O’Neill and Another v Phillips and Others; In re a Company (No 00709 of 1992): HL 20 May 1999

The House considered a petition by a holder of 25 of the 100 issued shares in the company against the majority shareholder. The petitioner, an ex-employee, had been taken into management and then given his shares and permitted to take 50% of the company’s profits and a salary. Later the respondent in negotiations with the petitioner said he agreed in principle to the petitioner increasing his shareholding to 50% if certain profit targets were reached. No final agreement was arrived at however before the respondent changed his mind and revoked the profit sharing arrangement. The petition was based on the respondents ‘unfair’ refusal to make good the petitioners reasonable expectations that, on achieving the target set, he would be made a 50% shareholder in the company and that meanwhile the profit sharing arrangement would continue.
Held: The majority shareholder’s appeal succeeded. A minority shareholder, seeking relief for oppressive conduct by a majority shareholders, must plead something beyond a mere lack of faith in the management of the company, and show breach of some agreement as to the conduct of the business.
Lord Hoffmann said: ‘In the case of section 459, the background [against which the concept of `fairness’ has to be applied] has the following two features. First, a company is an association of persons for an economic purpose, usually entered into with legal advice and some degree of formality. The terms of the association are contained in the articles of association and sometimes in collateral agreements between the shareholders. Thus the manner in which the affairs of the company may be conducted is closely regulated by rules to which the shareholders have agreed. Secondly, company law has developed seamlessly from the law of partnership, which was treated by equity, like the Roman societas, as a contract of good faith. One of the traditional roles of equity, as a separate jurisdiction, was to restrain the exercise of strict legal rights in certain relationships in which it considered that this would be contrary to good faith. These principles have, with appropriate modification, been carried over into company law. The first of these two features leads to the conclusion that a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. But the second leads to the conclusion that there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely on 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.’
Lord Hoffmann discussed the basis of calculation of the value of shares in a buyout in an unfair prejudice petition: ‘I think that parties ought to be encouraged, where at all possible, to avoid the expense of money and spirit inevitably involved in such litigation by making an offer to purchase at an early stage. This was a somewhat unusual case in that Mr Phillips, despite his revised views about Mr O’Neill’s competence, was willing to go on working with him. This is a position which the majority shareholder is entitled to take, even if only because he may consider it less unattractive than having to raise the capital to buy out the minority. Usually, however, 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 his shares or make some other fair arrangement . . 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 exclusion 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 . .
Secondly, the value, if not agreed, should be determined by a competent expert. The offer in this case to appoint an accountant agreed by the parties or in default nominated by the President of the Institute of Chartered Accountants satisfied this requirement. One would ordinarily expect the costs of the expert to be shared but he should have the power to decide that they should be borne in some different way.
Thirdly, the offer should be to have the value determined by the expert as an expert. I do not think that the offer should provide for the full machinery of arbitration or the half-way house of an expert who gives reasons. The objective should be economy and expedition, even if this carries the possibility of a rough edge for one side or the other (and both parties in this respect take the same risk) compared with a more elaborate procedure . .
Fourthly, the offer should, as in this case, provide for equality of arms between the parties. Both should have the same right of access to information about the company which bears upon the value of the shares and both should have the right to make submissions to the expert, though the form (written or oral) which these submissions may take should be left to the discretion of the expert himself.
Fifthly, there is the question of costs. In the present case, when the offer was made after nearly three years of litigation, it could not serve as an independent ground for dismissing the petition, on the assumption that it was otherwise well founded, without an offer of costs. But this does not mean that payment of costs need always be offered. If there is a breakdown in relations between the parties, the majority shareholder should be given a reasonable opportunity to make an offer (which may include time to explore the question of how to raise finance) before he becomes obliged to pay costs. As I have said, the unfairness does not usually consist merely in the fact of the breakdown but in failure to make a suitable offer. And the majority shareholder should have a reasonable time to make the offer before his conduct is treated as unfair. The mere fact that the petitioner has presented his petition before the offer does not mean that the respondent must offer to pay the costs if he was not given a reasonable time. ‘

