Neutral Citation Number: [2006] EWCA Civ 13
Case No: A3/2005/0721/CHANF
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM The High Court of Justice
Chancery Division
HHJ Howarth
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 19/01/2006
Before :

LORD JUSTICE MUMMERY
LADY JUSTICE ARDEN
and
LORD JUSTICE RICHARDS
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Between :

	STRAHAN	Respondent	
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	WILCOCK
	Appellant	

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Anthony Elleray QC (instructed by Messrs Beachcroft Wansbroughs) for the Appellant
Lesley Anderson (instructed by Messrs Taylors) for the Respondent

Hearing dates : 29 November 2005
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Judgment
Lady Justice Arden : 
1.	This is an appeal from the order of HHJ Howarth (sitting as an additional judge of the Chancery Division) dated 22 March 2005. By his order, the judge ordered Mr Wilcock to purchase all the ordinary shares in Plan-It Welding Services Ltd (“the company”) held by Mr Strahan at their full value with no discount for the fact that those shares represented a minority shareholding. This appeal concerns a situation that often arises in a closely-held company. The sole or principal shareholder of the company brings in a person (“the new participant”) to help him run the company. The new participant is given an executive role. The parties get on well, and the principal shareholder gives him or sells him an equity stake. Then, after some time, the parties fall out and the principal shareholder causes the dismissal of the new participant. He and the principal shareholder part company. In these circumstances, should the principal shareholder purchase the shares of the new participant and if so, should he do so on terms that the new participant receives the full value of the shares, i.e. their non-discounted value, or should those shares be valued on the basis that they represent a minority shareholding, i.e. on terms that their value is discounted to reflect their non-saleability in the open market? The general principle is well settled. Normally, in “quasi-partnership” companies the appropriate basis of valuation is on a non-discounted basis. This is established by the decision of this court in Re Bird Precision Bellows Ltd [1984] 1 Ch. 419 and the speech of Lord Hoffmann in O’Neill v Phillips [1999] 1 WLR 1092, at 1107 with which the other members of the House agreed. But Lord Hoffmann added:
“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 . . .”
2.	Is the normal principle excluded by showing that the parties had, or also had, purely commercial arrangements about the participant’s acquisition of shares in the first place? Do these circumstances constitute “special circumstances” for the purposes of Lord Hoffmann’s dictum?
3.	The jurisdiction of the court to make the order in this case derives from the statutory remedy for unfair prejudice contained in sections 459 to 461 of the Companies Act 1985 (“the 1985 Act”). The material parts of sections 459 and 461 of the 1985 Act are as follows:
“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 – 
. . . 
(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
4.	The company was formed by Mr Wilcock in 1987. Its business was light and heavy engineering. The authorised and issued share capital of the company was £1,000 divided into 1000 shares of £1 each, of which 900 shares had been issued to Mr Wilcock and were registered in his name and the remainder were registered in the name of his wife. In due course, Mrs Wilcock’s shares were acquired by Mr Wilcock.
5.	Mr Strahan did not join the company until 1991. The judge found that: 
“The Petitioner (“Mr Strahan”) joined the company in the spring of 1991 as a production consultant, but within a short time, Mr Wilcock asked Mr Strahan to take over the running of the company and to become the deputy managing director, which Mr Strahan agreed. At this time Mr Wilcock and his wife were separated and divorce proceedings were under way. Mr Wilcock 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. Mr Strahan 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, Mr Strahan was made the managing director of the company and Mr Wilcock became the chairman.” (judgment, paragraph 3).
6.	At some point, the parties also agreed that, initially for a period of five years, Mr Strahan would have an option to purchase all Mr Wilcock’s shares at a price per share based on a valuation of the company at £1.25m. I will call this option “the first option”. There is some uncertainty about its precise terms, which were never ultimately recorded in a written agreement between the parties, but that uncertainty does not matter for the purposes of this appeal. In December 1996, Mr Strahan was advised by his own accountant that the option price under the first option was high.
7.	In 1997 Mr Strahan’s remuneration was increased to £30,000 per annum with a bonus dependent on profits. The judge found that at about the same time Mr Strahan was given another option to buy up to 10 per cent of Mr Wilcock’s shares, which I will call “the second option”. The circumstances leading to the second option were as follows. The judge found that Mr Strahan was unable to buy the company at the option price of £1.25m. Accordingly, he went back to Mr Wilcock in 1996. His evidence was as follows: “I approached Bill [Mr Wilcock] and told him that in return for my part in the company’s renewed success I would like a further incentive for my efforts. I suggested the possibility of me acquiring shares in the company, thinking that this would reduce the total funds that I would then have to produce to buy the company from him.” (witness statement, paragraph 17).
