Prescott v Potamianos & Anor

The reasonableness of an offer to purchase a minority shareholding is a fact-sensitive part of the overall assessment of unfair prejudice. No single feature is decisive. Relevant matters include value, transparency, access to information, the offeror’s ability to perform, disputed matters affecting valuation, and the offer’s timing.

A fixed-price or non-binding offer is not automatically unreasonable, nor can an earlier offer invariably remedy later exclusion from management. The court may dismiss the petition, order purchase at the offered price, reflect the offer in costs, or give it no effect.

Exclusion following a fiduciary breach remains a question of fact and degree. A buy-out in a quasi-partnership will ordinarily use the shareholder’s full pro rata value without a minority discount.

Mr Prescott and Dr Potamianos held 60% and 40% respectively of Sprintroom Limited, the holding company of Sprint Electric Limited. Their relationship was found to constitute a quasi-partnership in which both were entitled to participate in management. After a dispute concerning software source code, Dr Potamianos was progressively excluded from management and removed as a director.

On a petition under sections 994–996 of the Companies Act 2006, the Deputy High Court Judge held that the exclusion was unfairly prejudicial, ordered a buy-out at full pro rata value and directed a balancing payment reflecting the parties’ agreed division of profits. He nevertheless postponed deciding whether earlier purchase offers defeated the petition. The decision was reported at [2018] EWHC 1924 (Ch).

Mr Prescott appealed against the findings and remedies. Dr Potamianos cross-appealed against the postponement of the offers issue and aspects of the balancing payment. The central questions concerned appellate review of the judge’s evaluation, the effect of fiduciary misconduct, minority discount, and the legal significance of earlier buy-out offers.

1. Disposition. Mr Prescott’s appeal was dismissed in its entirety. Dr Potamianos’s appeal was allowed to the extent that the earlier offers could not defeat the unfair-prejudice petition. Quantification and payment of the balancing payment remained for the second trial.

2. An appellate court reviewing an evaluative decision does not perform the balancing exercise afresh. It asks whether an identifiable flaw, such as a gap in logic, inconsistency or failure to consider a material factor, makes the decision wrong. Applying R (AR) v Chief Constable of Greater Manchester Police [2018] UKSC 47, no such flaw affected the judge’s evaluation.

3. There is no rule that every fiduciary breach by a minority shareholder makes exclusion from management fair. The issue is one of fact and degree. Dr Potamianos’s conduct justified excluding him from source-code matters, but not from management generally or removing him as a director. Partnership law could not simply be transferred to a quasi-partnership; the analogy must not be pressed too far.

4. The judge properly ordered purchase at full pro rata value. Under the guidance in O’Neill v Phillips [1999] 1 WLR 1092, a quasi-partnership buy-out ordinarily proceeds without a minority discount. A discount may be fair in special circumstances, but the historical price paid for these shares and Dr Potamianos’s misconduct supplied no error of principle.

5. The balancing payment was within the statutory remedial jurisdiction. Although payments through the parties’ service companies depended formally on services being supplied, their underlying purpose was to distribute profits in the ratio of the shareholdings. The judge could take account of the fact that Dr Potamianos ceased participating because he was unfairly excluded. The payment reflected joint ownership rather than remuneration for fiduciary services.

6. The reasonableness of a buy-out offer forms part of the overall assessment of unfair prejudice. It is not a logically antecedent or mechanically decisive issue. Relevant matters include the price or valuation method, transparency and access to records, disputed matters affecting value, the realistic prospect of performance, and the timing and context of the offer. Neither a fixed price nor the absence of an immediately binding contract is automatically fatal.

7. A court may respond to an offer in four ways: dismiss the petition; grant relief but order purchase at the offered price, with appropriate adjustments; take the offer into account on costs; or give it no effect. Here, the early offers preceded the irretrievable breakdown, funding was uncertain, later proposals assumed disputed matters against Dr Potamianos, and the final fixed offer was unexplained and closely preceded his removal. Expert evidence could not alter the conclusion that the offers did not make his exclusion fair.

1. Court of Appeal (Civil Division): In Prescott v Potamianos & Anor [2019] EWCA Civ 932, the court dismissed Mr Prescott’s appeal and allowed Dr Potamianos’s appeal on the offers issue. It left the period and amount of the balancing payment for determination at the second trial.
2. High Court, Business and Property Courts, Insolvency and Companies List: The Deputy High Court Judge held in [2018] EWHC 1924 (Ch) that Dr Potamianos had been unfairly excluded from management. He ordered a buy-out without minority discount and a balancing payment, but postponed deciding whether earlier offers defeated the petition.