If a shareholder does not own a controlling interest in a company, it or s/he will be vulnerable to the management of the business by the majority. What remedies are available should the company, for example, unfairly choose not to pay dividends; unfairly diminish the value of its shares; or unfairly dilute the shareholding of existing members?
The Companies Act 2006 contains provisions designed to protect minority shareholders from suffering loss as a result of such conduct. Section 994 allows a minority shareholder to petition the Court through a specially-designed procedure where s/he believes that the company’s affairs are being conducted so as to unfairly prejudice his or her interests. Typically, a petitioning shareholder will seek a compulsory share buy-out by either the company or the other shareholders.
However, when a share buy-out is ordered by the court, a further problem can arise. On what date should the shares be valued in order to set a purchase price? This question was recently addressed Re K R Hardy Estates Limited [2014] EWCH 4001 (Ch), in which a self-declared ‘dysfunctional family’ battled over the ownership and management of two linked family businesses.
The Court has a wide discretion under Section 994 on how to assess the amount to be paid to buy out the shares. The Judge considered seven potential dates as candidates for the valuation date in this case. These included (1) the date on which the unfairly prejudicial conduct occurred; (2) the date on which the value of the shares was affected; (3) the date on which the court was petitioned; and (4) the date of the Order for the shares to be purchased. Clearly the company (and therefore the shares) could be worth substantially different amounts on each of those dates.
The Judge found that the valuation should take place as at the date of the Order for purchase. That date had the advantage of certainty and was the most fair out of the possible valuation dates. It also aligned with the general trend of authority for interests to be valued at that date.
Unfortunately for the petitioner, this decision could in principle allow a majority shareholder to manipulate the value of the shares between the date on which the action arose and the date on which the Court Order was made. This will necessarily remain a risk in all cases where a long-running dispute proceeds through the Courts. However, the court made it clear that the overriding requirement is that the valuation should be fair in each case. Therefore the Court will still be heavily influenced by the facts and the parties’ conduct in reaching a decision.
Case summary: Re K R Hardy Estates Limited
The authors Rachel Green and Grace Dawson-Stevens are members of Burges Salmon's dispute resolution team working on shareholder and company disputes with Paul Haggett.