8.	The judge held:
“Part of these new terms was that Mr Strahan 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 Mr Strahan. The purchase price was to be £625 for each share …” (judgment, paragraph 6)
9.	Mr Wilcock agreed that Mr Strahan could purchase up to 10 per cent of the share capital of the company out of his bonuses. However, his case was that the reason for this arrangement was simply that Mr Strahan took the view that he might wish to make a further attempt to purchase the business and that if he acquired some shares in the business this might have the effect of reducing the overall sum to be paid in the event of exercising the option (witness statement paragraph 26). Mr Strahan was advised that the option price fixed by the second option placed a value on the company in excess of its true value, which he was advised was only £600,000. Mr Wilcock, however, took the view that the company was worth £1.25m and so he perceived the option price under the second option agreement to be generous to Mr Strahan. 
10.	By exercising the second option, Mr Strahan acquired 21, 25 and 4 ordinary shares in the company from Mr Wilcock in respectively 1998, 1999 and 2000. In 2000, however, he invested only part of his bonus in buying shares from Mr Wilcock. He said that he was advised that it would be better to put the remaining monies into his pension scheme.
11.	However, on 20 September 2001, Mr Strahan was dismissed from his employment with the company. Negotiations took place between the solicitors for Mr Strahan and the solicitors for the company as a result of which Mr Strahan compromised his claim against the company arising out of his dismissal and resigned as a director.
12.	Mr Strahan then asked Mr Wilcock to buy his shares at their full value on a non-discounted basis. Mr Wilcock declined, and Mr Strahan presented a petition for relief from unfair prejudice under Section 459 of the 1985 Act based on his exclusion from management and Mr Wilcock’s failure to buy out his shares at their non-discounted value. In his petition he also relied on the creation and issue of further classes of ordinary share capital on which dividends were paid and from which Mr Strahan was excluded. The judge found in favour of Mr Strahan on those matters, but it is not necessary to consider those findings on this appeal.
13.	On Mr Strahan’s case based on his exclusion from management and Mr Wilcock’s failure to purchase his shares, Miss Lesley Anderson, for Mr Strahan, submitted to the judge that equitable obligations were owed to him as the company was a “quasi-partnership”. (I will examine the meaning of that term below.) The judge’s conclusions on this submission were as follows:
“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 Mr Strahan into the ownership of that business by selling him a 2% interest in the business, Mr Strahan 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.”
14.	Having found that the company was a “quasi-partnership”, the judge turned to consider whether, given that on his findings the company was a “quasi-partnership”, Mr Wilcock owed Mr Strahan an obligation in equity to purchase his shares on a non-discounted basis upon Mr Strahan ceasing to participate in the management of the business. 
15.	The judge held as follows: 
“49. By holding out an expectation to Mr Strahan 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 Mr Strahan 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. Mr Strahan was, of course, dismissed before that date. After that date, if Mr Strahan 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 Mr Strahan and the sale of shares by Mr Wilcock, or the severance of his relations between Mr Strahan 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, Mr Strahan 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 Mr Strahan at a price of at least the price paid by Mr Strahan when he bought them. Clearly the expectation that Mr Strahan could purchase the shares of Mr Wilcock in the company at any time until 5 June 2002 would be of little interest to Mr Strahan if he was no longer employed by the company. I cannot see how Mr Strahan 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. Mr Strahan purchased his shares with money to which he was entitled. The contentions of Mr Wilcock lead to the result that Mr Strahan has received only a temporary benefit from that money and the risk is all one way. Either Mr Strahan 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 Mr Strahan. He has caused the employment of Mr Strahan to be terminated prior to June 2002 without offering to buy back the shares of Mr Strahan 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. Mr Strahan 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 Mr Strahan in relation to the shares in the company which were acquired by Mr Strahan 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.”
16.	Accordingly, the judge held that Mr Wilcock’s failure to offer to buy Mr Strahan’s shares at their non-discounted value following his dismissal by the company amounted to unfair prejudice for the purposes of section 459 of the 1985 Act. As I have said, the judge held that the appropriate form of order was an order that Mr Wilcock purchase Mr Strahan’s shares in the company at their non-discounted value. This is often called a “buy out order”.
Was there a “quasi-partnership” relationship?
