Minority Shareholders  – “It’s all about the timing”

Business associates who have worked together and managed a business for many years tend to form close emotional relationships.  Close enough that when they fall out, it is really personal.   Even where there are not close social and family relationships too, the likelihood is that the directors of a small limited company will know each other well and if they have to separate, it is not usually easy.  Where agreement cannot be reached, the answer is the minority shareholder action, which is the business equivalent of a messy divorce.

Section 994 Companies Act 2006 is the statutory basis for the power of the court to intervene.   One shareholder applies to the court for a declaration that his co-shareholder(s) have been responsible for unfairly prejudicial conduct.  Such conduct can be specific to themselves as a minority shareholder, or to a certain class of shareholders.  If such conduct is proved, the court has very wide discretionary powers, but will usually make an order to require the majority to buy the shares of the minority at a price that it defines.

The writer appeared at the High Court in Birmingham recently for the trial of such a claim.  It was the case of Pinfold v Ansell & Others (2017) EWHC 889.  The Petitioner held 49% of the issued share capital and had been excluded from the management of the company.  From the date of his exclusion to the date of the issue of the petition, the value of the company had collapsed.  The valuations were hotly contested, but the court appointed expert forensic accountant advised that in the space of about 2 years the value of the company dropped from about £618,000 to about £220,000.  There was no evidence of the value as at the date of the trial, but it was struggling to survive as a going concern.

One of the main issues between the parties was whether the sale price of the Petitioner’s shares should be based on the value as at exclusion or the value on the issue of the petition.   In minority shareholder cases there are many judicial authorities and it is hard to anticipate how a judge will decide.  The general rule suggests the date of the trial.   HHJ David Cooke decided that the early date (favourable to the Petitioner) should be adopted and expressed himself as follows:
91.    The various points that lead me to this conclusion may be summed up by saying that the essential unfair prejudice to Mr Pinfold is that since his expulsion he has been locked in against his will to a company which now pursues a commercial strategy that, contrary to the agreement for his participation as a member, he has no opportunity to be involved in or influence. The way in which the business is run has since changed substantially. I do not consider this to be sufficient for it to be regarded as a “new economic entity”, nor has it been changed in a way that excites suspicion that it may be being deliberately run down to defeat his claim (cf Croly v Good [2010] EWHC 1 (Ch), referred to by Mr Gunstone). Nevertheless it represents a “sea change” in conduct, to use an expression that appears in a number of the cases that preceded Profinance, and there is a substantial flavour in the evidence that the new approach is influenced by the private interests of the Ansell family, including the protection and enhancement of Mr Ansell’s reputation and legacy as an influential figure in the gaming world.
The effect of the decision as to timing was that price secured by Mr. Pinfold was substantially more than would otherwise have been the case, and at a subsequent hearing, Mr. Pinfold was also awarded costs and interest and an additional sum under part 36 Civil Procedure Rules 1998.

The conclusion of the case was a result with which Mr. Pinfold was very pleased and it represented the culmination of nearly 3 years of litigation.   This form of dispute is not for the faint hearted.  It is very expensive as the costs of valuation and the legal costs are high.  Nevertheless, the case does illustrate that the court does have the power to require payment for shares at a level that does justice between two competing interests.

 

Giles Gunstone

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