Kevin Geoffrey Dodson & Anor. v Christopher Richard Shield & Ors.

This is a petition under section 994(1) of the Companies Act 2006 for unfair prejudice by two shareholder-directors of International Automotive Engineering Projects Ltd (IAEP). The judge found that IAEP was a quasi-partnership and that certain conduct by other directors and associated parties amounted to unfair prejudice and breaches of fiduciary duty. Key legal principles applied included the statutory unfair prejudice jurisdiction under s.994, the objective test of unfairness derived from O’Neill v Phillips and related authorities, and the directors' duty to avoid conflicts under section 175 of the Companies Act 2006.

Material grounds of decision: (a) ownership: the technical documentation attached to individual machines passed with those machines to SES, but the separate shopfloor and BMW archive libraries belonged to IAEP; (b) transfer and use: making the shopfloor library available to SES and CGI without payment was a breach of duty and caused unfair prejudice; (c) diversion: conducting the turnkey project through CGI rather than IAEP breached non-compete and good faith obligations in the shareholders’ agreement and caused unfair prejudice; (d) clause 7.2 (option agreement duty to negotiate): there was a technical breach of the obligation to negotiate in the latter part of 2013 but no practical prejudice because the unavailability of lines 4–6 meant negotiations could not have produced a different outcome; (e) allegations that the petitioners had overcharged IAEP were rejected. The judge reserved determination of remedies and valuation to be heard later.

The petitioners, Mr Kevin Dodson and his son Murry, brought an unfair prejudice petition under s.994 Companies Act 2006 in relation to IAEP, a company formed to acquire and re-sell six BMW engine production lines on a turnkey basis. The respondents were seven individuals (directors/shareholders) and IAEP. The project stalled when lines 4–6 were delayed and financing constraints arose. Tensions grew in 2013, leading to SES (Shield Engineering) taking control of certain assets and later ENGAGEMENT with Infinity Max and CGI for a turnkey sale.

Nature of the claim/application: a shareholders' petition alleging unfairly prejudicial conduct by the respondents consisting principally of (i) diverting the turnkey project to a separate vehicle (CGI) in which the petitioners had no participation; (ii) causing transfer/use of technical documentation (the "technical library") away from IAEP without payment; and (iii) failing in good faith to negotiate under clause 7.2 of the option agreement.

Issues framed by the court:

• whether IAEP was a quasi-partnership and thus subject to equitable constraints;
• who owned the various components of the technical documentation (individual machine manuals and software, the shopfloor copy and the BMW archive copy);
• whether conduct in diverting the turnkey opportunity to CGI and providing IAEP's shopfloor/archive documentation to SES/CGI constituted unfair prejudice and/or breaches of directors' fiduciary duties (including duties under s.175 Companies Act 2006);
• whether any alleged duty to negotiate in clause 7.2 of the option agreement was breached and, if so, whether that breach caused actionable unfair prejudice; and
• whether delay, acquiescence or limitation barred relief.

Court’s reasoning (concise): the judge held that IAEP exhibited the hallmarks of a quasi-partnership (mutual confidence, participation in management, restrictions on transfer) and so equitable constraints applied. On ownership the judge distinguished three separate libraries: machine-specific manuals/software passed with their machines (and thus to SES under the chain of sales), but the shopfloor set and the BMW archive set were not ancillary to particular machines and, on the evidence, belonged to IAEP. The respondents’ assertion that BMW→Stuckenberger→Pagus→SES contracts transferred the shopfloor/archive libraries was rejected as unsupported.

The court found that making the IAEP shopfloor library available to SES and CGI without consideration constituted a breach of duty and caused unfair prejudice. Likewise, the conduct of diverting the turnkey contract to CGI (so that IAEP did not obtain the turnkey agreement although the business opportunity was of the company’s concern) breached the shareholders' agreement obligations (including non-competition and good faith) and the directors' fiduciary duties and caused unfair prejudice. By contrast, while there was a technical breach of clause 7.2 (the duty to negotiate during the option period), the judge concluded that by late 2013 the absence of lines 4–6 made any meaningful negotiation futile and thus that breach had no practical consequence. Allegations that the petitioners had overcharged IAEP were rejected on the balance of probabilities. The judge also rejected limitation and acquiescence defences so far as the two principal breaches were concerned. Relief and valuation were reserved for further hearing.

This is a first instance judgment allowing the petition in part. The court found that IAEP was a quasi-partnership; that the shopfloor and BMW archive technical libraries belonged to IAEP while machine-attached manuals/software passed with the machines to SES; that making IAEP’s shopfloor library available to SES/CGI without payment and diverting the turnkey project to CGI caused unfair prejudice and amounted to breaches of fiduciary duty; that a technical breach of clause 7.2 (duty to negotiate) occurred but produced no actionable prejudice because lines 4–6 were unavailable; and that allegations of deliberate overcharging by the petitioners were rejected. The judge reserved remedy and valuation for further hearing.