Scottish Court of Session Decisions

[1] The Petition before me, which is extensive, seeks reduction of an assignation of an Option Agreement. What was actually argued was whether a Minute of Amendment for the Petitioners should be allowed.

[2] Let me return to the Option agreement and try to summarise the issue.

[3] Mr and Mrs Brown live on a farm in East Lothian called Woollands Farm. In the 1990's Mr Brown took a decision to diversify from traditional farming and explore the business of producing still and sparkling water. He investigated the possibilities, sunk a borehole and set up a factory and bottling unit. A company was set up in 1993 called Scottish Borders Springs Limited and its registered office was at the farm ("the Company").

[4] The Company has an authorised share capital of £1 million. Mr Brown holds one share, and Mrs Brown 222,671 shares. It is alleged that 452,802 shares are held by a company called Scottish Border Holdings Ltd, who have an address in Jersey. That makes them the majority shareholder (I note that in the pleadings this is not admitted). The shareholding of the other issued shares is described in the pleadings.

[5] In 1996 Mr and Mrs Brown granted a 30 year lease of certain subjects to the Company including a grant of the right to draw water from the borehole. In return they got a considerable annual rent and royalty.

[6] In the same year they granted an Option to purchase the farm (subject to certain exclusions and inclusions) to the Company Scottish Border Springs Limited. In March 2000 the Company indicated that it intended to exercise the Option. The next month the majority shareholder said they were exercising the Option as they had an assignation from the Company. The Browns said no as they had been told of no assignation.

[7] Then 10 days later an assignation of the Option agreement was intimated by another company Purely Scottish Mineral Water Limited. They wanted to buy the farm.

[8] The Browns were evidently not happy about what was occurring and the reason for that was this. In 1998 there was concluded a Shareholders Agreement to regulate the dealings of the members of the Company. The Browns took the view that the assignation was getting rid of a valuable company asset (i.e. the Option) for nothing and was also contrary to the shareholders agreement in certain detailed aspects.

[9] In simple terms they complain of discriminatory abuse of power by the majority shareholders and that the Company's affairs are being carried on in a manner which is unfairly prejudicial to them. They want the assignation reduced. They call in aid sections 459 and 461 of the Act to give them the relief they need as minority shareholders.

[10] The Companies Act 1985 provides inter alia as follows:

The Court under section 261 has to be "satisfied" that the petition is well-founded.

[11] Then comes the proposed Minute of Amendment which inter alia says:

[12] Before the whole merits of the Petitions and Answers are heard the Browns move this amendment.

[13] The Company, its majority shareholder, Scottish Border Holdings, Holdings majority shareholder a Mr Leech and the assignee Purely Scottish Mineral Water Limited oppose this. It appears that the majority shareholders are concerned that their investment in the Company is worthless if the minority can prevent the exercise of the Option. The Company would be saddled with substantial rents and royalties for 30 years interest relief. Their argument developed in this fashion.

[14] The amendment had introduced a civil dispute between a landowner and an option holder as to whether the option was assignable. That had nothing to do with the operation of the Company; because section 459 was not concerned with ordinary commercial disputes but only with the Company and its members qua members. The amendment was thus extraneous to the interests of the members. A property dispute could not be disguised as a member's dispute. [I was at this stage referred to Ebrahimi v Westbourne Galleries Limited [1973] A.C. 360 and Re J E Cade & Son Ltd [1991] BCC 360].

[15] The petitioners have a personal interest to obtain rent and royalties. The Option (No 6/7) was at open market value. Their interest to obtain rent conflicted with the Company's interest to rid itself of that obligation by buying the land. The Option was granted when the Petitioners had control of the Company. Now they had not. Cade showed how interests in different capacities had to be distinguished.

[16] The receiving of rent by the Petitioners had nothing to do with their membership of the Company whereas if the Company could free itself of rent that would benefit the Company and them as members. Although the fifth respondent had minimal share capital, if it bought the land it would have an asset on the balance sheet. It was in any case controlled by Scottish Border Springs and this meant no loss of control of the valuable asset. It could not be complained that the assignation was gratuitous when the Option itself was granted for £1. In any case the assignees had an obligation to pay to the petitioners any agreed price.

[17] Mr Robertson for the Petitioners, moved me to allow the amendment. The Petitioners were concerned about any dilution in value of their share holding and this would happen if rent was stopped. Sections 459 and 461 gave a very broad discretion as to what could be struck at.

