Gary Stevens & Anor v Stephen Kyte & Ors

Conduct may be unfairly prejudicial even where the petitioner has behaved improperly, if the conduct complained of excludes a minority shareholder from management and is used to depress the value of the shareholding. The court must assess unfairness against the company’s constitutional and equitable framework. In a quasi-partnership, exclusion from management following an irretrievable breakdown may justify a buy-out at fair value. The usual valuation date is the date of the purchase order, although fairness and the parties’ conduct may justify another date. Shares in a quasi-partnership are ordinarily valued without a minority discount where the majority has breached obligations of good faith.

The Petitioners were shareholders in GSK Electrical Services Ltd, a small electrical company operated by three working directors and their wives. After relations deteriorated, Mr Stevens was dismissed as an employee, removed as a director and deprived of dividends, while the remaining directors increased their salaries. The Petitioners alleged unfair prejudice under sections 994 to 996 of the Companies Act 2006. The Respondents cross-petitioned for a just and equitable winding up under section 122(1)(g) of the Insolvency Act 1986.

The central issues were whether the Petitioners had suffered unfair prejudice and, if so, the appropriate terms for purchasing their shares.

1. The claim under section 994 of the Companies Act 2006 succeeded. The Petitioners suffered prejudice because Mr Stevens lost his employment income and office, and the change from dividends to increased salaries left the shares effectively without value to them. The treatment was also unfair.

2. The covert CCTV installation was a gross breach of trust and a breach of Mr Stevens’ duties as a director. That conduct did not, however, prevent a finding of unfair prejudice. The contemporary documents showed that the Respondents had decided to remove Mr Stevens before discovering the CCTV, sought to acquire the shares cheaply, failed to investigate alleged misconduct properly, and used dismissal and cessation of dividends to weaken his bargaining position.

3. The court applied the principles in O’Neill v Phillips [1999] 1 WLR 1092 and Grace v Biagioli [2005] EWCA Civ 1222. Unfairness is assessed objectively against the company’s legal and equitable framework. A breakdown in relations alone is insufficient, but exclusion from management following that breakdown may be unfairly prejudicial even where the excluded shareholder has acted improperly.

4. GSK was a quasi-partnership. The relevant features were mutual confidence, an understanding that shareholders would participate in the business, and restrictions on share transfers. The parties’ wives’ non-participation did not prevent that conclusion.

5. The appropriate remedy was an order under section 996(2)(g) of the Companies Act 2006 requiring Mr Kyte and Mr Handford to purchase the Petitioners’ shares. The valuation was to be based on the court’s findings, with the experts directed to agree the precise figure if possible. The normal valuation date remained the date of the purchase order. The court rejected a backdated valuation to Mr Stevens’ departure and imposed no minority discount.

6. The cross-petition for a just and equitable winding up was dismissed. Winding up was a last resort, and the buy-out order provided appropriate relief.