COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM The High Court of Justice
Strand, London, WC2A 2LL
B e f o r e :
LADY JUSTICE ARDEN
LORD JUSTICE RICHARDS
|- and -
Lesley Anderson (instructed by Messrs Taylors) for the Respondent
Hearing dates : 29 November 2005
Crown Copyright ©
Lady Justice Arden :
"That is not to say that there may not be cases in which it will be fair to take a discounted value. But such cases will be based upon special circumstances . . ."
"459 (1) A member of a company may apply to the court by petition for an order under this Part on the ground that the company's affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members (including at least himself) or that any actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial . . .
461 (1) If the court is satisfied that a petition under this Part is well founded, it may make such order as it thinks fit for giving relief in respect of the matters complained of.
(2) Without prejudice to the generality of subsection (1), the court's order may ľ
. . .
(d) provide for the purchase of the shares of any members of the company by other members or by the company itself and, in the case of a purchase by the company itself, the reduction of the company's capital accordingly."
Background and the judge's judgment
"The Petitioner ("MráStrahan") joined the company in the spring of 1991 as a production consultant, but within a short time, Mr Wilcock asked MráStrahan to take over the running of the company and to become the deputy managing director, which MráStrahan agreed. At this time Mr Wilcock and his wife were separated and divorce proceedings were under way. MráWilcock had two young children, who were taking up a lot of his time. As a result, Mr. Wilcock was devoting considerably less time to the company's business and affairs. MráStrahan was in day-to-day control of the running of such business and affairs and Mr Wilcock, when he was not on holiday, was calling at the premises of the company at regular intervals. After about a year, MráStrahan was made the managing director of the company and Mr Wilcock became the chairman." (judgment, paragraph 3).
"Part of these new terms was that MráStrahan was to have an option to acquire shares in the company from Mr Wilcock. The purchase price for such shares was to be paid out of the bonus due to MráStrahan. The purchase price was to be ú625 for each share ů" (judgment, paragraph 6)
"48. What is a quasi partnership? In my judgment it is an association of shareholders in a company where if they were conducting the same business without having formed or acquired a limited liability company, they would in law be joint proprietors of that business and would thus be partners in accordance with the Partnership Act 1890. Thus mere investment in the company will not create a quasi partnership any more than it will constitute the investor as a partner if the business is run by an unincorporated body. There has to be both investment as a co-owner and participation in the decision making processes connected with the running of the business. If prior to March 1998 Mr Wilcock had been a sole trader running the business and he took MráStrahan into the ownership of that business by selling him a 2% interest in the business, MráStrahan would have become a partner in the business. This partnership interest would have increased in 1999 to a 4% interest and in 2000 to a 5% share. I appreciate that the above percentages are approximate only, but they are not far wrong."
"49. By holding out an expectation to MráStrahan that he could purchase the remaining shares in the company at any time up to 5 June 2002, Mr Wilcock must be taken as having given MráStrahan to understand that he would continue in the employment of the company until at least that date. No doubt he could have been dismissed for misconduct during that time, but that has nothing to do with this case. MráStrahan was, of course, dismissed before that date. After that date, if MráStrahan had not purchased the other shares in the company from Mr Wilcock, the parties would have had to sit down and come to a new arrangement which would have involved either the further purchase of shares by MráStrahan and the sale of shares by Mr Wilcock, or the severance of his relations between MráStrahan and the company, including the repurchase of his shares. This does not directly help me save that I find it impossible to conceive that if by June 2002, MráStrahan had not purchased the shares of Mr Wilcock at a price agreed by both of them, then he would be dismissed from the employment of the company and Mr Wilcock would have bought back the shares of MráStrahan at a price of at least the price paid by MráStrahan when he bought them. Clearly the expectation that MráStrahan could purchase the shares of Mr Wilcock in the company at any time until 5 June 2002 would be of little interest to MráStrahan if he was no longer employed by the company. I cannot see how MráStrahan would want to buy shares in the company out of his bonus if he thought that he could be left with those shares which he might well not be able to sell and which might never pay him any dividend. At the very least he must have expected that he could sell those shares back at the price he paid for them, or may be more or less, depending on the financial health of the company at the relevant time. If Mr Wilcock had thought about matters when the understanding had been reached in 1997 or when the first shares were being bought in 1998, he too would have come to the same conclusion. This is sufficient to amount to a mutual understanding.