Lord Hoffmann, Lord Jauncey of Tullichettle, Lord Clyde, Lord Hutton, Lord Hobhouse of Wood-borough
Gazette 09-Jun-1999, Times 21-May-1999, Gazette 02-Sep-1999, [1999] UKHL 24, [1999] 1 WLR 1092, [1999] BCC 600, [1999] 2 All ER 961, [1999] 2 BCLC 1
House of Lords, Bailii
Companies Act 1985 459(1)
England and Wales
Citing:
CitedIn re Saul D Harrison and Sons plc CA 1995
The ‘legitimate expectations’ of a party were a label for the ‘correlative right’ to which a relationship between company members may give rise when, on equitable principles, it would be regarded as unfair for a majority to exercise a power . .
CitedEbrahimi v Westbourne Galleries Ltd and Others (on Appeal from In Re Westbourne Galleries Ltd) HL 3-May-1972
Unfair Prejudice to Minority Shareholder
A company had operated effectively as a partnership between two and then three directors. No dividends had been paid, but the directors had received salaries. One director was removed and sought an order for the other to purchase his shares, or . .
CitedIn re A Company (No 006834 of 1988) 1989
. .
Appeal fromIn the Matter of Pectel Limited; O’Neill; O’Neill v Phillips; Phillips and Pectel Limited CA 1-May-1997
The petitioners sought either the purchase of their shares, or the winding up of the company alleging unfair prejudice in the management of the company. The defendants argued that what was complained of did not fall within section 459 since it was . .
CitedIn re H R Harmer Ltd CA 1958
Shareholders who receive their shares as a gift but afterwards work in the business may become entitled to enforce equitable restraints upon the conduct of the majority shareholder. To succeed the applicant must show some detriment in their capacity . .

Cited by:
CitedAnderson v Hogg IHCS 14-Dec-2001
The appellant sought an order under the section for repayment to the company of sums paid to a director by way of extra redundancy payments. He said the payments were improper. His application had been refused, in part because he had not chosen the . .
CitedCVC/Opportunity Equity Partners Limited and Opportunity Invest II Limited v Luis Roberto Demarco Almeida PC 21-Mar-2002
(Cayman Islands) The respondent was a minority shareholder. An offer was made to buy out his interest. He petitioned for the winding up of the company on the just and equitable ground. The claimants obtained an injunction to prevent him doing so, . .
CitedArrow Nominees Inc and Another v Blackledge and Others CA 22-Jun-2000
A petition had been lodged alleging unfair prejudice in the conduct of the company’s affairs. The defendants alleged that when applying for relief under section 459, the claimants had attempted to pervert the course of justice by producing forged or . .
CitedKoeller and Another v Coleg Elidyr (Camphill Communities Wales) Ltd CA 12-Jul-2005
The applicants occupied a house as licensees. An order for possession was made against them. The company was a charitable company set up to provide accomodation in communities for handicapped adults. The workers in the communities were not formally . .
ExplainedGrace v Biagioli and others CA 4-Nov-2005
The petitioner complained that he had first been removed as director, and that the remaining directors had misdescribed the company’s profits and paid those profits to themselves as management expenses and in breach of a resolution requiring an . .
CitedAllmark v Ervel Curt Burnham, Distinct Services Ltd ChD 30-Nov-2005
The petitioner sought for relief from alleged prejudicial conduct by the respondents in the management of the company. . .
CitedBonham v Crow and others CA 13-Dec-2001
The petitioner complained of unfair prejudice in the way the company had been operated, and sought an order that his shares be bought out. However the judge found that the net value of the company was negative and the shares worthless. The judge had . .
CitedBee Tee Alarms, Re ChD 10-Mar-2006
. .
CitedKohli v Lit and Others ChD 13-Nov-2009
The claimant asserted that the other shareholders had acted in a manner unfairly prejudicial to her within the company.
Held: The claimant was allowed to bring in without prejudice correspondence to contradict evidence by the defendant which . .
CitedBilkus v Stockler Brunton (A Firm) CA 16-Feb-2010
Solicitors appealed against the rejection of their claim for an uplift in their fees amounting to andpound;50,000, based on the value element in the transaction in the 1994 Order. The court had to decide whether the matter came under the rules as a . .
CitedHarborne Road Nominees Ltd v Karvaski and Another ChD 19-Aug-2011
The claimant asked the court to set aside as an abuse the petition issued by the defendants, saying that it was only an attempt to obtain control of the company.
Held: The application failed. To succeed the claimant must show that his offer . .
CitedArrow Nominees Inc, Blackledge (L) v Blackledge (G), Blackledge (M), Blackledge (GR and MM) ChD 21-Jan-2000
The claimants had begun proceedings claiming unfair prejudice by the defendants in the management of the business. The defendants sought to have the petition struck out saying that the claimants had used falsified documents to base their petition. . .
CitedKaneria v Kaneria and Others ChD 15-Apr-2014
The parties were embroiled in a company dispute with allegations of conduct prejudicial to minority shareholders. An application was now made for sanctions for a failure to comply with court directions.
Held: Unless and until a higher Court . .
CitedMacom Gmbh v Bozeat and Others ChD 21-Jun-2021
Order regulating company’s affairs
COMPANY – Unfair prejudice – Petitioner 60% shareholder – Respondents 40% shareholders – Alleged breaches of director’s duties and failures to observe Shareholders’ Agreement – Undermining company’s corporate governance – Appropriate remedy – . .

Lists of cited by and citing cases may be incomplete.

Company, Damages

Leading Case

Updated: 01 November 2021; Ref: scu.84457