The dreams of parents

This is a shareholder dispute between three brothers and a sister, all involved in a construction and civil engineering business which had been set up by their parents. It seems that the parents had anticipated that this would be a family business and that the various siblings would all have a role in its management and operation.

It appears that it was intended that Patrick would be the first amongst equals as he was given a shareholding of 30% and was made the managing director. His sister and his younger brothers, Austin and Gerard, were to have subsidiary roles.

Difficult terrain

The company ran into very considerable problems in 2008 as a result of the Great Recession and financial crisis which was at its foundation: the company had borrowings of £3.4m but was provided with continuing support by its bankers, Natwest. One of the conditions for this support was that a subsidiary of the bank took a shareholding. Despite that support the company was obliged to enter into a CVA in 2010.

The company remained in the CVA until 2015 with only very modest payments to creditors. This episode put clear strains on the relationships, with Patrick taking responsibility for all discussions with the bank.

Conflicts of interest?

As the business recovered from the CVA and returned to profitability, Patrick had set up another company, 'Tunnelling', and this company had purchased various assets from an unrelated business in administration. These assets were then rented to the company by Tunnelling. Austin and Gerard became aware of these arrangements soon after they were put in place.

The collapse of the brittle edifice constructed by the parents was occasioned by the purchase of the shares held by Natwest in the company; Patrick wished to buy the shares for himself and thereby acquire a majority shareholding. He was not willing to contemplate an arrangement in which the shares were purchased pro rata by the shareholders; he was determined that he should be the majority shareholder. Austin and Gerard were at least as equally impassioned that this should not be the case.

They were so troubled by the proposals that were in place that they contacted the bank in order to put their own views across and to explain the differences between the shareholders.

The roof falls in

After Patrick learnt of the meeting which Austin and Gerard had had with the bank he was infuriated: matters came to a head. On 9th August 2016 he wrote to Austin and to Gerard dismissing them as employees of the Company.

The tone and choice of language in the letters gives an insight into the way that Patrick viewed his younger brothers: the letters said that Austin and Gerard neglected their work and engaged in 'gross insolence' and 'insubordination' towards Patrick.

Skulduggery

Sometime prior to their dismissal, Austin and Gerard met the IT consultant who looked after the email server; they asked for access to Patrick’s emails but this was denied; when persuasion failed they offered a modest cash payment as a means of weakening the resolve of the IT consultant, but all to no avail.

Should equitable considerations apply?

This is another case in which shareholder dispute decisions appear to be moving away from the lodestone of the quasi-partnership concept. The Judge appeared not to favour the term other than to acknowledge that it provided a general pointer as to when the strict terms of the Articles may not apply.

His conclusion was that a meeting arranged by the parents at which the future of the company was revealed to their children was 'a powerful indication that the affairs of the Company were treated as [a] matter for arrangement and agreement within the family and not just a matter of arm's length commercial agreement.'

Fatal flaws

There were failings by all brothers: Patrick had proceeded with the arrangements regarding Tunnelling without consulting his brothers. That conduct was unfairly prejudicial for the purposes of section 994. However, as Austin and Gerard did not object at the time, but only some two years later, following their exclusion, their claim in this regard collapsed.

Of greater concern to the Judge was the episode with the IT consultant and the manner in which Gerard and Austin gave their evidence to the Court. The Judge gave his views: 'In my judgement this was rightly seen as serious misconduct. The stark facts are that Austin and Gerard sought to bribe a contractor so as to gain covert access to Patrick's e-mails with a view to advancing their interests in their dispute with Patrick. That was behaviour which justified their removal from further involvement in the management of the Company even in the context of the family arrangements.'

Conclusions

As the unfairly prejudicial conduct of Patrick was purged by its tacit acceptance by Austin and Gerard, the action under s 994 Companies Act 2006 failed. Rather helpfully the Judge set out how he would have concluded, had this not been the case:

• if there had been valid grounds for section 994 relief, the conduct of Austin and Gerard meant that the order for buying out the shares would have been on a fully discounted basis;
• if the exclusion of Austin and Gerard had not been justified the order would have been on a non-discounted basis.

Commentary

This appears to be another case, to join those of Sunrise Radio, Blue Index and McCallum-Toppin in which equitable considerations are broadened beyond the classic quasi-partnership concepts.

Unlike the case of Booth and Booth, the fact that the shareholders had not invested money in acquiring the shares, but obtained them via inheritance, did not impact on the question of equitable considerations. The Judge considered this to be a relatively normal aspect of family companies.

Andrew Strickland