50. MráStrahan purchased his shares with money to which he was entitled. The contentions of Mr Wilcock lead to the result that MráStrahan has received only a temporary benefit from that money and the risk is all one way. Either MráStrahan buys at least 90% of the shares in the company at a price which is considerably more than he has been professionally advised they are worth or he is likely to be left with valueless shares on his hands. It is difficult to imagine circumstances which do not more obviously affect the conscience of Mr Wilcock.
51. For these reasons I find that Mr Wilcock has conducted the company's affairs in a manner which is unfairly prejudicial to the interests of MráStrahan. He has caused the employment of MráStrahan to be terminated prior to June 2002 without offering to buy back the shares of MráStrahan at a fair price. In my view it is hard to find a clearer case where the court would exercise its powers under Section 459. This is clearly a case where obligations of good faith apply. MráStrahan clearly had legitimate expectations that his shares would be purchased if his employment came to an end before June 2002. The dealings of Mr Wilcock and MráStrahan in relation to the shares in the company which were acquired by MráStrahan clearly affected the conscience of Mr Wilcock in the manner I have indicated. All the other elements of the law summarised above are clearly satisfied. Even if I should be wrong in my conclusion as to the existence of a quasi partnership, I would still have reached the same conclusion for the reasons set out above. This is a plain case where a court of equity would intervene in the way I have indicated."
Was there a "quasi-partnership" relationship?
"My Lords, in my opinion these authorities represent a sound and rational development of the law which should be endorsed. The foundation of it all lies in the words "just and equitable" and, if there is any respect in which some of the cases may be open to criticism, it is that the courts may sometimes have been too timorous in giving them full force. The words are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The "just and equitable" provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.
It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. Certainly the fact that a company is a small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, of which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles. The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence ľ this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be "sleeping" members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members' interest in the company ľ so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.
It is these, and analogous, factors which may bring into play the just and equitable clause, and they do so directly, through the force of the words themselves. To refer, as so many of the cases do, to "quasi-partnerships" or "in substance partnerships" may be convenient but may also be confusing. It may be convenient because it is the law of partnership which has developed the conceptions of probity, good faith and mutual confidence, and the remedies where these are absent, which become relevant once such factors as I have mentioned are found to exist: the words "just and equitable" sum these up in the law of partnership itself. And in many, but not necessarily all, cases there has been a pre-existing partnership the obligations of which it is reasonable to suppose continue to underlie the new company structure. But the expressions may be confusing if they obscure, or deny, the fact that the parties (possibly former partners) are now co-members in a company, who have accepted, in law, new obligations. A company, however small, however domestic, is a company not a partnership or even a quasi-partnership and it is through the just and equitable clause that obligations, common to partnership relations, may come in."
"ůthere will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers. Thus unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith.
This approach to the concept of unfairness in section 459 runs parallel to that which your Lordships' House, in In re Westbourne Galleries Ltd.  AC 360, adopted in giving content to the concept of "just and equitable" as a ground for winding up. After referring to cases on the equitable jurisdiction to require partners to exercise their powers in good faith, Lord Wilberforce said, at p. 379:
"The words ['just and equitable'] are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act  and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The 'just and equitable' provision does not, as the respondents [the company] suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way."
ůIn the Australian case of In re Wondoflex Textiles Ltd.  VLR 458, 467, Smith J also contrasted the literal meaning of the articles with the true intentions of the parties:
"It is also true, I think, that, generally speaking, a petition for winding up, based upon the partnership analogy, cannot succeed if what is complained of is merely a valid exercise of powers conferred in terms by the articles ů To hold otherwise would enable a member to be relieved from the consequences of a bargain knowingly entered into by him ů But this, I think, is subject to an important qualification. Acts which, in law, are a valid exercise of powers conferred by the articles may nevertheless by entirely outside what can fairly be regarded as having been in the contemplation of the parties when they became members of the company; and in such cases the fact that what has been done is not in excess of power will not necessarily be an answer to a claim for winding up. Indeed, it may be said that one purpose of [the just and equitable provision] is to enable the court to relieve a party from this bargain in such cases."