17.	The burden of the dispute between the parties on this appeal is as to the basis of valuation in the buy out order. Shares are generally ordered to be purchased on the basis of their valuation on a non-discounted basis where the party against whom the order is made has acted in breach of the obligation of good faith applicable to the parties’ relationship by analogy with partnership law, that is to say where a “quasi-partnership” relationship has been found to exist. It is difficult to conceive of circumstances in which a non-discounted basis of valuation would be appropriate where there was unfair prejudice for the purposes of the 1985 Act but such a relationship did not exist. However, on this appeal I need not express a final view on what those circumstances might be.
18.	In general, the relationship between shareholders is governed exclusively by the terms of the memorandum and articles of association of the company of which they are shareholders. Their rights and obligations are derived from those documents and those documents alone. In some circumstances, however, equitable obligations will arise between shareholders. The relationship where such equitable obligations exist is often labelled, not always helpfully, as a “quasi-partnership”. The classic statement of the law as to when such a relationship will arise is set out in the speech of Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 at 371. Although this was a case involving the court’s discretion to order the winding-up of a company on the “just and equitable” ground (now section 122 (1) (g) of the Insolvency Act 1986), the same principles apply to claims for relief from unfair prejudice under section 459 of the 1985 Act. Lord Wilberforce held:
“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 – 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 – 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.”
19.	The question whether the relationship between shareholders constitutes a “quasi-partnership” is relatively easy to answer if the company’s business was previously run by a partnership in which the shareholders were the partners. It is indeed common for partnerships to be converted into companies for tax or other reasons. It is also relatively easy to establish whether a relationship between shareholders constitutes a “quasi-partnership” when a company was formed by a group of persons who are well known to each other and the incorporation of the company was with a view to them all working together in the company to exploit some business concept which they have. It is much less easy to determine whether a company is a “quasi-partnership” in a case such as this. Mr Strahan did not know Mr Wilcock when the company was formed. He joined the company as an employee. It was only subsequently that he acquired some of its shares from Mr Wilcock and became a director. However, it is clear on the authorities that a relationship of “quasi-partnership” may be acquired after the formation of the company. Lord Wilberforce specifically refers to an association “formed or continued” on the basis of a personal relationship.
20.	The question then is: in what circumstances should the courts determine that such a company constitutes a “quasi-partnership”? At the end of paragraph 48 of his judgment (set out above), the judge in effect approached this issue by asking whether, if Mr Wilcock had been a sole trader running the business prior to Mr Strahan first acquiring an interest in it, Mr Strahan would have become a partner upon acquiring that interest. He answered that question affirmatively. 
21.	The difficulty, however, about this question as such is that it assumes what it sets out to prove, namely the relationship between the parties was a form of partnership i.e. that it rested on the type of a personal relationship which is an ingredient of a “quasi-partnership”. In addition, the assumption is counter-factual: there never was a partnership between Mr Wilcock and Mr Strahan. Their relationship was only ever in or through the company. Logically, the appropriate question is whether, if the company had been formed (viz incorporated) at the time the company is alleged to have become a “quasi-partnership” (that is, in this case, at the time when Mr Strahan acquired his shares), the company would have qualified as a “quasi-partnership”, applying the guidance set out by Lord Wilberforce. Thus, it is important to ask whether at that point in time the company would have been formed on the basis of a personal relationship involving mutual confidence. It would also be appropriate to ask whether, under the arrangements agreed between the parties, all the parties, other than those who were to be “sleeping” members, would be entitled to participate in the conduct of the business. Likewise it would be appropriate to ask whether there was a restriction on the transfer of the members’ interests in the company. That last requirement is in fact met by the articles of association in the present case, which restrict the transfer of shares. With limited exceptions, the directors can refuse to register the transfer of shares. The articles would therefore enable the directors to prevent Mr Strahan from transferring his shares to a third party.
22.	Was the company a “quasi-partnership”? Mr Strahan joined the company initially in 1991 but as I have explained, the judge found that he rapidly took over day-to-day control and became first deputy managing director and then managing director. It was Mr Wilcock who became the “sleeping” member of the company. In 1994 Mr Wilcock gave Mr Strahan the first option. Under this option, Mr Strahan could acquire the entire share capital of the company exercisable within a five-year period. The condition of that offer was that Mr Strahan should be in full time employment of the company at the date when the option was exercised. This option was not committed to writing and appears to have been for a rolling five-year period. 
