George v McCarthy & Anor

This is a petition under section 994 of the Companies Act 2006 for relief for alleged unfairly prejudicial conduct by a co-shareholder. The court held that the relationship between the parties was governed by a written Shareholders' Agreement and was not a "quasi-partnership" for the purposes of equitable intervention. Applying objective equitable principles, the judge found that the conduct alleged by the petitioner (complaints about support while resident in Dubai, alleged exclusion from management and premises, the handling of board meetings and minutes, access to financial information, acquisition approaches and dividend timing) did not amount to unfairly prejudicial conduct or mismanagement.

The court also determined the company valuation in principle. Using an adjusted EBITDA-based approach with an adjusted maintainable earnings figure of £225,000 and an appropriate multiple slightly above 6, together with a deduction of deferred income and a modest working capital reserve, the judge reached a valuation of approximately £2.2m on the 30 June 2018 accounts (subject to adjustment for up-to-date cash figures). The judge indicated that, if a sale were ordered, a 20% minority discount would be appropriate. Costs were awarded to the first respondent on the standard basis with a substantial interim payment ordered.

Background and parties. The petitioner Richard George and the first respondent Robert McCarthy were equal (50/50) shareholders in Goss Interactive Limited. Mr George petitioned under section 994 Companies Act 2006 alleging a variety of unfairly prejudicial acts and mismanagement. The points of dispute were identified in a Scott Schedule and included complaints about the petitioner’s time in Dubai, alleged exclusion from the company, handling of dividends, failure to pursue acquisition opportunities, denial of access to financial information, changes to bank mandates and minutes, and alleged mismanagement.

Procedural posture. This was a first instance unfair prejudice petition heard in the Insolvency and Companies List (ChD) over multiple days of oral evidence and expert valuation reports. The judge heard factual evidence from both principal parties and witnesses, and expert accounting evidence on valuation. The parties agreed the court should hear valuation evidence in any event.

Issues framed by the court. The judge summarised the main issues as:

• Whether the relationship between the shareholders amounted to a "quasi-partnership".
• Whether the petitioner had been subject to unfairly prejudicial conduct in relation to Dubai arrangements, exclusion from management, meetings and minutes, access to financial information, acquisition opportunities (notably Agile), and dividend payments.
• Whether there was mismanagement warranting either relief or an enhanced valuation.
• The correct valuation of the company and any minority discount to apply.

Reasoning and principal findings.

• The judge concluded that the Shareholders' Agreement of September 2001 governed the relationship, contained entire agreement and non-partnership clauses, and therefore the factual matrix did not support treating the company as a quasi-partnership. Reliance was placed on the written agreement and the absence of an equitable understanding that both shareholders would participate in management.
• On the merits of the pleaded complaints the judge found that, applying objective equitable standards, the conduct complained of did not establish unfairness coupled with prejudice to Mr George in his capacity as a member. Examples: the petitioner voluntarily relocated to Dubai and was not sent by the company so his claim for rent did not fall within director expense reimbursement; alleged denial of access to accounts was addressed by the provision of management Dashboard reports and the appointment of a finance controller; alleged manipulation of minutes, failure to call meetings and bank mandate issues were either not shown to be unfair or arose from innocent errors or justified managerial caution; the Agile approach raised suspicions and the correspondence and conduct supported the respondent's caution; dividend delays did not amount to unfair prejudice given the informal nature of the arrangement and the company's position once litigation was threatened.
• The judge found no evidence of mismanagement of such a character as to justify enhancement of valuation.
• On valuation the judge accepted the experts' methodology of capitalising adjusted maintainable earnings and adding a cash surplus, preferred a mid-range multiple a little above 6 to capitalise adjusted EBITDA (£225,000) producing a capitalised value of about £1.45m, and preferred the respondent's approach on deferred income such that the cash surplus was about £750,000, yielding an aggregate valuation of approximately £2.2m on the 30 June 2018 figures (subject to updating cash/deferred income figures). The judge identified a 20% minority discount as appropriate if a sale were ordered.
• Costs were awarded on the standard basis to the first respondent, with a substantial interim payment (£216,000 plus VAT) ordered; indemnity costs were refused.

The petition is dismissed. The court found no quasi-partnership and held that the matters relied upon by the petitioner did not amount to conduct both unfair and prejudicial under section 994 Companies Act 2006. There was no mismanagement warranting relief or enhancement of valuation. The judge stated a valuation in principle of approximately £2.2m on the 30 June 2018 figures (subject to update) and directed costs to the respondent on the standard basis with a substantial interim payment.