Prescott v Potamianos (Re Sprintroom)

This Court of Appeal considered (i) a claim by Sprint Electric Limited (SEL) to ownership of source code written by Dr Potamianos and (ii) an unfair prejudice petition under sections 994–996 of the Companies Act 2006 brought by Dr Potamianos as a 40% shareholder of Sprintroom Limited (holding company of SEL). The judge below found SEL owned the source code (that part is not appealed), held that the companies were a quasi-partnership and that exclusion of Dr Potamianos from management was unfairly prejudicial, ordered a buy-out of his 40% shareholding at full pro rata value (no minority discount) and directed a "Balancing Payment" from SEL to Dr Potamianos’ service company to reflect disproportional payments to the majority shareholder’s service company.

The Court of Appeal upheld the judge’s key evaluative findings: the existence of a quasi-partnership, that the exclusion from management was not justified notwithstanding limited breaches of fiduciary duty by Dr Potamianos in relation to the source code, and that the normal remedy is buy-out at pro rata value. The court rejected the majority shareholder’s appeals on those points. The Court of Appeal allowed in part the appeal brought by Dr Potamianos concerning case management: it held the judge should not have deferred consideration of the reasonableness of the buy-out offers (and the question whether they defeated the petition) to a second trial; the offers did not, on the material before the court, defeat the petition.

This appeal arises from two related sets of proceedings concerning Sprintroom Limited and its trading subsidiary SEL: (1) a substantive claim by SEL that source code developed by Dr Aristides Potamianos belonged to SEL (the "Source Code Claim"); and (2) an unfair prejudice petition by Dr Potamianos under sections 994–996 Companies Act 2006 alleging he had been unfairly excluded from management and prejudiced as a minority shareholder.

The High Court (Spearman QC, Deputy Judge) held that SEL owned the source code and ordered delivery up (that part is not appealed). On the unfair prejudice petition the judge found the group to be a quasi-partnership, that the affairs of the holding company included those of SEL, that exclusion of the 40% shareholder was unfairly prejudicial even though the petitioner had acted evasively at times in relation to the source code, and therefore ordered that the petitioner be bought out at full pro rata value without a minority discount. The judge also ordered a "Balancing Payment" calculation to compensate the petitioner’s service company for disproportionate invoicing to the majority shareholder’s service company since exclusion.

The Court of Appeal reviewed the judge’s evaluative findings and application of principle. It summarised the issues as: (i) whether the judge was right to treat the company relationship as a quasi-partnership and to regard exclusion as unfairly prejudicial despite findings of breach of fiduciary duty by the petitioner; (ii) whether the buy-out should be at full pro rata value or discounted; (iii) whether the judge was entitled to direct the Balancing Payment; and (iv) whether the various offers by the majority shareholder to buy out the minority should defeat the petition.

The Court of Appeal held:

• On the quasi-partnership and exclusion: the judge’s evaluative conclusions were within the permissible ambit of judgment. Although Dr Potamianos had acted evasively regarding the source code and breached fiduciary duties in respect of that conduct, those breaches were not of such gravity to justify his complete exclusion from management or to oust equitable relief. The judge could properly weigh fault on both sides and make a buy-out order.
• On valuation: the court endorsed the judge’s exercise of discretion to order buy-out at full pro rata value as the normal outcome in quasi-partnership unfair prejudice cases, absent exceptional circumstances.
• On the Balancing Payment: the court upheld the principle of the payment as compensatory for the effective exclusion, and that the judge was entitled to order it in principle; the detailed quantification was properly left to further consideration given interlinked issues (including SEL’s claim against BDL and costs).
• On the offers: the Court of Appeal held that the judge was wrong to defer determination of whether the offers to purchase the minority shares defeated the petition to a second trial; on the material before the court none of the offers made by the majority defeated the petition and the offers did not render the later exclusion fair. The Offers issue should not have been postponed to the valuation/quantum stage.

The court therefore dismissed the majority shareholder’s appeal in full and allowed the minority shareholder’s appeal in part (remedying the case management error about deferment of the Offers issue), leaving other factual and quantification matters for the trial judge to resolve.

The Court of Appeal dismissed Mr Prescott’s appeals and allowed in part Dr Potamianos’s appeal. The court affirmed that the companies were a quasi-partnership, that exclusion of the minority shareholder was unfairly prejudicial despite limited breaches of fiduciary duty by him in relation to the source code, and that the normal remedy is a buy-out at full pro rata value. The court further held that the judge erred in deferring consideration of the reasonableness of the majority’s offers to a later trial; those offers did not, on the material before the court, defeat the petition. The balancing payment was upheld in principle but quantification and related interlocutory matters remain for the trial judge.

Appeal from the order dated 28 September 2018 of Mr Richard Spearman QC (sitting as a Deputy High Court Judge) giving effect to his judgment of 30 July 2018 in the High Court, Business and Property Courts of England and Wales, Insolvency and Companies List (ChD) (see [2018] EWHC 1924 (Ch)). Permission to appeal was granted by the trial judge and additional permission by Patten LJ in this court. The appeals were heard in the Court of Appeal (Civil Division) on 2-4 April 2019 and determined on 6 June 2019.