If the Articles of Association of a company are amended so as to include “drag-along” provisions and those provisions are then exercised so as to allow for the purchase of the shares of a minority shareholder, will this constitute unfair prejudice? On the facts of the recent case of Arbuthnott v Bonnyman and Others [2014] EWHC 1410 (Ch) the court decided that the circumstances in which Mr Arbuthnott was forced to sell his shares by the introduction of new drag-along provisions in the Articles did not amount to unfair prejudice.
Background
The facts were complicated, and in order to consider the various allegations of unfair prejudice made by the claimant, the court was required to hear evidence over 27 days from lay witnesses and experts. The court considered a multitude of documents including Articles of Association and shareholder agreements and extensive communications between the parties.
Immediately prior to the proceedings, a limited company called Watling Street Limited (“WSL”), which was essentially a consortium of some of the other shareholders, had purchased the shares of all of the other shareholders save for those held by Mr Arbuthnott who claimed that the price he was being offered was wholly inadequate and refused to sell. As part of the purchase arrangements, the other selling shareholders had agreed with WSL to vote for an amendment to the Articles of Association so as to include a “drag-along” provision which had the effect of allowing WSL to purchase Mr Arbuthnott’s shares without his consent.
Mr Arbuthnott decided to issue unfair prejudice proceedings pursuant to Section 994 of the Companies Act 2006. He made several claims but for the purposes of this note, one of these consisted of an allegation that the alteration of the Articles so as to include the drag-along provisions amounted to an unfair expropriation of his shares at a substantial undervalue and that this caused him prejudice.
During the trial it became clear that Mr Arbuthnott’s case in this respect was dependent upon alleging that his shares were being purchased at an undervalue. The experts had widely differing views of the value of the company. The claimant’s expert valued the company in the range of £300million and £325million. The defendants valued the entire shareholding in the range £20-25million. However, despite the disparity in approach to the overall value of the company the valuation of the claimant’s 8.9% shareholding in the company on a minority basis as at the date of the WSL offer showed that there was a substantial overlap between the experts. In either case it became clear that the WSL offer (which provided for a payment of £1.35million for his shares) was higher than both of these valuations. The court decided that although the defendants’ conduct involved an expropriation of shares from the claimant, since the claimant had been offered a fair value for those shares and since he had been offered the same price as had been offered to all of other shareholders, he was not being treated unfairly and therefore the court refused his claim.
Summary
A rogue shareholder can often cause a myriad of difficulties for the remaining shareholders and the board. He may sometimes try to use this dynamic to achieve greater value for his shareholding. Often it is difficult to get rid of such a shareholder despite the fact that they are making a nuisance of themselves. The facts of this case set out some interesting circumstances in which the board were able to remove the shareholder without his consent.