It has long been established that where a majority shareholder in a company offers to purchase a minority shareholding at a fair value (as determined by a competent expert) any petition alleging unfair prejudice will be negated and will be liable to be struck out as an abuse of process (O’Neill v Phillips (1999)1 WLR 1092). The High Court in Harbourne Road Nominees Ltd v (1) John Greenway Karvaski (2) Sitewatch Fire & Surveillance Ltd [2011] EWHC 2214 (Ch), however, has now held that the O’Neill principle does not apply in the case of equal shareholders. Rather, in such cases, the determinative issue was whether the shareholder had been offered a sale on terms that gave him all the advantages he could reasonably expect to achieve from issuing an unfair prejudice petition: only then would it be an abuse to continue those proceedings in the face of such an offer.

Background Facts

Sitewatch was incorporated in 2001 as a joint-venture company by Mr Morris and Mr Karvaski to provide the services which their respective companies had previously provided independently of one another. The shares in Sitewatch were held by Harbourne, as nominee, for Messrs Karvaski and Morris in a 50/50 split. Pursuant to the joint venture arrangement, Mr Karvaski became a director of Sitewatch and drew a salary. It was agreed, however, that both he and Mr Morris would operate Sitewatch jointly and, as shareholders, each would receive dividends.

Over time, Sitewatch received little return business from Mr Morris’ company. In November 2010, therefore, Mr Karvaski sought to take control of Sitewatch. He informed Mr Morris that (i) Sitewatch would no longer utilise his company’s services; (ii) it was unlikely to declare any dividends in the current or next financial year; and (iii) it would be in Sitewatch’s best interests if Mr Morris no longer remained a shareholder and if he was excluded from participating in the management of Sitewatch. Mr Karvaski offered to purchase Mr Morris’ 50% shareholding but the parties were unable to agree on a price. Mr Morris proposed, therefore, that an accountant be appointed to value Sitewatch’s assets and determine its share price.

Mr Morris had previously conveyed his concern that Mr Karvaski’s threatened actions would unfairly prejudice his interests as a shareholder. In response, Mr Karvaski contended that, where an offer was made by the majority shareholder in the format set out in O’Neill – i.e. there was an offer to purchase shares at a fair value which, if not agreed, should be determined by a competent expert – that would negate any claim for unfair prejudice. Consequently, Mr Karvaski asserted that any unfair prejudice petition Mr Morris presented would be liable to be struck out or stayed, with Mr Morris suffering the associated cost consequences.

Offers and counter-offers, expressed to be made in the O’Neill format, ensued but no agreement was reached. In April 2011 Mr Morris, through Harbourne, therefore proceeded to issue a petition alleging unfair prejudice affecting his shareholding in Sitewatch. In response, Mr Karvaski and Sitewatch contended that Mr Morris’ refusal to accept Mr Karvaski’s offers was unreasonable and that, in accordance with the principles established in O’Neill, the continued prosecution of the petition was either an abuse or was bound to fail.

Decision

The Court held that the key issue to be determined was whether, in all the circumstances of this particular case, Mr Karvaski and Sitewatch had satisfied the conditions required to have the petition struck out, or summary judgment awarded in their favour, i.e. that the continued prosecution of the petition after the making of the offer amounted to an abuse of process, or was bound to fail. That issue was highly fact sensitive; consideration of the nature and terms of any offer made could only ever be an intermediate step in that process.

In that context, the Court noted that the parties had appeared to approach this issue as if what had to be considered was simply the extent to which any offer made complied with the O’Neill guidelines, and that if a sufficient degree of compliance was achieved, Mr Karvaski would inevitably be protected from any petition issued by Mr Morris. The Court considered that to be “a cardinal error”.

The Court noted that the reasoning in O’Neill expressly concerned cases where there was a majority shareholder. Mr Morris, however, was not a minority shareholder but an equal 50% shareholder and in such cases it was by no means obvious which of two equal shareholders should sell to the other. Further, in the case of equal shareholders, particularly, as in this case, where they were effectively quasi partners, the Court considered that there was a clear potential for injustice if one shareholder was able to seize de facto control of the company and force the other either to accept his offer to buy or be forever excluded from the participation that he bargained for and, in addition, be barred from any remedy in respect of what would be a continuing breach of the quasi partnership arrangement originally made.

The Court therefore distinguished O’Neill. Instead, the Court held that the real question in this case was whether Mr Morris had been offered a sale on terms that gave him all the advantages he could reasonably expect to achieve from the petition proceedings: if so, it would then be an abuse to continue those proceedings in the face of such an offer. In all the circumstances, however, the Court was not satisfied that such requirement had been met since Mr Morris might well obtain a Court order via his petition which was more advantageous to him in material respects than the offers made by Mr Karvaski.  

Comment

Whilst it remains to be seen whether the appellants will seek permission to appeal this decision, the judgment will nevertheless be of particular interest to parties who have an equal stake in a joint venture and subsequently find themselves in dispute with each other, whether following a decision to part company or otherwise. The decision makes it clear that any party seeking to buy out their joint venture partner in such circumstances cannot simply rely on the guidelines in the O’Neill case. It is also apparent from the judgment, however, that such a party might face considerable uncertainty demonstrating to the Court that any buy-out offer is materially more advantageous than any remedy a Court might order following a petition alleging unfair prejudice. A party may be able to mitigate that risk by ensuring that the nature and terms of any expert valuation underpinning the buy-out offer are sufficiently clear such that, reasonably, there can be no ambiguity as regards the material worth of the offer relative to any Court ordered remedy. That, however, may be far from straightforward.  

Postscript

This decision is one of several recent High Court judgments, including In the Matter of Annacott Holdings Limited and in the Matter of Tobian Properties Limited [2011] EWHC 2186 (Ch), concerning unfair prejudice petitions in the context of disputes between equal shareholders. Given the current economic climate, it is likely that disputes of this nature will continue to come before the English courts granting further opportunity for consideration of this area of law.