Langer v McKeown & Anor

For the purposes of the unfair-prejudice jurisdiction, the court may consider both the company’s legal rules and equitable considerations arising from the parties’ relationship. Conduct may be unfair where a director uses corporate powers in a conflict of interest, diverts a commercial opportunity, transfers assets at an undervalue, mismanages company resources or administers shareholder loans inconsistently and without proper accounting.

A director must take reasonable steps to establish value and protect the company’s interests when disposing of corporate assets. The statutory duty to avoid conflicts applies to corporate opportunities even where the company might not ultimately have been able to exploit them. Later ratification does not cure unfair prejudice already suffered. A share purchase order may provide an appropriate remedy, with valuation assumptions designed to restore the petitioner’s economic position.

Diana Langer, a 25% shareholder in The Stratos Club Limited, petitioned under Companies Act 2006, section 994. She alleged that John McKeown, the controlling director and majority shareholder, had conducted the affairs of Stratos and its subsidiaries unfairly by mismanaging company finances, making excessive or improper payments, transferring the Soho and Marylebone club businesses to companies associated with him at undervalue, appropriating the opportunity to acquire the Euston Club, and mishandling her shareholder loan account.

The trial was split. The court determined whether unfairly prejudicial conduct had occurred and the appropriate form and basis of relief. The central questions were whether the impugned conduct breached directors’ duties or equitable understandings between the shareholders, whether it caused relevant prejudice, and how the petitioner should be restored economically.

1. Unfair prejudice. The petition succeeded. The court could consider strict legal rights together with equitable considerations of a personal nature. The parties’ close relationship, continuing involvement in the business, mutual confidence and restrictions on share transfers justified applying the good-faith aspect of the section 994 jurisdiction: [2020] EWHC 3485 (Ch), paras 96–113.
2. Financial management. Mr McKeown’s practice of paying personal and corporate expenses from whichever account had funds, and allocating them retrospectively, fell materially below the standard required of a director to keep proper books of account. Excessive salary and unjustified payments to family members and associates were breaches of duty and contributed to unfair prejudice, paras 119–164.
3. Soho transaction. The transfer of the Soho Club to JMCL involved undisclosed and unauthorised conflicts. A reasonable director should have tested the market and obtained a professional valuation. The transaction was inadequately documented, the company’s interests were not independently protected, and the assets, brand and management support were transferred for substantially less than fair value. The court assessed fair value at £813,000, paras 167–178 and 193–255.
4. Euston opportunity. Section 175 of the Companies Act 2006 applied to the opportunity to acquire the Euston Club. The opportunity arose through Mr McKeown’s involvement in the Sophisticats business. It was immaterial that Stratos might have lacked the resources, or might ultimately have declined, to exploit it. He was required to bring the opportunity to the company’s attention. The conflict was not validly authorised because he was an interested director and shareholder, paras 256–297.
5. Marylebone transaction. The transfer of the Marylebone business, brand and portable goodwill for no payment, in return principally for the purchaser assuming staff liabilities, involved an unauthorised transactional conflict. The transaction could have been commercially justified in view of the impending lease expiry, but the consideration was inadequate because the purchaser obtained valuable staff, know-how, reputation and business goodwill, paras 298–317.
6. Ratification. Retrospective board and shareholder resolutions did not cure unfair prejudice already caused. In the circumstances, arranging the ratifications could itself be viewed as further unfairly prejudicial conduct, paras 318–323.
7. Shareholder loan account. The existence of the loan account was not itself unfair. The unfairness lay in allowing it to accumulate without proper explanation or accounting, selectively demanding repayment, and failing to clear it through distributions or equivalent arrangements while benefits were provided to Mr McKeown and his associates, paras 324–337.
8. Relief. The appropriate remedy was an order requiring Mr McKeown to purchase Mrs Langer’s shares without a minority discount. Valuation was to proceed on the basis of a deemed group including the Euston business, with the Sophisticats goodwill and brand, and with specified assumptions correcting the effects of the unfairly prejudicial conduct. The valuation date was set at 1 October 2019. Mr McKeown was also to assume responsibility for the shareholder loan account up to the lesser of its full value and 25% of defined excess salary and payments, paras 352–372.

First-instance petition under section 994 of the Companies Act 2006. The court found unfairly prejudicial conduct and proposed a share purchase and consequential valuation orders.