Arbuthnott v Bonnyman

The Court of Appeal dismissed the appeal from Asplin J's order rejecting a petition under section 994 of the Companies Act 2006 for relief for unfairly prejudicial conduct. The principal issue was whether the compulsory acquisition of the appellant's shares pursuant to a sale to Watling Street Limited at £1,500 per share involved expropriation at a gross undervalue or otherwise constituted conduct unfairly prejudicial to the appellant. The court upheld the trial judge's findings that there was no oral agreement to procure a separate valuation, no evidence of bad faith by respondents, and that the directors did not breach their duties under sections 171 and 172 in the way they handled the offer. The court held that the amendments to the articles (introducing Article 39) were, in substance, a "tidying up" consistent with the parties' original bargain in the shareholders' agreement (clause 7.2) and could reasonably be regarded as for the benefit of the company; the compulsory acquisition mechanism was therefore lawful in the factual context. The judge's valuation findings and preference for the respondents' expert evidence were upheld, including that the realistic purchaser was the continuing executive team and that the offer price fell within a range a reasonable founder majority could accept. The court therefore found no unfair prejudice.

Background and parties: The appellant, a founder and minority shareholder (holding 900 A shares, c.8.9%) in Charterhouse Capital Limited, petitioned under s.994 Companies Act 2006 claiming unfair prejudice arising from the process and effect of a 2011–2012 transaction by which Watling Street Limited (WSL) acquired the company's shares and the company amended its articles to facilitate compulsory acquisition of dissenting shareholders' shares. The respondents included founder shareholders and the company. The petition followed the interposition of an LLP and a remuneration structure under which most of the group's fees flowed to the LLP.

Nature of application and relief sought: A s.994 petition seeking relief for unfairly prejudicial conduct, grounded on four complaints: (1) repudiation of an alleged oral agreement for an independent valuation and buy‑out; (2) the company's failure properly to investigate alleged misuse of confidential information and irregularities; (3) improper amendments to information rights under the shareholders' agreement in 2009; and (4) that the WSL offer, the amendments to the articles (Article 39) and the manner of implementation were designed to expropriate the appellant's shares at a gross undervalue.

Procedural posture: Petition dismissed by Asplin J (Companies Court, Chancery Division) on 8 May 2014; permission to appeal granted by the judge; appeal heard in the Court of Appeal, judgment delivered 20 May 2015 ([2015] EWCA Civ 536).

Issues framed:

• Whether an oral agreement existed for an independent valuation and purchase of the appellant's shares.
• Whether the company's handling of alleged misconduct and information rights was unfairly prejudicial.
• Whether the amendments to the articles were invalid or an improper device to expropriate the minority.
• Whether directors breached duties (notably under ss.171 and 172) in relation to the WSL offer.
• Whether the offer price represented a gross undervalue and, if so, whether that produced unfair prejudice.

Court’s reasoning and conclusions: The Appellate Court endorsed Asplin J's detailed factual findings after a 27 day trial. On the oral agreement, she found no such agreement existed. On alleged misconduct and information rights, the judge found the matters investigated sufficiently and not a basis for unfair prejudice. On directors' duties and takeover conduct, the court applied established principles (e.g. Dawson, Heron) to conclude that directors' duties in a takeover context are limited: directors must give members sufficient information to decide and avoid misleading conduct, but there is no positive duty to secure the best price for individual shareholders. The shareholders and independent directors were sophisticated and received advice; there was no evidence that further information would have changed the outcome. On the articles' amendment, the court applied authorities on limits to the majority’s power to amend articles (Allen, Sidebottom, Shuttleworth, Greenhalgh, Citco, Peters' American Delicacy and others) and held that the amendment was a bona fide, reasonable exercise in the company’s interests and a "tidying up" to align articles with the shareholders' agreement. The court accepted the trial judge's valuation assessment favouring the respondents’ expert (who placed a realistic market value in the range of the offer) and rejected the appellant’s higher valuation. The court also treated the remuneration model and the relevant contractual waivers (clause 11.5 of the shareholders' agreement) as precluding the appellant's attack on that model. The appeal was dismissed.

Wider context or implications: Not stated in the judgment.

Appeal dismissed. The Court of Appeal upheld the trial judge's findings that there was no unfairly prejudicial conduct under s.994: no oral agreement for a separate valuation; no bad faith or improper motive by respondents; the directors did not breach their duties in the takeover context; the amendments to the articles were a lawful "tidying up" consistent with the shareholders' agreement and could reasonably be regarded as for the company's benefit; and the valuation and transactional process did not produce unfair prejudice to the appellant.

Appeal from the High Court of Justice, Chancery Division, Companies Court (Asplin J), petitioner’s unfair prejudice claim dismissed by order dated 8 May 2014; permission to appeal granted by the trial judge; appeal to the Court of Appeal determined by judgment of 20 May 2015, neutral citation [2015] EWCA Civ 536.