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

In an unfair-prejudice petition, contractual compliance does not by itself prevent equitable constraints arising in a quasi-partnership company. The court must assess objectively whether the shareholders’ agreed arrangements, fiduciary duties and equitable obligations have been respected.

A shareholder-director may not divert a company’s business opportunity to another vehicle in breach of non-compete and business-promotion obligations. Nor may company property be transferred for no consideration where the transfer involves an unauthorised conflict of interest. A technical breach of a good-faith negotiation clause will not justify relief without consequential prejudice. Continuing fiduciary breaches are not necessarily defeated by limitation or acquiescence.

The petitioners were shareholders and directors of International Automotive Engineering Projects Ltd, a company formed to acquire BMW engine-manufacturing lines and sell a turnkey facility. They alleged that the respondents diverted the project to CGI Automotive Consulting Ltd, transferred IAEP’s technical library without payment, and failed to negotiate an alternative strategy under the option agreement.

The respondents relied on the contractual arrangements, the expiry of IAEP’s option to acquire the lines, limitation and acquiescence. The central issues were whether IAEP was a quasi-partnership, whether the alleged conduct was unfairly prejudicial under section 994 of the Companies Act 2006, and what effect should be given to the fiduciary and contractual obligations.

1. Quasi-partnership. IAEP was a quasi-partnership. The relevant indicators were mutual confidence, an understanding that shareholders would participate in the business, and restrictions preventing a shareholder excluded from management from withdrawing his stake. The contractual statement that the parties were not in partnership did not prevent that conclusion.
2. Good-faith negotiations. The respondents technically breached clause 7.2 of the option agreement by failing to negotiate an alternative mechanism or strategy. However, the delayed availability of lines 4, 5 and 6 meant that productive negotiations could not have overcome the commercial difficulty. The breach therefore caused no unfair prejudice and could attract, at most, nominal damages.
3. Technical library. Manuals and software physically attached to individual machines passed with those machines to SES. The separate shopfloor and archive libraries were not ancillary to the machines and were not transferred by express or implied contractual terms. They belonged to IAEP. Making the shopfloor library available to SES and CGI without consideration caused unfair prejudice.
4. Diversion of the project. SES could sell the lines it owned. It could not, consistently with the shareholders’ agreement, enter a turnkey arrangement with Infinity Max through CGI while replacing Mr Dodson with Mr Murphy and obtaining a larger shareholding. That conduct breached the non-compete and business-promotion obligations and caused unfair prejudice.
5. Fiduciary duties. The transfer of the shopfloor library and diversion of the turnkey project were breaches of fiduciary duty. The directors acted in conflicts between their IAEP duties and their roles in CGI. No valid authorisation occurred under section 175(6) of the Companies Act 2006.
6. Delay and acquiescence. The relevant fiduciary breaches were continuing. The duty to account arose when the turnkey arrangements were made and profits were generated, and the claims were not statute-barred or waived by acquiescence.
7. The court found unfair prejudice on the technical-library and project-diversion grounds. The petitioners’ claims were not dismissed; the question of relief and valuation was adjourned for submissions.