Brown v Bray & Anor

Conduct may be unfairly prejudicial where majority shareholders use contractual or statutory powers in breach of good-faith obligations, for a collateral purpose, or disproportionately to the circumstances. Contractual consent provisions require consent to be requested before the power is exercised; consent need not be subject to an additional implied requirement of reasonableness where that is unnecessary and inconsistent with the agreement. In a quasi-partnership company, an understanding that shareholders will participate in management may persist alongside detailed articles and a shareholders’ agreement. Exclusion from management without an opportunity to realise the investment on reasonable terms may therefore be unfairly prejudicial. A petitioner’s related breach does not necessarily defeat relief where it was prompted by the respondents’ conduct and is substantially outweighed by it.

Philip Brown, a minority shareholder and director of Audas Group Limited, petitioned under Companies Act 2006, sections 994 and 996. He alleged that Stephen Bray and Philip Sharp had unfairly prejudiced him by dismissing him as an employee, excluding him from management and information, undertaking reserved matters without his consent, and seeking to compel a transfer of his shares at £1 per share.

The respondents counterclaimed for specific performance of a compulsory transfer provision, relying on Mr Brown’s disclosure of confidential company information to the company’s bank. The court determined liability only, including whether the contractual breaches and the surrounding equitable considerations established unfair prejudice and whether the transfer mechanism should be enforced.

1. Unfair prejudice. The affairs of Audas Group Limited and its subsidiary had been conducted in a manner unfairly prejudicial to Mr Brown. The respondents had dismissed him through a predetermined disciplinary process, without properly investigating the allegations, allowing a meaningful opportunity to respond, or considering lesser sanctions. Their decision was disproportionate and pursued their sectional interests rather than the companies’ interests.
2. Contractual good faith. Clauses 18.1–18.3 of the shareholders’ agreement required the parties to act openly and fairly, have proper regard to one another’s legitimate interests, observe the agreement, and avoid collateral purposes. The consent requirement for reserved matters was subject to an implied limitation against unfair or capricious withholding, but no wider term that consent could not be unreasonably withheld was necessary.
3. Reserved matters and information. Bonuses, recruitment and employment termination fell within the reserved matters. Mr Brown’s consent had to be requested before those decisions were made. Restrictions imposed on his access to company information and banking arrangements were inconsistent with his continuing office as a director, including his statutory entitlement to inspect accounting records.
4. Equitable considerations. The company had originated from a personal relationship in which the shareholders contributed capital and participated in management as employees. The respondents’ exclusion of Mr Brown without independently valuing or purchasing his shares on reasonable terms was therefore unfairly prejudicial, applying the principles in re Westbourne Galleries Ltd and O’Neill v Phillips.
5. Transfer notice and counterclaim. Mr Brown breached the confidentiality clause by sending management accounts and related information to the bank. The breach was incapable of remedy and fell within the compulsory transfer provision. Nevertheless, the respondents’ decision to invoke that provision was itself made in bad faith, opportunistically and in reliance on their own contractual breaches. The court therefore indicated that relief should include dispensing with compliance with the transfer notice and an order for the respondents to purchase Mr Brown’s shares. Final relief was deferred for further submissions.

First-instance liability judgment. The court deferred final relief, orders and directions pending further submissions.