Buying Out Minority Shareholders Under The Companies Act 1985

Buying Out Minority Shareholders Under The Companies Act 1985



Buying Out Minority Shareholders under the Companies Act 1985
Rights of​ Minority Shareholders
In the decision of​ the Court of​ Appeal in​ Profinance Trust SA v Gladstone (Case No: A3/2000/0435, 2 July 2018) ('Profinance'), the rights of​ minority shareholders to​ have their shares purchased by other shareholders or​ the company under Sections 459-461 of​ the Companies Act 1985 (as amended) was extensively considered by Robert Walker LJ .​
It was concluded that the general purpose of​ these provisions is​ to​ provide a​ shareholder who has been unfairly prejudiced by the conduct of​ a​ company's affairs with a​ remedy more flexible and less drastic than a​ winding up on just and equitable grounds .​
However, Walker LJ observed:
'It is​ well known among company lawyers that although Sections 459-461 were intended to​ provide a​ fairly summary remedy for minority shareholders who have been unfairly prejudiced, proceedings under the sections often become bogged down in​ a​ mass of​ written evidence containing numerous accusations and counter-accusations reminiscent of​ petitions and cross-petitions alleging cruelty under the old divorce law.'
Companies Act: Sections 459 & 461
Section 459(1) of​ the Companies Act 1985 (as slightly amended by the Companies Act 1989) provides as​ follows:
'A member of​ a​ company may apply to​ the court by petition for an​ order under this Part on the ground that the company's affairs are being or​ have been conducted in​ a​ manner which is​ unfairly prejudicial to​ the interests of​ its members generally or​ of​ some part of​ its members (including at​ least himself) or​ that any actual or​ proposed act or​ omission of​ the company (including an​ act or​ omission on its behalf) is​ or​ would be so prejudicial.'
Section 461(1) and (2) of​ the Act provide as​ follows:
'(1) If the court is​ satisfied that a​ petition under this Part is​ well founded, it​ may make such order as​ it​ thinks fit for giving relief in​ respect of​ the matters complained of .​
(2) Without prejudice to​ the generality of​ subsection (1), the court's order may:
(a) regulate the conduct of​ the company's affairs in​ the future;
(b) require the company to​ refrain from doing or​ continuing an​ act complained of​ by the petitioner or​ to​ do an​ act which the petitioner has complained it​ has omitted to​ do;
(c) authorise civil proceedings to​ be brought in​ the name and on behalf of​ the company by such person or​ persons and on such terms as​ the court may direct;
(d) provide for the purchase of​ the shares of​ any members of​ the company by other members or​ by the company itself and, in​ the case of​ a​ purchase by the company itself, the reduction of​ the company's capital accordingly.'
It was observed in​ Profinance that there 'is a​ good deal of​ authority as​ to​ the circumstances in​ which Section 459 is​ engaged and as​ to​ the wide nature of​ the powers conferred on the Companies Court by Section 461 if​ it​ is​ satisfied that a​ Section 459 petition is​ well founded .​
Many of​ these cases are concerned with the circumstances in​ which the court should direct a​ purchase of​ shares under Section 461(2)(d) and with the basis on which the shares (almost invariably a​ minority holding) should be valued.'
In a​ quasi-partnership case where the petitioner is​ not at​ fault the court tends to​ favour an​ undiscounted share of​ the value of​ the company as​ a​ whole .​
Date of​ Valuation and Interest under the Companies Act
The main question in​ Profinance was two-fold:
1 .​
Does the court have the power to​ set an​ appropriate valuation date for the share purchase?
2 .​
Does the court have the power to​ award interest from the date of​ valuation to​ the date of​ payment?
As to​ the appropriate valuation date, it​ was held that the court has a​ wide discretion in​ the matter .​
However, even a​ wide discretion to​ do what is​ fair must be exercised judicially and on rational principles .​
As to​ the power of​ the court to​ award interest under a​ Section 461 order, it​ was held that an​ order for interest is​ not beyond the powers of​ the court .​
The court can make adjustments in​ the valuation process which means that the court is​ actually valuing shares, not as​ they are, but as​ they would have been if​ events had followed a​ different course; and that practice is​ regularly followed by the court in​ orders under Section 461(1) .​
In these circumstances, it​ was held, a​ denial of​ the court's power to​ award interest would be unacceptable .​
Fair Valuation Date under the Companies Act
According to​ Walker LJ, the authorities show that there are two main considerations which the court has to​ bear in​ mind in​ deciding what valuation date is​ fair on the facts of​ the particular case:
1 .​
One is​ that the shares should be valued at​ a​ date as​ close as​ possible to​ the actual sale so as​ to​ reflect the value of​ what the shareholder is​ selling .​
2 .​
The rival consideration is​ that the date of​ the petition is​ the correct starting point .​
This is​ because the date of​ the petition is​ the date on which the petitioner elects to​ treat the unfair conduct of​ the majority as​ in​ effect destroying the basis on which he agreed to​ continue to​ be a​ shareholder, and to​ look to​ his shares for his proper reward from participation in​ a​ joint undertaking.
Although the Court of​ Appeal in​ Profinance opted for the second (i.e .​
that the date of​ the petition should be the valuation date of​ the shares) as​ the better stating point, it​ did conclude that there may be circumstances where fairness would require that another date be used .​
Another date, according to​ Walker LJ, may be more fair in​ the following cases:
where a​ company has been deprived of​ its business, an​ early valuation date (and compensating adjustments) may be required in​ fairness to​ the claimant .​
where a​ company has been reconstructed or​ its business has changed significantly, so that it​ has a​ new economic identity, an​ early valuation date may be required in​ fairness to​ one or​ both parties .​
But an​ improper alteration in​ the issued share capital, unaccompanied by any change in​ the business, will not necessarily have that outcome .​
where a​ minority shareholder has a​ petition on foot and there is​ a​ general fall in​ the market, the court may, in​ fairness to​ the claimant, have the shares valued at​ an​ early date, especially if​ it​ strongly disapproves of​ the majority shareholder's prejudicial conduct .​
but a​ claimant is​ not entitled to​ a​ one-way bet and the court will not direct an​ early valuation date simply to​ give the claimant the most advantageous exit from the company, especially where severe prejudice has not been made out .​
all these points may be heavily influenced by the parties' conduct in​ making and accepting or​ rejecting offers either before or​ during the course of​ the proceedings .​
Also, it​ should be noted that recent case law has clearly established the reluctance of​ the courts to​ allow section 459 of​ the Companies Act to​ be widely used to​ force the company's hand when its controlling shareholders not acting improperly .​
The clear message from the courts is​ that the parties are expected to​ behave like adults and talk to​ each other with a​ view to​ one party being bought out.
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