A steady stream of cases through the courts helps to define the boundaries within which this section operates. The 2013 case of Moxon v Litchfield was a colourful trial, taking some 14 days and involving 11 witnesses. The object of the trial was LTM Wealth Management Limited, a business set up by Mr Moxon and Mr Litchfield. Two other shareholders had provided funding and were seeking EIS relief on their investments. There were also some preference shareholders.
Some of the colour was provided by claims of forgery (disposed of by evidence of handwriting experts), a hard drive being wiped clean, and claims that a 300% overspend on a marketing event had been hidden from the non-executive director. This overspend appears to have sown seeds of bitter distrust. Some of the relationships between the parties never recovered from this incident.
Valuation needed?
At the core of the case was the question of whether or not Mr Moxon was a “bad leaver” as defined in the shareholders’ agreement. If this was the position, then the shareholders’ agreement provided that the shares held by Mr Moxon could be acquired from him at par.
The definition was a far narrower one than is often encountered. A bad leaver was a person dismissed in circumstances where he had committed an act of fraud or serious or repeated breach of his obligations under his contract of employment.
The main documents, governing the relationships between the shareholders and the Company, were the articles of association and the shareholders’ agreement. In addition to this Mr Moxon’s employment was governed by a detailed employment contract.
Quasi-partnership concept and contractual documentation
One of the points addressed was whether there were rights wrapped within the quasi-partnership concept which somehow negated the terms of the shareholders’ agreement, the articles and the employment contract. It was submitted, on behalf of Mr Moxon, that all these agreements and arrangements should be viewed and construed in the context of an overarching quasi-partnership.
Under this interpretation the court should import equitable obligations between the quasi-partners collateral to their legal relationships. The court should then give effect by restraining the exercise of strict legal rights and instead providing for a fair and equitable separation.
The Judge saw no uncertainty in this. The relationships between the parties were governed by bespoke legal agreements. He explained the position with persuasive clarity.
“In my view, neither equity nor the jurisdiction under section 994 sweeps away contractual arrangements; at most, the exercise of contractual rights is subjected to equitable restraint if it would be unconscionable, or unfairly prejudicial. If the exercise of the legal right would not be unconscionable, the consequences of its exercise must be permitted to follow.”
Limitations on exclusion
The trial addresses the most common ground for bringing an action under section 994. This is in respect of exclusion of a shareholder from the management of the company.
The Judge recognised that exclusion did not always take the clumsy shape of changing the locks and denying the shareholding director admittance. It could also take on rather more subtle and invidious forms. He recognised that it was possible for board meetings to become nothing more than ciphers confirming decisions already made elsewhere by an overbearing majority.
The Judge addressed whether any such exclusion would always be justification for an action under Section 994, even if there was an understanding between the parties of continued management participation, it must have had some limit. The contractual limit as set out in the various agreements was an entirely fair and reasonable one.
Therefore, if Mr Moxon conducted himself in such a way as to be within the definition of a bad leaver, then the exclusion from management was justified.
The pivotal question: was there gross misconduct?
The Judge described the hurdle to be cleared in order for there to be gross misconduct.
“Gross misconduct means or extends to conduct on the part of the relevant person (here, Mr Moxon) of such seriousness and disrepute, or showing such disregard for the interests of the company and the obligations owed to it and his fellow shareholders, as to make it quite unreasonable to expect his co-directors and those fellow shareholders to continue in business with him, or to account to him for any share of the success of their joint endeavours, and quite reasonable for him to be dismissed summarily.”
The allegations regarding the conduct of Mr Moxon centred on some property dealings which Mr Moxon was trying to bring to fruition, but without the knowledge or consent of the other shareholders.
It seems that the reality of the property dealings was then exacerbated by attempts by Mr Moxon to hide his activities. As part of one project he went to Cannes with another property developer. However his office diary showed him to be working at home, having a root canal dental appointment or attending a funeral in Beverly in the days in question.
The Judge was quietly scathing in describing Mr Moxon as having abandoned truth in favour of expediency. He also describes some of his written communications with regards to the projects as having departed starkly and startlingly from the truth.
The Judge concluded, “I consider that Mr Moxon was guilty of gross misconduct and justifiably characterised as a bad leaver, and there is no basis for the court's intervention to modify the consequences provided for in the contractual agreements the parties made when the company was formed.”
No valuation needed
There was therefore no valuation needed, the agreements entered into between the parties governed their relationships. These provided for the shares to be acquired at par value when the shareholder was a bad leaver. This was harsh, but this was what the parties had agreed.
Andrew Strickland, Corporate Partner, Scrutton Bland
Valuation Group, December 2014
