Saxon Woods Investments Limited v Francesco Costa & Ors

A shareholders’ agreement requiring a company and its investors to work in good faith towards an exit by a specified date imposes a substantive obligation to pursue the process by that date. Preparatory steps, or a decision to defer marketing because a later sale might achieve a higher price, do not satisfy the obligation.

An obligation to give good faith consideration to exit opportunities is not confined to unconditional offers. A company must engage seriously with credible approaches and cannot reject them for reasons unrelated to the agreement. Breach may amount to unfair prejudice under Companies Act 2006, even where the petitioner’s remedy is sought against a director rather than the company. Relief remains dependent on proof of causative loss and must be proportionate.

The petitioner held a minority interest in Spring Media Investments Limited under a shareholders’ agreement requiring the company and its investors to work in good faith towards an exit by 31 December 2019 and to consider exit opportunities arising during that period. No sale occurred.

The petitioner alleged that the first respondent, the company’s chairman and an indirect investor, had controlled the exit process, caused the company to delay marketing, and refused properly to engage with offers. The petition was brought under section 994 of the Companies Act 2006, seeking a purchase of the petitioner’s shares by the first respondent. The issues included construction of the exit provisions, breach, unfair prejudice, the respondent’s directors’ duties, the proposed remedy, and the lawfulness of company funding of his defence.

1. Construction of the shareholders’ agreement. The drafting error referring to an exit after the investment period as occurring during that period was corrected as an obvious error. The obligation to work towards an exit by 31 December 2019 was not subject to an implied commercial-reasonableness override. Directors would not breach their fiduciary duties merely by seeking an offer at that time rather than waiting for a potentially better offer later: the principle in Heron International Ltd v Lord Grade concerned contemporaneous competing bids.
2. The expression “Exit” included a sale of all or substantially all of the company’s shares to an acquisition vehicle even if some sellers reinvested in a differently structured, leveraged vehicle. A transaction had to be assessed by its legal and economic substance. “At arm’s length” referred to a price negotiated between a willing buyer and seller on open-market terms.
3. The clause imposed continuing urgency. After the specified date, the investment bank had to be instructed to pursue an exit as soon as reasonably practicable. The company’s obligations included giving good faith consideration to opportunities, not merely unconditional offers.
4. The company breached the agreement. It did not properly market the company by the deadline, and the Metric approaches were not given good faith consideration because the first respondent had decided not to deal with a bidder associated with the petitioner. The first respondent caused the breach by retaining exclusive control of the process, misleading the board about the scope of the investment bank’s mandate, and presenting compliance as established when it was not.
5. The statutory elements of unfair prejudice were satisfied in principle. The petitioner was a member; the company’s affairs had been conducted through acts attributable to the first respondent; the conduct was prejudicial and unfair; and the petitioner was sufficiently connected with the conduct for relief to be available against him under section 996. A director need not own a majority of voting shares or possess formal control.
6. The first respondent was not in breach of section 172(1), section 174, or section 175(1). He sincerely believed that delay would promote shareholder value, and the evidence did not establish the alleged alternative scheme or negligence. His reliance on professional advice could not, however, establish compliance with obligations outside the scope of the instructions given.
7. The petitioner’s conduct did not justify withholding relief. Attempts to find alternative buyers, communicate the contractual timetable, and challenge the process were not sufficiently blameworthy or sufficiently connected with the unfair prejudice to engage the clean-hands principle.
8. A buy-out order was proportionate and appropriate in principle. The first respondent was required to purchase the petitioner’s shares at 22.33% of the value of a hypothetical final binding offer exceeding $75 million net of debt. The value of that offer, and the resulting price, were reserved for a further quantum hearing. If no such offer would have been received, the petitioner would have suffered no loss caused by the unfair prejudice and no relief would be available.
9. The judgment also held that company funding of the first respondent’s defence to the petition was not allowable merely because the proceedings concerned his directorship. The company was not a genuine protagonist in the shareholders’ dispute, and the contractual indemnity was subject to statutory and contractual limits. The supplied text ends before the final determination of the indemnity issue.