Arbuthnott v Bonnyman & Ors

This was a petition under section 994 of the Companies Act 2006 alleging unfair prejudice by majority shareholders and the company in relation to the reorganisation and sale of Charterhouse Capital Limited and the exercise of amended drag / compulsory transfer provisions. The petitioner asserted (i) an oral agreement to obtain an independent valuation and negotiate a purchase of his shares, (ii) failures to investigate alleged misuse of confidential information, (iii) improper amendments restricting information rights, and (iv) that the Watling Street Limited (WSL) offer and amended articles were used to expropriate his 8.91% holding at an undervalue.

The court rejected the alleged oral agreement, found the investigations into misconduct were properly conducted, upheld the amendments to the shareholders' information rights as lawfully adopted, and held that the process and the articles amendment (and resulting compulsory transfer mechanism) fell within the contractual and commercial bargain embodied in the Shareholders' Agreement and existing articles. The judge preferred the DCF-based valuation approach that reflected the limited market for the business and the reality that the continuing management team were the only realistic purchasers; she concluded there was no unfair prejudice and dismissed the petition.

Background and parties: Mr Geoffrey Arbuthnott, an 8.91% shareholder and former operating executive of Charterhouse Capital Limited, petitioned under s.994 Companies Act 2006. The respondents comprised the chief executives, other senior investment executives, Watling Street Limited (a purchaser vehicle) and the Company. The business was a private equity management group in which most surplus management fees were distributed through an LLP structure to active investment managers.

Nature of the claim / relief sought: The petitioner sought relief for unfair prejudice including specific performance or a court valuation and purchase of his shares (or injunctive relief), claiming repudiation of an alleged Oral Agreement to obtain an independent valuation, failure to investigate alleged misconduct, unlawful restriction of information rights, and that the WSL Offer and amended Articles were used to expropriate his shares at a gross undervalue. He also sought adjustment for dividends allegedly foregone after his retirement.

Issues framed by the court:

• Whether the alleged Oral Agreement existed and was repudiated;
• Whether the Company improperly investigated or failed to investigate alleged misconduct;
• Whether amendments to the Shareholders' Agreement and Articles (and the information-rights deed) were improper or unfair;
• Whether the WSL Offer, the amendment of the Articles and the implementation process amounted to conduct of the company's affairs that was unfairly prejudicial under s.994;
• Appropriate valuation methodology and any relief if unfair prejudice were established, including whether dividends should have been paid and whether the petitioner suffered substantive unfairness.

Court’s reasoning (concise):

• Oral Agreement: the judge concluded, on the balance of probabilities, that no binding oral agreement was reached to obtain and use an independent valuation as the basis of a negotiated purchase and rejected the petitioner’s evidence about such an agreement.
• Investigations and information rights: the court accepted evidence that the Company properly investigated the petitioner’s complaints and that amendments to information rights (Deed of Amendment) were adopted legitimately by the required majorities to protect commercially sensitive and confidential information.
• WSL Offer and alteration of Articles: the restructuring and the WSL Offer were undertaken to resolve a genuine misalignment between share ownership and the active investment team ahead of fundraising. The articles had pre-existing drag / compulsory transfer mechanisms and the Shareholders’ Agreement already envisaged exit/drag mechanics (Clause 7.2). The amendments were, on the evidence, a "tidying up" to align the Articles with existing contractual arrangements and the commercial context of the LLP structure; reasonable shareholders could have concluded the changes were bona fide for the benefit of the company/group.
• Dividends and remuneration model: the court held the distribution/remuneration regime was part of the commercial bargain embodied in the Shareholders’ Agreement and the LLP deed (including relevant waivers). On that factual and contractual matrix the petitioner could not successfully complain that dividend non-payment after his retirement gave rise to unfair prejudice.
• Valuation and relief: expert evidence was considered. The judge preferred an approach reflecting the limited market for the business and the reality that continuing executives were the only likely purchasers, and concluded the WSL price was not outside a reasonable range for minority shares. No unfair prejudice was made out; petition dismissed.

The petition is dismissed. Mrs Justice Asplin found no binding Oral Agreement, accepted that the Company properly investigated the petitioner’s concerns and lawfully modified information rights, and held that the WSL Offer and related amendments fell within the contractual and commercial framework (including the Shareholders’ Agreement and LLP arrangements) and were not unfairly prejudicial under section 994; therefore no relief was granted.