Paul Durose & Ors v Tagco BV & Ors

In an unfair-prejudice petition, conduct authorised by the company’s articles and related contractual arrangements will ordinarily not be unfair. The court must first identify the governing legal rules. If those rules were followed, it must then consider whether exceptional equitable considerations make reliance on strict rights unjust or contrary to good faith.

Such intervention is unlikely in a purely commercial relationship between sophisticated parties who negotiated comprehensive agreements with legal advice. Pre-contractual assurances will not normally override those agreements unless they disclose a sufficiently substantial equitable obligation. A contractual condition requiring payment before completion cannot be satisfied merely by an agreement to pay. Where an insolvency event occurs and the articles authorise enhanced voting rights and dilution, exercising those rights in accordance with the articles will not ordinarily amount to unfair prejudice.

The petitioners were minority shareholders in Gas Tag Limited. They alleged that Waterland Private Equity Fund VI CV and its investment vehicle, Tagco BV, engineered an insolvency event, exercised enhanced voting rights, diluted their shareholdings and unfairly excluded Paul Durose from management.

The dispute concerned the construction of a May 2019 offer involving new shares and the sale of existing shares, the effect of unpaid underwriting obligations, the validity of the subsequent share dilution, and whether earlier assurances about the use of the enhanced voting rights created equitable constraints. The court also considered whether Mr Durose’s exclusion was unfairly prejudicial.

1. Petition dismissed. None of the petitioners established unfair prejudice.
2. The court applied the approach in O’Neill v Phillips [1999] 1 WLR 1092. It first considered whether the complained-of conduct complied with the articles, the investment agreements and the general law. If so, it considered whether exceptional equitable considerations justified withholding reliance on strict legal rights.
3. The relationship was purely commercial. The parties were sophisticated, had legal advice and entered comprehensive agreements containing an entire-agreement clause. The assurances that £30 million had been ring-fenced and that swamping would be a last resort did not create an equity overriding the formal documents. They were consistent with the agreed contractual framework.
4. The May 2019 offer required the new shares to be fully paid before the sale shares could be transferred or paid for. A mere agreement to pay was insufficient. Although the company informally allowed more time for payment, that waived the original timing requirement only; it did not create an obligation to complete the sale shares transaction.
5. Tagco was therefore contractually entitled not to purchase the sale shares before the required £2 million had been raised. Its motivation was irrelevant. The insolvency event resulted substantially from excessive expenditure, inadequate sales and the petitioners’ failure to pay the sums due, rather than from Tagco’s reliance on the contractual condition.
6. Once the company was unable to pay its debts, the articles permitted the voting adjustment, appointment of directors, issue of new shares and resulting dilution. The formalities were not challenged, and no equitable considerations displaced the articles. The dilution was therefore not unfairly prejudicial.
7. Mr Durose’s exclusion was justified by his failure to fund his obligations, misleading assurances about payment and breaches involving company funds. The approach in Lloyds Autobody Ringway Ltd [2018] EWHC 2336 (Ch) did not apply because the contractual arrangements expressly addressed members leaving the company.

First-instance decision. The petition was dismissed.