Stuart Wells v Paul Hornshaw & Ors

Under Companies Act 2006, contractual exit rights may materially affect whether prejudice to a minority shareholder is unfair. Where a shareholder has chosen, or is contractually required, to sell at a specified valuation date, later conduct will ordinarily not prejudice the value of that shareholder’s interest.

An expert valuation is invalid where the expert materially departs from the instructions. A valuation mechanism may nevertheless provide an adequate alternative to statutory relief if it allows relevant misconduct to be reflected in the valuation. A minority holding should generally be valued as such unless special circumstances justify a pro rata valuation.

The petitioner held a minority shareholding in Transwaste Recycling and Aggregates Ltd and had been a director. Following an HMRC raid in September 2015, he decided to leave the company and sell his shares under a shareholders’ agreement containing a compulsory exit and valuation mechanism.

The parties did not complete the sale. The company’s auditor produced a valuation using figures to December 2014, although the instructions required valuation as at 30 September 2015 and more recent audited figures were available. The petitioner alleged share dilution, excessive related-party payments, breaches of directors’ duties, non-payment of dividends and other mismanagement.

The central issues were whether the allegations established unfair prejudice, whether the contractual mechanism governed the petitioner’s exit, whether the auditor’s valuation was binding, and what remedy and valuation basis should follow.

1. Petition allowed in limited respects. The court found unfair prejudice only in the failure properly to complete the valuation exercise. The petitioner's other principal allegations did not justify relief.
2. The September 2015 correspondence constituted a “sale eventuality” under clause 7 of the shareholders’ agreement. The petitioner was required to make a sale offer to the other shareholders, with the sale price calculated by an expert at the relevant time. The relevant valuation date was the end of September 2015.
3. The parties had not clearly agreed to abandon clause 7. The auditor was appointed as an expert, not an arbitrator. His valuation was not binding because he used outdated figures and therefore materially failed to value the business as at 30 September 2015. A material departure from instructions invalidates an expert determination unless it is trivial or de minimis, applying the approach in Jones v Sherwood [1992] 1 WLR 277 and Veba Oil Supply & Trading v Petrotrade Inc [2002] 1 All ER 703 (CA).
4. Some rent, management charges and advertising payments were excessive or uncommercial. There was also double recovery through a fuel card and vehicle allowance, and certain interest-free loans breached directors’ duties. The evidence did not establish that the other related-party payments were excessive, nor did it establish an actionable failure under section 177 where the petitioner knew, or ought reasonably to have known, of the relevant interests.
5. The post-September 2015 directors’ loans and failure to consider dividends did not constitute unfair prejudice. The petitioner’s financial interest had effectively crystallised at the contractual valuation date. The later matters could not affect the value then to be attributed to his shares.
6. The appropriate remedy was a fresh expert valuation, undertaken jointly or, failing agreement, by a valuer appointed by the court. The valuation was to use the September 2015 date and incorporate the findings in the judgment. The petitioner’s shares were to be valued subject to a minority discount, with the amount determined by the valuer. The court reserved issues concerning interest and the detailed order.