Arbuthnott v Bonnyman & Ors

A claim under Companies Act 2006, section 994 requires conduct of the company’s affairs, prejudice to the petitioner’s interests as a member, and unfairness. Directors’ duties under section 172 are owed to the company, not directly to shareholders. In the context of a bid, directors generally need only provide sufficient information for shareholders to make an informed decision; they have no positive duty to negotiate price or obtain advice for shareholders. An alteration of articles is valid where made honestly for the benefit of the company as a whole and reasonable members could have reached the same conclusion. Existing compulsory-transfer rights and an agreed remuneration model may make a later drag-along transaction neither unfair nor prejudicial.

The petitioner held 8.91% of Charterhouse Capital Limited after retiring from its private-equity business. The active investment managers and other shareholders later established Watling Street Limited, which offered to acquire all shares for £15.15 million and required amendments to the company’s articles. All shareholders accepted except the petitioner, whose shares were then compulsorily acquired under the amended drag provisions.

The petitioner alleged an oral agreement for an independent valuation, failures to investigate misconduct and provide information, improper amendments to the shareholders’ agreement and articles, non-payment of dividends, breach of directors’ duties, and acquisition of his shares at an undervalue. The central issues were whether the conduct was unfairly prejudicial under section 994 and whether the alteration of the articles was invalid under the rule in Allen v Gold Reefs of West Africa.

1. Statutory jurisdiction. The court applied the three requirements under section 994 of the Companies Act 2006: conduct of the company’s affairs or an act or omission of the company, prejudice to the petitioner’s membership interests, and unfairness. The petitioner must also show that relief should be granted under section 996.
2. Directors’ duties and the offer. The duties in section 172 were owed to the company. In the circumstances of this offer, the directors had no positive duty to negotiate with the offeror, obtain valuation advice for shareholders, recommend the offer or seek the best possible price. The offer contained sufficient detail for sophisticated shareholders to make an informed decision. The independent directors had not breached their duties.
3. Articles and compulsory transfer. The original articles and clause 7.2 of the Shareholders’ Agreement already contemplated compulsory transfer following an approved sale. The amendments principally brought the articles into line with that bargain and corrected inconsistencies. They were not a wholly new expropriation power. Applying the Allen v Gold Reefs of West Africa test, the shareholders honestly considered alignment between ownership and active management necessary to preserve the company’s future fundraising ability. Reasonable shareholders could have reached that view.
4. Dividends and remuneration. Although the directors should consider whether profits can commercially be distributed, the petitioner had agreed to the remuneration arrangements as director, shareholder and LLP member. The amended contractual structure placed the principal income stream at LLP level and contained relevant waivers. The continuation of that model and non-payment of dividends did not amount to unfair prejudice.
5. Value and relief. The court rejected the petitioner’s valuation assumptions, including third-party ownership, altered remuneration, retention of carried interest by the company and a run-off model. The only realistic purchasers were the continuing investment managers. The offer price was within the range supported by the evidence and exceeded the value of the petitioner’s shares on a minority basis. The claim under section 994 and the challenge under Allen v Gold Reefs of West Africa were dismissed.