TIMOTHY SMITH v JOAN SMITH & Anor

For the purposes of an unfair-prejudice petition, equitable considerations may constrain a majority shareholder’s exercise of strict legal rights where the company is operated on a personal and informal basis. A family company is not automatically a quasi-partnership, and no rigid requirement exists for a clear promise that control will be surrendered. The court must assess the parties’ relationship, understandings, conduct and the company’s constitution as a whole. Exclusion from employment and management contrary to an understanding that a shareholder would continue participating may be unfairly prejudicial, particularly where no offer is made to purchase the shares at fair value. In a quasi-partnership, the usual valuation is without a minority discount. Even outside a quasi-partnership, the court retains a discretion to order a non-discounted valuation where treating the petitioner as a willing seller would be unfair.

Timothy Smith held 20% of the shares in Clive Smith (Oxford) Ltd. His mother, Joan Smith, held the remaining 80% and was a director. Tim had worked in the family company, had been appointed a director, and was understood to have an eventual role in taking over the business.

Following a breakdown in their relationship, Joan caused Tim to be dismissed as an employee and removed as a director. Tim petitioned under sections 994–996 of the Companies Act 2006, alleging that the exclusion was unfairly prejudicial because no offer had been made to purchase his shares at fair, non-discounted value. The issues included whether the company was a quasi-partnership, whether equitable constraints applied, and the proper basis of valuation.

1. Unfair prejudice. Sections 994–996 of the Companies Act 2006 required Tim to establish conduct of the company’s affairs, prejudice to his interests as a member, and unfairness. The test of unfairness was objective.
2. Equitable constraints. The starting point was the parties’ legal rights and the statutory power under section 168 of the Companies Act 2006 to remove a director. However, personal and equitable considerations could make reliance on those rights contrary to good faith. A quasi-partnership was a common, but not exclusive, context for such constraints.
3. The court rejected an excessively restrictive approach requiring proof that Joan had expressly intended to surrender her section 168 control. The relevant question was whether, viewed in the circumstances as a whole, personal dealings, family understandings, participation in management, informal operation and restrictions on share transfers made it inequitable to exercise the statutory powers without offering a fair buy-out.
4. The company had originated as a husband-and-wife business operated on a quasi-partnership basis. There was an accepted family understanding that Tim would work in the business, participate in its management and ultimately take it over. His appointment as director, return from Brighton, continuing employment, acquisition of shares, management role and the company’s informal operation supported the existence of equitable constraints. The company remained a quasi-partnership when Tim was excluded.
5. Joan’s dismissal of Tim and removal as director, without an offer to purchase his shares at fair non-discounted value, contravened the applicable understanding and equitable constraints. The conduct was therefore unfairly prejudicial.
6. Valuation and relief. Under section 996 of the Companies Act 2006, Joan was ordered to purchase Tim’s 2,000 shares. Because the company was a quasi-partnership, the shares were to be valued without a minority discount. No special circumstances justified departure from the usual rule. The company was valued at £2,560,000 and Tim’s 20% holding at £512,000.
7. Alternatively, even if the company were not a quasi-partnership, a non-discounted valuation would have been ordered because Tim was not a willing seller, the breakdown was not his fault, and Joan would obtain 100% control and the benefit of marriage value.