23.	As I have said, the judge held that the company was a “quasi-partnership”. The factors which support the judge’s conclusion are as follows. First, pursuant to the second option, Mr Strahan bought 5 per cent of the company’s shares, a not insignificant percentage. The only other shareholder was Mr Wilcock. Secondly, the evidence showed that Mr Wilcock agreed to the second option as a reward for Mr Strahan’s efforts in the company and as an incentive to him and this is confirmed by the fact that under the second option Mr Strahan had to pay for the shares he acquired out of his bonuses. Thirdly, at the relevant time Mr Strahan was participating in management decisions of the company. Indeed, as I have said, Mr Wilcock had in effect become a sleeping partner. Mr Strahan became a signatory and possibly the only signatory on the mandate for the company’s bank account. Fourthly, the terms of the option agreement were informally agreed between them. The terms were never committed to writing, and this reinforces the conclusion that there was a personal relationship involving mutual trust and confidence between the parties. Fifthly, while Mr Strahan was rewarded by the payment of remuneration, he also received a share of the profits in the form of his bonus. In addition, it was in effect agreed that Mr Wilcock should receive his return from the company in the form of dividends. In point of fact those dividends were substantially greater than Mr Strahan’s remuneration. Mr Wilcock’s case is that his return was in reality no more than a tax-efficient way to pay remuneration. The judge made no finding on that but he found as a fact that Mr Strahan had waived his right to receive any dividend on his shares whilst he was an employee of the company. The fact that Mr Wilcock and Mr Strahan came to an understanding or agreement as to the form of the return they were each to obtain from the company’s profits is indicative that their relationship was more a “quasi-partnership” relationship than a relationship between a majority shareholder and company executive. All these factors can be found among the findings of fact made by the judge in his judgment.
24.	Mr Anthony Elleray QC, for Mr Wilcock, submits that the judge drew the wrong inferences from the facts and that the relationship between Mr Wilcock and Mr Strahan was a commercial one, stemming originally from Mr Strahan’s status as a mere employee of the company. On Mr Elleray’s submission, the first option was a purely commercial arrangement between parties dealing at arm’s length. He submits that Mr Strahan was given the second option merely as a stepping stone to facilitate his acquisition of the whole of the share capital of the company under the first option. He also submits that Mr Strahan saw the second option in that light. On that basis, Mr Strahan’s expectation that he could exercise the option in the second option agreement was no more and no less than as a prospective purchaser of shares. Further, the real reason why Mr Strahan did not proceed to use all his bonus to acquire shares in 2000 was that as from 2000 the company had started to make losses: his motivation in this respect confirmed the commercial basis on which he took the benefit of the option arrangements. In addition, Mr Elleray submits that, if Mr Strahan is entitled to a buy out order on a non-discounted basis, he takes all the benefits and none of the risks of share ownership. 
25.	In my judgment, the judge was entitled to draw the inferences that he did from the evidence and to conclude that the relationship between Mr Wilcock and Mr Strahan developed into the relationship of “quasi-partnership”.  Mr Elleray’s submissions do not take sufficient account of the five factors listed in paragraph 23 above, which as I have said were all consistent with the existence of a “quasi-partnership” between the parties. In truth, the relationship between Mr Wilcock and Mr Strahan was multi-layered and multi-faceted, involving aspects arising from Mr Strahan’s employment, his right under the options and his participation in the management of the company’s business. Moreover, the terms of the option agreements did not inevitably mean that the parties adopted the position of vendor and purchaser under a commercial contract. On the contrary, Mr Wilcock considered that, under the terms of the second option agreement, he was giving Mr Strahan the opportunity to acquire shares in the company at a price representing about half their value, something he was most unlikely to have done if the relationship was a purely commercial one.  Moreover, the second option opened the door to Mr Strahan becoming a shareholder without acquiring all the shares under the first option. Again, this is something that Mr Wilcock is hardly like to have wanted to do under a purely commercial contract of purchase and sale.  Mr Wilcock must have contemplated that in that half-way house Mr Strahan and he would run the company together.  Seen overall the relationship between the parties met the description laid down by Lord Wilberforce in the Westbourne Galleries case.
26.	In addition, like the judge (judgment, paragraph 50), I do not accept the argument that Mr Strahan bore no risk by acquiring shares in the company. He bore the risk that the company might go into liquidation or that (as happened) Mr Wilcock might be unwilling to repurchase his shares at their full value if he caused the removal of Mr Strahan from the company or that he (Mr Strahan) might be unable to find a purchaser for his shares in the company because he held a minority shareholding or that if he did find a purchaser Mr Wilcock would cause the directors to refuse to register the share transfer.
