Re OS3 Distribution Ltd

The petitioner (formerly Quindell plc) brought a petition under section 994 of the Companies Act 2006 alleging unfair prejudice by reason of transactions and board conduct which together diluted its shareholding in OS3 Distribution Limited. The court found that the directors acted genuinely and in the best interests of the company in seeking flexibility to raise finance and in entering the September and subsequent transactions, which provided funding and assisted the company to survive and to repay the petitioner's loan note. The court did find a breach of duty under section 171 in that the directors failed to give effective notice of a proposed special resolution to the petitioner, but that breach caused no prejudicial consequence because the special resolution would have passed in any event and the dilution complained of was not caused by that failure of notice. On the valuation evidence the petitioner failed to show that its shareholding had any value as at 8 June 2015 and therefore failed to establish unfair prejudice. The petition was dismissed.

Background and parties:

• The petitioner, formerly Quindell plc (referred to in the judgment as Quindell), was a minority shareholder (originally 19%, later 33% under agreements) in OS3 Distribution Limited (the Company). Key respondents included Quob Park Estate Limited (QPE) and individual directors/founders of the Company.
• The dispute arose from: (a) a December 2014 settlement (the December Agreement) and a later June 2015 settlement (the June Agreement); (b) a special resolution passed in June 2015 disapplying pre-emption rights; and (c) issue of warrants and subsequent allotments in September–December 2015 that substantially diluted the petitioner's holding.

Nature of the claim and relief sought:

• The petitioner sued under section 994 CA 2006 seeking relief for unfairly prejudicial conduct, specifically repayment of its loan note and a buy-out order for its shares.

Issues framed by the court:

• whether the directors promulgated the Special Resolution in breach of their duties (sections 171 or 172 or equitable fiduciary duties);
• whether the September and subsequent arrangements (warrants, non-cash share issues and later cash issues) were entered into in breach of directors' duties;
• whether any conduct caused prejudice to the petitioner and, if so, whether the prejudice was unfair; and
• what remedy, if any, should be ordered.

Court's reasoning (concise):

• The court analysed the pleaded case and confined itself to matters properly put in the statements of case. The judge emphasised careful reliance on contemporaneous documentary evidence and treated oral recollection with caution.
• On the Special Resolution the court found the directors genuinely believed the company needed disapplication of pre-emption rights to obtain rapid funding and to enable settled arrangements with Quindell, and that their predominant purpose in seeking the resolution was to enable fundraising and to permit timing of the issue of Quindell's additional shares. However the directors did deliberately fail to give timely notice of the proposed resolution to Quindell; that conduct breached section 171 (misuse of power to influence shareholder decision-making) because it was intended to avoid Quindell becoming aware before votes were secured.
• As to the September and subsequent arrangements, the court found they did provide non-cash consideration (shares in third companies and warrants) and later cash, which improved the company's balance sheet, enabled further lending from QPE and other short-term funding, and remedied breaches under a loan note instrument. The directors honestly believed these steps were in the company's interests; the petitioner abandoned reliance on an improper purpose allegation in respect of those transactions and the court found no breach of duty in their entry.
• On causation and prejudice the court concluded that the petitioner did not suffer prejudice caused by the failure of notice because the special resolution would have passed regardless and the dilution which followed would have occurred even if statutory pre-emption offers had been made. The petitioner failed to show its shareholding had value at 8 June 2015; expert and documentary evidence supported the conclusion that the company was in precarious financial condition and depended on the challenged transactions to survive.
• Accordingly the petitioner did not establish unfair prejudice and no remedial order was appropriate.

Subsidiary findings:

• The judge gave detailed credibility findings about witnesses and preferred contemporaneous documents over reconstructed oral recollection in line with Gestmin guidance.
• The court declined to permit the petitioner to expand unpleaded complaints at trial, stressing the importance of adherence to pleaded issues in section 994 petitions.

The petition is dismissed. Although the court found a breach of section 171 in that the directors failed to give effective notice of the proposed special resolution to Quindell (an improper use of power to influence shareholder decision-making), that breach did not cause any prejudice because the resolution would have passed regardless. The September and subsequent arrangements were held to have been entered into bona fide to obtain funding and to preserve the company; they raised funding and assisted repayment of the petitioner's loan note. The petitioner failed to show its shares had value at the relevant valuation date and therefore failed to establish unfair prejudice under section 994. Accordingly no buy-out or other relief was ordered.