In the case of Re Home & Office Fire Extinguishers Ltd Rodliffe v Rodliffe and another the claimant and defendant were brothers, and each were directors, employees and 50% shareholders of the second defendant company.
The brothers each sought orders under s 994 of the Companies Act 2006 for the compulsory purchase of the other’s shares, each on the basis he had been attacked by the other with a hammer. The first defendant was charged with malicious wounding and subject to bail conditions which, among other things, prevented him from going to the company’s office.
It fell to be determined:
- whether the first defendant attacked the claimant with a hammer;
- whether the first defendant was entitled to arrears of salary;
- whether the first defendant had conducted the company’s affairs in an unfairly prejudicial manner;
- whether the first defendant should be ordered to sell his shares in the company; and
- whether it was appropriate to discount the value of the first defendant’s shareholding.
The application would be allowed.
- The evidence established that it had been the first defendant who had instigated an attack on the claimant;
- It was a well-established principle that an employee could not recover his salary if he had failed to do the work for which he was employed and, in this case, the first defendant had disabled himself by his actions from doing any work for the company on the day of or after the attack. Up to the end of his trial, his bail conditions had prevented him from going to the company’s premises.
- It was established that, in order to succeed in a petition under s 994 of the Act, the petitioner was required to establish that the respondent had conducted the company’s affairs in an unfairly prejudicial manner. The prejudicial conduct was usually a breach of the terms on which the shareholders had agreed that the company’s affairs should be conducted, but might also be a single event which had put an end to the basis upon which the parties had entered into association with each other. In the circumstances, there was no doubt that the first defendant’s conduct had related to the affairs of the company, as his conduct had been a breach of the implied understanding that he and the claimant would act properly and in good faith towards each other, and it had also been a single event which had made it impossible for them to continue their association as directors of, and shareholders in, the company.
- In the circumstances, it was obvious that the claimant or the first defendant should sell his shares to the other and, equally obvious that it should be the first defendant who sold his shares to the claimant. That was mainly not only because the first defendant was the guilty party, but also because the claimant had been running the company on his own for nearly four years, whereas the first defendant’s performance before the attack had been below standard.
- In general, it was not appropriate to discount the value of a minority (or 50%) shareholding in a quasi-partnership company, but the court had a discretion to do so where there were special circumstances, for example where the prejudicial conduct had caused loss to the company. However, the basic principle was that the valuation should be fair. No financial loss to the company was proven and so the discretion was not exercised.
Accordingly, the first defendant would be ordered to sell his shares to the claimant for £113,321, plus interest at 2% over the banks’ base rate from the date on which the petition was issued.
Hopefully the majority of share sales are less violent than this example! If you would like advice on shares, shareholding, selling of shares generally or shareholder disputes then please contact a solicitor.
Geoff Kew