27.	The next question is whether there are equitable considerations which bind Mr Wilcock to purchase Mr Strahan’s shares on a non-discounted basis once Mr Strahan had been dismissed by the company. In determining what equitable obligations arise between the parties, the court must look at all the circumstances, including the company’s constitution, any written agreement between the shareholders, and the conduct of the parties. These matters were explained by Lord Hoffmann in O’Neill v Phillips at page 1099 to 1102:
“…there 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. [1973] 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 [1948] 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.”
 …In the Australian case of In re Wondoflex Textiles Ltd. [1951] 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 … To hold otherwise would enable a member to be relieved from the consequences of a bargain knowingly entered into by him … 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 [1998] 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 [1990] 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.”
28.	Lord Hoffmann went on to explain that the concept of legitimate expectation was unnecessary in this context. The crucial question is whether, as explained in the passage already cited, equitable principles arose which made it unfair for a party to exercise rights conferred by the articles. He went on to hold on the facts of the case that there was no unfair prejudice. However, at page 1107 he held that where a majority shareholder prevents a minority shareholder from continuing to participate in the management of the company it would almost always be unfair for the minority shareholder to be excluded without an offer to buy his shares: 
“Usually, … 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.”
29.	It follows from these passages that it is appropriate to ask whether the relationship between Mr Wilcock and Mr Strahan was such as to make it unfair in the sense given above for Mr Wilcock to decline to buy Mr Strahan’s shares on a non-discounted basis after his dismissal, alternatively the test is whether Mr Wilcock’s failure to buy out Mr Strahan’s shares on a non-discounted basis after he had been dismissed from the company is fairly to be regarded as having been outside the parties’ reasonable contemplation when Mr Strahan’s acquired his shares. If so, Mr Wilcock’s failure in this regard would constitute unfair prejudice.
30.	The judge considered these questions in paragraphs 49 to 51 of his judgment (leaving to one side the last two sentences which, as I have said, do not need to be considered on this appeal). In my judgment, he also came to the correct conclusion. Mr Strahan’s departure from the company was involuntary: he did not take a unilateral decision to leave nor is it said that he was guilty of misconduct. He had been involved in the management of the company. Once he left the company, he was no longer able to do that which the parties anticipated that he should have the opportunity to do, namely to purchase the shares of the company held by Mr Wilcock pursuant to the first option. Indeed he was no longer interested in doing so because of the company’s financial position and because the price was too high. However, that is not the end of the matter. He retained his existing shares. Mr Wilcock rightly recognised that once Mr Strahan left the company he (Mr Wilcock) should buy his shares. However, he contended that he should do so only on a discounted basis. In my judgment, the judge was right to reject that contention. Mr Strahan had been prevented from continuing to participate in management. Moreover he had invested his bonuses in buying the shares. He was not able to benefit from any increase in the value of those shares by staying in the company and contributing to its profitability (if such was achievable). In those circumstances, the expectation reasonably to be imputed to the parties, given their previous relationship, was that he should receive the true value of those shares. He had invested in the company. In those circumstances fairness demanded that he should be entitled to claim back not simply the cost of acquiring the shares (viz the value of the bonuses foregone), but their value at the date of the buy out order. 
31.	It will be seen from this judgment that the terms of the first and second options principally throw light on whether the relationship between the parties was one of “quasi-partnership”. Those options are an essential part of the background and require careful consideration for a proper understanding of the parties’ relationship. Once, however, the question of “quasi-partnership” was answered in Mr Strahan’s favour, those options have little role to play. They were certainly arrangements of a commercial nature between the parties and such as might have been negotiated by parties who were not in a “quasi-partnership”. However, that does not mean that they constitute “special circumstances” justifying a buy out order other than on a full, non-discounted basis. On the contrary, the existence of the “quasi-partnership” cannot be ignored and the fact that the shares were paid for out of bonuses which Mr Strahan had earned strengthens the conclusion as to the appropriateness in this case of the basis of valuation which normally flows from the fact of exclusion from management in the case of “quasi-partnership” company. Mr Elleray rightly did not suggest that the prejudice which Mr Strahan suffered by using his bonus to buy the shares from Mr Wilcock should be left out of account on the grounds that it was prejudice suffered by him only in his capacity as a director. The statutory requirement that the unfair prejudice complained of should be suffered by the petitioner in his capacity as a member is satisfied by Mr Wilcock’s failure to purchase Mr Strahan’s shares on appropriate terms.
32.	Accordingly I would dismiss the appeal.
Lord Justice Richards
33.	I agree.
Lord Justice Mummery
34.	I also agree.