I cite these references to "the literal construction of these articles" contrasted with good faith and "the plain general meaning of the deed" and "what the parties can fairly have had in contemplation" to show that there is more than one theoretical basis upon which a decision like Blisset v Daniel can be explained. Nineteenth century England law, with its division between law and equity, traditionally took the view that while literal meanings might prevail in a court of law, equity could give effect to what it considered to have been the true intentions of the parties by preventing or restraining the exercise of legal rights. So Smith J speaks of the exercise of the power being valid "in law" but its exercise not being just and equitable because contrary to the contemplation of the parties. This way of looking at the matter is a product of English legal history which has survived the amalgamation of the courts of law and equity. But another approach, in a different legal culture, might be simply to take a less literal view of "legal" construction and interpret the article themselves in accordance with what Page Wood V-C called "the plain general meaning of the deed." Or one might, as in Continental systems, achieve the same result by introducing a general requirement of good faith into contractual performance. These are all different ways of doing the same thing. I do not suggest there is any advantage in abandoning the traditional English theory, even though it is derived from arrangements for the administration of justice which were abandoned over a century ago. On the contrary, a new and unfamiliar approach could only cause uncertainty. So I agree with Jonathan Parker J when he said in Re Astec (BSR) plc  2 BCLC 556 at 588:
'. . . in order to give rise to an equitable constraint based on "legitimate expectation" what is required is a personal relationship or personal dealings of some kind between the party seeking to exercise the legal right and the party seeking to restrain such exercise, such as will affect the conscience of the former.'
This is putting the matter in very traditional language, reflecting in the word 'conscience' the ecclesiastical origins of the long-departed Court of Chancery. As I have said, I have no difficulty with this formulation. But I think that one useful cross-check in a case like this is to ask whether the exercise of the power in question would be contrary to what the parties, by words or conduct, have actually agreed. Would it conflict with the promises which they appear to have exchanged? In Blisset v Daniel the limits were found in the 'general meaning' of the partnership articles themselves. In a quasi-partnership company, they will usually be found in the understandings between the members at the time they entered into association. But there may be later promises, by words or conduct, which it would be unfair to allow a member to ignore. Nor is it necessary that such promises should be independently enforceable as a matter of contract. A promise may be binding as a matter of justice and equity although for one reason or another (for example, because in favour of a third party) it would not be enforceable by law.
I do not suggest that exercising rights in breach of some promise or undertaking is the only form of conduct which will be regarded as unfair for the purposes of s 459. For example, there may be some event which puts an end to the basis upon which the parties entered into association with each other, making it unfair that one shareholder should insist upon the continuance of the association. The analogy of contractual frustration suggests itself. The unfairness may rise not from what the parties have positively agreed but from a majority using its legal powers to maintain the association in circumstances to which the minority can reasonably say it did not agree: non haec in foedera veni. It is well recognised that in such a case there would be power to wind up the company on the just and equitable ground (see Virdi v Abbey Leisure Ltd  BCLC 342) and it seems to me that, in the absence of a winding up, it could equally be said to come within s 459. But this form of unfairness is also based upon established equitable principles and it does not arise in this case."
"Usually, ů the majority shareholder will want to put an end to the association. In such a case, it will almost always be unfair for the minority shareholder to be excluded without an offer to buy shares or make some other fair arrangement. The Law Commission Report on Shareholder Remedies, at pp. 30-37, paras. 3.26 has recommended that in a private company limited by shares in which substantially all the members are directors, there should be statutory presumption that the removal of a shareholder as a director, or from substantially all his functions as a director, is unfairly prejudicial conduct. This does not seem to me very different in practice from the present law. But the unfairness does not lie in the exclusion alone but in exclusion without a reasonable offer. If the respondent to a petition has plainly made a reasonable offer, then the exclusions as such will not be unfairly prejudicial and he will be entitled to have the petition struck out. It is therefore very important that participants in such companies should be able to know what counts as a reasonable offer.
In the first place, the offer must be to purchase the shares at a fair value. This will ordinarily be a value representing an equivalent proportion of the total issued share capital, that is, without a discount for its being a minority holding. The Law Commission (paragraphs 3.57-62) has recommended a statutory presumption that in cases to which the presumption of unfairly prejudicial conduct applies, the fair value of the shares should be determined on a pro rata basis. This too reflects the existing practice. This is not to say that there may not be cases in which it will be fair to take a discounted value. But such cases will be based upon special circumstances and it will seldom be possible for the court to say that an offer to buy on a discounted basis is plainly reasonable, so that the petition should be struck out."
Lord Justice Richards
Lord Justice Mummery