Unfair prejudice petitions and fair offers for shares

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27 November 2023

Unfair prejudice petitions are a form of statutory protection afforded to minority shareholders in the context of shareholder disputes. Accordingly, pursuant to section 994 of the Companies Act (CA) 2006, provided an aggrieved minority shareholder can show that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to their interests, the court may make such order as it thinks fit for providing relief in respect of the matters complained of.

There are various remedies available to the court when it comes to a well-founded unfair prejudice petition, including orders regulating the future conduct of the company's affairs, or requiring the company to do or refrain from doing some act. However, an order pursuant to section 996(2)(e) of the CA, providing for the purchase of the petitioner's shares by other members of the company, or the company itself, represents the remedy most commonly sought. But what if a fair share offer has already been made and how does this impact the court’s assessment of  "unfair prejudice"?

How do fair offers impact "unfair prejudice"?

The leading authority of the effect on an unfair prejudice petition of an earlier offer by the majority to purchase the minority shareholding is the House of Lords decision in O’Neill-v-Phillips [1999]1 WLR 1092. In this case, Lord Hoffman held that there had in fact been no unfairly prejudicial conduct, but he went on to consider, obiter, the effect of the offer by Mr Phillips to buy Mr O’Neill’s shares at a fair price. In this respect, Lord Hoffman agreed with the Court of Appeal that Mr O'Neill had been entitled to reject the offer that had been made in circumstances where the proceedings had already been underway for almost three years and it did not include his legal costs.

However, Lord Hoffman went on to encourage, where at all possible, offers to purchase at an early stage. The way in which he proposed for this to happen was for the majority to make an offer to buy which was plainly reasonable so that if the minority shareholder rejected it, the majority could apply to strike out any petition subsequently lodged. Unfairness, Lord Hoffmann said, did not lie in the exclusion from management alone but "in exclusion without a reasonable offer".

So what constitutes a fair or reasonable offer, namely one which would entitle a respondent to have an unfair prejudice petition struck out? And what factors will the court take into account?

What constitutes a fair offer in unfair prejudice petitions?

In assessing when a respondent may be entitled to have an unfair prejudice petition struck out by the court, Lord Hoffman in O’Neill set out the features of a "reasonable offer", from an offer to purchase the shares at a fair value to including the petitioner's legal costs as part of that offer.

However, in Sprintroom Ltd: Prescott-v-Potamianos and another [2019] EWCA Civ 932, the Court of Appeal held that there is no one feature of an offer which will automatically make it either a reasonable or unreasonable offer for this purpose. The court also disagreed with the findings of the lower court that the reasonableness of the offer could not be assessed without valuation evidence, setting out the following factors to be taken into account when assessing reasonableness:

  • The value offered or the means proposed for arriving at that value will be important. Generally speaking, however, on offer to appoint a mutually acceptable independent expert who will be given full access to relevant company documents (and whose decision on the value will be binding on the parties) is more likely to be a fair offer than a fixed figure offer presented on a 'take it or leave it' basis. Still, the fairness of the value may also be linked with the substance of the unfair prejudice allegations, such that it may not be just to expect the minority shareholder to accept an expert valuation for his shares without an authoritative determination of the claim.
  • The second factor, after price or value, is the likelihood of the majority shareholder being able to implement the offer made. This essentially means that the person making the offer must be able to demonstrate that they had the resources to follow through on their proposed offer. For example, an offer to purchase the shares at fair value to be determined by an independent expert "subject to affordability" is unlikely to be binding. Any offer conditional upon affordability would mean that the respondent would have no obligation to buy at all, let alone at the price fixed by the expert, where the offer would not have entitled any respondent to have the petition struck.
  • The third factor is the proximity of the offer to the unfairly prejudicial conduct complained of, where the timing of the offer may well be significant, depending on the nature of the conduct alleged. For example, if the respondent’s offer was made very shortly after a petitioner had been excluded from the company, the court might regard it as reasonable for the petitioner to refuse that offer if they were not satisfied at that point that the relationship had irretrievably broken down. In these circumstances, the petitioner may still harbour a legitimate hope that the business could be brought back on track and a way could be found for working together moving forward.

Overall, therefore, there are no hard and fast rules here, where much will depend on "the terms of any offer made by the majority to purchase the petitioner's shares, the circumstances in which the offer was made and the reasons why it was rejected". Even then, these factors may not represent the overall consideration by the court of whether an unfair prejudice petition should succeed. As the unfair-prejudice jurisdiction is based on fairness, this inevitably requires a considerable degree of flexibility, where expert advice should always be sought when making or receiving offers.

Legal disclaimer

The matters contained within this article are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law in England and Wales and should not be treated as such.

Whilst every effort is made to ensure that the information is correct, no warranty, either express or implied, is given as to itsaccuracy, and no liability is accepted for any errors or omissions.

Before acting on any of the information contained herein, expert advice should always be sought.

The Dispute Adviser

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