Stuart Wells v Paul Hornshaw & Ors

The petition under s.994 Companies Act 2006 alleged unfair prejudice arising from share dilution, related‑party and other payments, directors' loans, failure to declare dividends and a flawed valuation process under clause 7 of the parties' 2005 shareholders' agreement. The court held that the contractual exit mechanism in clause 7 was available to the petitioner when he indicated in September 2015 that he wished to leave and that the valuation under that mechanism should have been carried out as at that relevant time.

The auditor's valuation (Mr Clark, June 2016) was not binding because it departed materially from instructions by relying on figures to December 2014 instead of valuing as at 30 September 2015. Most alleged related‑party overpayments were not proved to be excessive or uncommercial, save limited adjustments identified by Mr Clark (rent in excess of contractual amounts, material uplift in advertising spend and minor adjustments to management remuneration). The court rejected broader claims for an account of profits based on asserted non‑disclosure under s.177 CA 2006, finding the petitioner knew or ought reasonably to have known of the relevant related‑party interests. The petition succeeded only in limited respects: principally because the valuation process was not properly completed and a fresh, expert valuation process is required (to be carried out on fair terms and as at the relevant valuation date).

Background and nature of the claim:

• The petition is a first instance unfair‑prejudice claim brought by Mr Stuart Wells under s.994 Companies Act 2006 concerning Transwaste Recycling and Aggregates Limited (TRAL). The petitioner held c.14.3% of the shares (contention that he should be treated as holding 24.9% was rejected). The majority shareholders are Paul and Mark Hornshaw.
• Key events: after an HMRC/police raid on TRAL's Melton premises on 23 September 2015, Mr Wells said he wished to leave TRAL. The shareholders had a 2005 shareholders' agreement containing clause 7 which requires a departing shareholder to make a Sale Offer with the sale price to be determined by the company accountant by reference to standard and historical accounting practices.

Reliefs sought and issues framed:

• Primary relief sought was an order requiring the Hornshaws to acquire Mr Wells' shares at a fair value determined by the Court or independent valuer, without a minority discount and with a premium for loss caused by unfair prejudice.
• The court framed the following issues: whether the 2008 alleged dilution was improper; effect and operation of clause 7 and whether Mr Clark's valuation was binding; whether payments to associated companies were excessive or uncommercial; whether there were breaches of directors' duties (including s.177) giving rise to an account of profits; other alleged mismanagement (directors' loans, Knightsbridge loan, guarantees); failure to declare dividends; whether prejudice was unfair and, if so, the appropriate remedy.

Key factual and legal findings:

• 2008 dilution: the court rejected the petitioner's contention that his interest should be restored to 24.9%. The judge found the reduction arose from an accepted concern about unequal past and prospective financial exposure and that the accounts of the meeting and surrounding contemporaneous documents supported the Hornshaws' and Mr Taylor's version.
• Clause 7 and timing: the judge held that Mr Wells' expression of a wish to leave in September 2015 constituted a 'sale eventuality' under clause 7 and that the contractual valuation date is the relevant time of that event (end of September 2015).
• Mr Clark's valuation: the valuation in June 2016 was not binding because Mr Clark departed materially from instructions by using figures only up to December 2014 rather than valuing as at 30 September 2015; the court accepted that Mr Clark had undertaken adjustments for related‑party items but his report was not a binding certificate.
• Related party payments: the court found most challenged payments to companies associated with the Hornshaws or the Elliotts were supported by the evidence or adequately justified on market terms. Exceptions: (i) rental payments in excess of contractual rent were treated as excessive, (ii) a marked uplift in advertising spend (2012–2014) was held to be disproportionate and adjusted (benchmarked to an earlier lower figure), and (iii) small adjustments to management remuneration were accepted. The judge attributed weight to Mr Clark's investigatory approach even though his report was not binding.
• Directors' duties and account of profits: the court rejected the late‑developed submission that the Hornshaws must disgorge full commercial profits of their associated companies. The judge held that, on the evidence, the petitioner knew or ought reasonably to have known of the Hornshaws' interests (so s.177 exceptions applied), that there was insufficient evidence of undisclosed overcharging to found an account of profits, and that it would be procedurally unfair to reframe the case at remedy stage to pursue a detailed account previously unpleaded and unproven.
• Directors' loans and other mismanagement: breaches of s.197 (loans to directors without shareholder approval) were identified and the Knightsbridge £1m loan of October 2014 was criticised as imprudent; however, the judge declined to find other alleged mismanagement (for example, in respect of Melton investments) gave rise to identifiable loss affecting valuation.
• Dividends: the court found no evidence of a deliberate scheme to withhold dividends to deprive the petitioner; after September 2015 the petitioner's entitlement crystallised under clause 7 and subsequent non‑payment of dividends did not amount to unfair prejudice to him.

Remedy and outcome:

• The petition was allowed in limited respects because the valuation process required by clause 7 was not properly completed. The judge ordered a fresh valuation process: a jointly appointed (or court‑appointed) valuer acting as an expert should value the petitioner’s shares as at the relevant date (end of September 2015), taking account of the findings in the judgment. The valuer process should be summary and cost‑effective; interest and the minority discount are to be addressed (the court indicated a minority discount is generally appropriate and the valuer should apply it unless special circumstances are shown). The court declined to order a non‑discounted/pro rata valuation or to make findings that would support a broad account of profits beyond the limited adjustments upheld.

The Petition under s.994 CA 2006 is allowed in part. The court found that (i) the contractual exit mechanism in clause 7 of the shareholders' agreement crystallised the petitioner's rights when he sought to leave in September 2015, (ii) the auditor's June 2016 valuation was not binding because it departed materially from instructions by using outdated figures, (iii) most allegations of excessive related‑party payments were not made good save limited adjustments (rent above contractual amount, disproportionate advertising spend and small management pay adjustments), (iv) there was insufficient evidence to disgorge broad profits of associated companies under s.177, and (v) the appropriate relief is an orderly fresh valuation by an expert as at the relevant valuation date (with provision for submissions, interest and application of an appropriate minority discount).