[18] Counsel referred me by name only to Re a Company 5287/85 [1985] 1 BCC 99, 586 at 99, 589; Re Full Cup International Trading Ltd 1998 BCC 58; McGuinness v Bremner 1988 SLT 891 and Cade supra (which he looked at in some detail).

[19] He argued that the facts of Cade were very different from this case. That case concerned agricultural holdings whereas here what was struck at was the act of the company. To offload the asset was bound to devalue their shares as a member; and it was a proper subject to raise whether the Option could ever be assigned at all. The lease, the Option and the Shareholders Agreement all had to be looked at together. It was artificial and unworkable for the Court to consider whether the action of the Company in assigning was valid without considering the construction and effect of the Agreement itself.

[20] I now turn to look at Cade as it was the only case fully canvassed. The case concerned a family dispute between two brothers, Tony and John, and the rights to a firm called Marriotts Drove Farm. Inter alia the case shows how easily a protected agricultural tenancy can be created even though no party intended it. The background was the break up by consent of many successful family businesses run by a number of brothers. One business was a farm. It was to go to John but was more valuable than his proper share. He could not afford to buy it and so Tony paid for it. It was John's home and Tony, in order to help his brother, agreed to let him farm it by means of the company J E Cade & Son Ltd. Tony took a minority share (6%) in the company and no tenancy was to be created. There was an option to John that within five years he could buy the farm and Tony's shares. Tony also granted a licence to the company to farm Marriotts for five years free of charge.

[21] After five years the brothers fell out. John had not enough money to buy out Tony or the farm. Tony discovered that his brother probably had a protected tenancy. Tony tried to obtain rent by going to arbitration. He tried to recover possession and mesne profits in another separate action.

[22] He then petitioned under section 259 for orders inter alia to have John purchase his shares for almost £1/4 million and (after many amendments) for possession of the farm and to have the company wound up. He complained of unfairly prejudicial conduct by his brother.

[23] For present purposes the importance of Cade turns narrowly on whether Tony could amend his petition to seek possession and profits. Warner J. refused to allow this and his reason was as follows. By seeking possession (which he was anyway in one of the many other actions) he was pursuing his interests as the freeholder of the farm and not his interests as a minority shareholder. It was, correctly, pointed out that his interest as freeholder was adverse to his interest as shareholder. As freeholder Tony would not want a protected tenancy, as a member of the Company he would, as this was a benefit of the Company. Although there were many situations where sec 459 could be used they did not extend to interests in a capacity other than a shareholder. Interestingly, Warner J. refrained from deciding whether the petition was also an attempt to circumvent the provisions of the Agricultural Holdings Act.

[24] I will deal briefly with some other cases noticed in passing before me. Full Cup was a very different kind of case. There were many amendments in "hectic" interlocutory activity and the single judge correctly exercised his wide discretion on unfair conduct by saying that no relief would meet the justice of the case. He had not been asked to wind up the business and left the provisional liquidator to make the relevant investigation. It does not help me in this case.

[25] McGuinness dealt with inordinate delay in holding a meeting properly asked for by shareholders. It is not in point here.

[26] Re a Company 5287/85 again presents very different facts. It concerned transfer of majority shares offshore and the vanishing of company assets. Very clearly the minority shareholders were affected by this. Hoffman J. took the view that sec. 459 applied even though some of the issues could be litigated in a separate process. Duplication was unnecessary.

[27] In my opinion this amendment raises issues which are not appropriate to sec. 459. It raises a pure question of construction of a document entered into between two private citizens (the vendors) and the Company. The fact that the vendors were also shareholders is nothing to the point. The rent they are recovering as landlords is as private individuals, not as shareholders, and their more general complaints in the Petition are in a capacity other than that where they benefit as landlords.

[28] It seems to me that the circumstances of the present case are very close to Cade and quite different from the other authorities. Also, and importantly, a decision on what I have described as a pure question of contract would not advance the petitioners' complaints under sec. 259 which remain on much more general grounds. Also, if the Petition is argued unamended that still leaves open the contract point.

[29] There is a certain superficial attraction in hearing all the points at once but in my view that would not be the correct solution here. In the result I will refuse to allow the amendment of the Petition.

[30] The parties will observe that I have not found it necessary to deal with in re Westbourne Galleries cit supra. I am well aware of the importance of Lord Wilberforce's remarks at 379D on equity and the importance of personal relationships. There is a flavour of that in this Petition but it is irrelevant to the pure question of contract.