George v McCarthy & Anor

A breakdown in relations between shareholders does not, by itself, establish unfair prejudice under section 994 of the Companies Act 2006. The conduct complained of must concern the company’s affairs and be both unfair and prejudicial to the petitioner in the capacity of a member. Unfairness is judged objectively by equitable standards and ordinarily requires conduct contrary to good faith. Incompetence or inadvertence is insufficient unless it amounts to sufficiently serious mismanagement. A breach of the articles or a shareholders’ agreement does not necessarily constitute unfair prejudice. Where a shareholder has voluntarily withdrawn from management and no quasi-partnership exists, the shareholder’s participation rights are confined to the rights created by the company’s constitutional documents and agreements.

Richard George and Robert McCarthy were equal shareholders and directors of Goss Interactive Limited. Mr George petitioned under section 994 of the Companies Act 2006, alleging exclusion from management, failures concerning meetings and financial information, mishandling of acquisition opportunities, and delayed or withheld dividends. He also alleged that the company was a quasi-partnership and sought relief based on the valuation of his shares.

The court considered whether equitable considerations had arisen, whether any conduct was unfairly prejudicial, and, if so, how the company and Mr George’s shareholding should be valued.

1. The petition was dismissed. None of the complaints, individually or cumulatively, amounted to unfair prejudice, and there was no evidence of mismanagement.
2. The court held that Goss Interactive was not a quasi-partnership. Its formation involved several parties and a funding institution. The 2001 Shareholders’ Agreement established express checks and balances, contained an entire-agreement clause, and expressly negated partnership. The limited transfer restrictions did not satisfy the relevant equitable criteria. Later conduct did not establish any collateral understanding that both shareholders would participate in management.
3. Mr George had voluntarily withdrawn from operational management, resigning as managing director and chairman and relocating to Dubai. He therefore had no equitable right to return to day-to-day management. His rights were limited to those conferred by the articles and the Shareholders’ Agreement.
4. Under section 994, the conduct had to be both unfair and prejudicial. Unfairness was an objective concept, judged by established equitable principles and requiring conduct contrary to good faith. Mere incompetence or inadvertence was insufficient unless exceptionally serious. A breach of the articles or agreement did not automatically establish unfair prejudice, and prejudice suffered in another capacity, such as an employee, was outside the statutory protection.
5. The alleged failures concerning meetings, minutes, financial information, access to premises, acquisition opportunities and dividends did not satisfy that test. The late dividend payments caused temporary financial prejudice but were not shown to result from bad faith. Suspension of dividends after November 2017 was reasonable in the circumstances, particularly because it affected both shareholders and followed serious disputes and concerns about disclosure of confidential information.
6. The court nevertheless assessed valuation evidence on the parties’ agreement. It valued the company, subject to updated figures, at approximately £2.2 million, based on capitalised maintainable earnings and surplus cash. A 20 per cent minority discount would have applied if a sale had been ordered, but no buy-out order arose because the petition failed.
7. The petitioner was ordered to pay the first respondent’s costs on the standard basis, with an interim payment of £216,000 plus VAT.

First-instance decision. No prior appellate decision is stated in the judgment.