When is an offer to buy out a minority shareholder reasonable?

Blake Morgan acted in the recent Court of Appeal case of Potamianos.  In its judgment, the Court of Appeal provided guidance as to the circumstances in which, in the context of an unfair prejudice petition brought by a minority shareholder pursuant to s.994 of the Companies Act 2006, an offer (that was not accepted) to buy that minority shareholder’s shares in the company was “reasonable” such as to deny that shareholder any remedy on the basis he should instead have taken up the offer.

Potamianos v Prescott & ANR [2019] EWCA Civ 932 – Court of Appeal guidance on reasonable offers in unfair prejudice petitions.

The Court has a broad jurisdiction to assist a shareholder whose interests as a shareholder have been unfairly prejudiced by the manner in which the affairs of the company are being conducted: “it may make such order as it thinks fit” (s.996(1) of the Companies Act 2006).  The most common order made when “unfair prejudice” is established is for the shares of the prejudiced shareholder – usually a minority shareholder, whose lack of voting power leaves them without power to effect decisions – to be bought at a fair price to be determined by the Court.

It is a prerequisite for the grant of any remedy under s. 996(1) of the Companies Act 2006 that the shareholder was “unfairly prejudiced“.  It is well established that a reasonable offer to buy that shareholder’s shares at a fair value serves to ‘cure’ otherwise unfairly prejudicial conduct so as to leave the shareholder without a legal remedy (see, for example, O’Neill v Phillips [1999] 1 WLR 1092, at page 1107 per Lord Hoffmann).

In Potamianos, Lord Justice McCombe, Lord Justice Leggatt, and Lady Justice Rose stated (at paragraph 130 of their judgment) that there is “no one feature of an offer which will automatically make it either a reasonable or an unreasonable offer for this purpose“.  They went on to set out a non-exhaustive list of factors that will be relevant in most cases to the question whether or not an offer was reasonable:

1. The price offered, or means of calculating that price, will be important. An offer to buy the minority shareholder’s shares at a fixed price will not necessarily be an unfair value, but the offer must be fair to both parties.  An important factor as to the reasonableness or unreasonableness of an offer is therefore the ability of the prejudiced shareholder to be able to satisfy himself that the figure offered is a reasonable one, and to be able to do so before he has to decide whether to accept or reject the offer.  The Court of Appeal cited the example that a fixed price offer will rarely be fair if the prejudiced shareholder (or his advisers) are not given access to company documents needed to understand how the price was arrived at and whether that valuation is reasonable.

2. The likelihood of the majority shareholder being able to implement the offer made. An offer is not only reasonable if it becomes binding immediately upon acceptance.  But, the question of how likely it appeared at the time that the majority shareholder would go through with the offer may be relevant to the reasonableness of an offer.  To illustrate this, the Court of Appeal noted a previous case in which an offer expressed to be “subject to affordability” was not reasonable in the circumstances (Re Flex Associates Ltd [2009] EWHC 2690 (Ch)).

3. The proximity of the offer to the unfairly prejudicial conduct complained of. It is not the case that an offer made before prejudicial conduct takes place can never amount to a reasonable offer, but the timing of an offer may be significant.  The Court of Appeal gave the example of a wrongful exclusion from management of the company and whether at the time the offer was made all that the prejudiced shareholder could reasonably expect was that he would be bought out, so as to enable he and his former business partners to go their separate ways.  Or, if the offer was made before the relationship had broken down the prejudiced shareholder may act reasonably in refusing the offer: he may have a legitimate hope that the relationship can be patched up.  The fact that, with hindsight, the relationship did break down irretrievably does not mean that an offer made before this became apparent should have been accepted.

On the facts of Potamianos, the Court of Appeal held that none of the offers relied on by the majority shareholder, Mr. Prescott, rendered fair Dr. Potamianos’ exclusion from the company and that Dr. Potamianos was entitled to an order that his shares be bought at a fair price, such price to be determined by the Court at a subsequent trial.

Blake Morgan LLP represented Dr. Potamianos.