Arbuthnott v Bonnyman & Ors

A power to amend a company’s articles is validly exercised where shareholders act in good faith in the company’s interests and a reasonable person could regard the amendment as beneficial. The challenger bears the burden of showing otherwise. An amendment is not invalid merely because it adversely affects a minority or benefits other shareholders.

Where the company has no interest as an entity, the amendment remains valid unless it oppresses the minority, is otherwise unjust, or falls outside the power’s proper scope. A contractual power enabling a shareholder majority to compel a sale may carry an implied obligation that the majority approve only terms which they honestly consider fair and reasonable. The precise content of that obligation depends on the parties’ commercial arrangements.

The appellant petitioned under section 994 of the Companies Act 2006, alleging that Charterhouse Capital Ltd’s affairs had been conducted in a manner unfairly prejudicial to him. The dispute principally concerned amendments to the company’s articles which enabled a purchaser associated with other shareholders to acquire his shares compulsorily for £1,500 per share.

Asplin J dismissed the petition after a 27-day trial. She found that the amendments largely aligned the articles with the founders’ existing contractual bargain, addressed a genuine need to align ownership with the active investment executives, and were not made in bad faith or for an improper motive.

The central appellate questions were whether the original contractual arrangements already permitted the compulsory sale, whether the amendments were valid and unfairly prejudicial, whether the sale price was improper, and whether the company’s remuneration and distribution model caused unfair prejudice.

1. Appeal dismissed unanimously. The shareholders’ agreement and the original articles permitted the majority shareholders, acting through a purchasing vehicle, to acquire the minority’s shares where the prescribed majority of independent, non-purchasing shareholders approved the transaction. The contractual protections did not depend upon the buyer being an independent third party.

2. A power to amend articles is constrained by its purpose and by the presumed limits upon a majority’s power to bind a minority. It is validly exercised where shareholders act in good faith in the company’s interests. The shareholders decide whether an amendment benefits the company, subject to the court’s power to intervene where no reasonable person could regard it as beneficial. An amendment is not invalid merely because it is intended to affect a minority adversely while benefiting others. Where the company has no interest as an entity, invalidity depends upon oppression, injustice, an improper appropriation, or another use outside the power’s scope. The challenger bears the burden of establishing a vitiating ground.

3. The amendments were valid. They clarified and aligned the articles with the shareholders’ agreement, added protection requiring approval by a majority of non-purchasing shareholders, and facilitated registration following a compulsory acquisition. The trial judge was entitled to find that the voters acted honestly to resolve a serious ownership-alignment issue and secure the business’s future. The applicable question was whether a reasonable person could regard the amendments as serving the company’s interests, not whether every reasonable person would agree.

4. Clause 7.2 of the shareholders’ agreement impliedly required the Founder Majority to approve an exit only on terms which they honestly considered fair and reasonable. It did not require them to secure the objectively best price or a proportionate share of the supposed true value of the controlling interest. That more exacting standard was inconsistent with the commercial arrangement among sophisticated founders. The implied obligation was satisfied.

5. The remuneration model was contemplated by the governing agreements and had consistently been implemented with the appellant’s knowledge. Objections to it were also precluded by the contractual waiver. Its continuation, and the resulting non-distribution of profits to the appellant, was neither illegitimate nor unfairly prejudicial.

• Court of Appeal (Civil Division): By [2015] EWCA Civ 536, unanimously dismissed the appeal and upheld the dismissal of the section 994 petition.
• High Court, Chancery Division, Companies Court: Asplin J dismissed the unfair-prejudice petition by order dated 8 May 2014. No citation for that judgment is stated.