of section 994 of the Companies Act 2006. The wider factual context may nevertheless bring the transaction within section 994(1)(a). In a quasi-partnership, an improperly denied opportunity to acquire shares may form part of unfairly prejudicial conduct where it affects the member’s remuneration, influence or participation in management.

A petition should not be struck out merely because material allegations require further particulars where the nature of the alleged wrongdoing is intelligible and the claim is capable of succeeding once properly particularised. Nor will an offer to purchase the petitioner’s shares justify striking out the petition unless it provides a fair valuation procedure, equality of access and participation, and appropriate treatment of costs.

The appellant petitioned under section 994 of the Companies Act 2006, alleging that the affairs of a company operating an ice bar and restaurant had been conducted in a manner unfairly prejudicial to him. He relied on an alleged common understanding governing the joint venture, exclusion from management, financial mismanagement and the purchase of other shareholders’ shares without compliance with agreed pre-emption rights.

A deputy judge of the Chancery Division partly allowed the respondents’ strike-out application. He struck out parts of the alleged common understanding and the non-compliant share-purchase allegation, but declined to strike out the entire petition. The petitioner appealed those rulings. The respondents cross-appealed, contending that their earlier buy-out offer, the alleged absence of communicated acceptance of the Heads of Agreement and deficiencies in particularisation required the entire petition to be struck out. They also sought permission to appeal the costs order.

The central questions were whether the challenged allegations were incapable of falling within section 994 and whether the remaining pleading deficiencies or the buy-out offer justified terminating the petition.

1. The appeal was allowed and the cross-appeal dismissed. The challenged parts of the common-understanding allegation and paragraphs 24–26 concerning the non-compliant share purchase should not have been struck out. The petitioner was required to provide the promised particulars. Permission to appeal the deputy judge’s costs order was refused.

2. The court could not determine on a strike-out application that the Heads of Agreement required acceptance through notification of execution. Acceptance might have occurred by conduct, including the parties’ operation of the joint venture for several years. The pleaded common understanding was not confined to the written document, and disputes concerning the petitioner’s evidence required factual findings at trial.

3. A shareholder’s purchase of shares, or a bare breach of a personal pre-emption agreement, is not by itself an act or omission of the company or conduct of its affairs under section 994(1) of the Companies Act 2006. A personal transaction does not acquire that character merely because registration of the transfer requires a ministerial act by the company.

4. The transaction could nevertheless form part of the conduct of the company’s affairs when viewed in its full context. The company was arguably a quasi-partnership in which directors were to receive dividends rather than salaries. The size of each director’s shareholding therefore affected remuneration, influence and the ability to block special resolutions. Denial of the petitioner’s pre-emption right, together with his alleged exclusion from management, was capable of forming part of a course of unfairly prejudicial conduct. Arden, McCombe and Vos LJJ agreed that the allegation should proceed, subject to proper particularisation.

5. The respondents’ offer did not satisfy the safeguards identified in O’Neill v Phillips [1999] 2 BCLC 1. The petitioner did not receive the valuation report when the offer was made, had no opportunity to submit information to the valuer, lacked equal access to relevant material, and was not offered his costs. The valuation also failed to address his financial-mismanagement allegations. Refusal of the offer was therefore reasonable.

6. Although the petition and further information were materially deficient, the respondents understood the nature of the alleged wrongdoing. The appropriate course was to require further particulars and permit a renewed strike-out application if they were not supplied. The expression “instigation or connivance” did not allege fraud, which the petitioner had expressly disclaimed.

1. Court of Appeal (Civil Division): The appeal was allowed and the cross-appeal dismissed in [2014] EWCA Civ 191. The struck-out portions of the common-understanding and non-compliant share-purchase allegations were restored, subject to further particularisation. Permission to appeal the costs order was refused.

2. Chancery Division: Mr Stuart Isaacs QC, sitting as a deputy judge, partly allowed the respondents’ strike-out application on 18 January 2013. He struck out parts of the common-understanding allegation and the non-compliant share-purchase allegation, but refused to strike out the entire petition. No citation is stated.