In Arbuthnott v Bonnyman and others [2015] the Court of Appeal rejected an appeal relating to a claim of unfair prejudice under section 994 Companies Act 2006 based upon a variation of drag-along rights in a company’s Articles of Association.


The claimant, Mr Geoffrey  Arbuthnott, was an investment manager in Charterhouse Capital, one of the UK’s oldest private equity houses, and one of the founding shareholders in Charterhouse Capital Limited (the Company). Mr Arbuthnott was one of the management buy-out team which acquired the Charterhouse private equity business from HSBC in 2001 and the second largest shareholder with 8.9% of the equity.

Participation in the Company was governed by a Shareholders’ Agreement and Articles which included drag-along provisions effective on an exit. However, the sale had to be approved by a majority of shareholders who were not associated with the Buyer (the Founder Majority). 

By November 2011, Mr Arbuthnott and a number of the investment executives who were shareholders had retired or indicated their intention to do so, including the chief executive, Mr Bonnyman. Together the retired or retiring members held more than 50% of the shares in the Company. There was concern about the resulting misalignment between share ownership and the continuing investment executives as this would cause difficulty with investors.

A sale of the company’s shares to the continuing investment executives was proposed and on 11th November 2011 the shareholders of the Company were sent an offer for their shares from Watling Street Limited (WSL), a wholly owned subsidiary of an LLP, the partners of which comprised the continuing investment executives.

WSL’s offer:

  • valued the Company at £15.5million (£1,500 per share) which Mr Arbuthnott regarded as a gross undervalue; and
  • included a condition that the Articles be amended by including a revised drag-along provision which no longer provided that it had effect following a ‘general offer’ to acquire a controlling interest which conformed to the requirements of the City Code on Takeovers and Mergers. The amended drag-along had effect on a sale of a majority of the shares by number and by value and retained the need for approval by the Founder Majority. The amendment was required to facilitate the sale to WSL.

Mr Arbuthnott was the only shareholder not to agree to the offer and was “dragged-along” and therefore forced to sell his shares at what he believed to be a gross undervalue.

The Unfair Prejudice Claim

Mr Arbuthnott claimed that he had suffered unfair prejudice within the meaning of Section 994(1) Companies Act 2006 for reasons which included:

  • the Company had repudiated an oral agreement entered into by Mr Bonnyman and Mr Arbuthnott that an independent valuation would form the basis of a negotiation for the purchase of his shares on his resignation as a member;
  • WSL was not a genuine third party purchaser and the effect of the amended articles was to allow the majority to expropriate his shares at a grossly undervalued price rather than for any genuine corporate purpose.

In the High Court, Mrs Justice Asplin dismissed the petition. Mr Arbuthnott appealed to the Court of Appeal.

Court of Appeal Decision

The Court of Appeal dismissed the appeal.

Oral Agreement

The existence of an oral agreement that Mr Arbuthnott claimed to have entered into with the chief executive was not established on the evidence.

Unfair prejudice

The expression ‘the company’s affairs... have been conducted in a manner that is unfairly prejudicial’ covers all matters decided by the board of directors. It does not extend to matters which are neither effected by the Company nor on its behalf. Actions or omissions in compliance with or in contravention of the articles of a company may or may not constitute conduct of the company’s affairs within section 994(1) depending on the facts. A member will not normally be entitled to complain that conduct is unfair if it is consistent with the Articles or other agreement between the shareholders.

Alterations to a Company’s Articles

An alteration to a company’s Articles, even if passed by the requisite majority of shareholders, may be challenged as invalid in certain circumstances. Several authorities were cited including Allen v Gold Reefs of West Africa Limited [1900]. The Chancellor of the High Court (Sir Terence Etherton) extracted the following principles from the authorities:

  1. The limitations on the exercise of the power to amend a company’s Articles arise because the power of a majority to bind a minority will not, in the absence of clear words, be completely without limitation;
  2. A power to amend will be validly exercised if it is exercised in good faith in the interests of the company;
  3. It is for the shareholders, and not the court, to say whether an alteration of the Articles is for the benefit of the company but it will not be for the benefit of the company if no reasonable person would consider it to be such;
  4. The view of the shareholders acting in good faith that a proposed alteration of the Articles is for the benefit of the company is not impugned by the fact that one or more of the shareholders was actually acting under some mistake of fact or lack of knowledge or understanding;
  5. The mere fact that the  amendment adversely affects one or more minority shareholders and benefits others does not, of itself, invalidate the amendment if the amendment is made in good faith in the interests of the company;
  6. A power to amend will also validly be exercised, even though the amendment is not for the benefit of the company because it relates to a matter in which the company has no interest and is only for the benefit of shareholders or some of them, provided that the amendment does not amount to oppression of the minority or is otherwise unjust or is outside the scope of the power;
  7. The burden is on the person impugning the validity of the amendment of the articles to satisfy the court that there are grounds for doing so.

Drag-along rights

Drag-along provisions formed part of the original commercial bargain between the parties at the time of the buy-out from HSBC. The amendments were consistent with the Shareholders’ Agreement and were a ‘tidying up exercise’ which brought the Articles and the Shareholders’ Agreement more into line. There was no evidence of bad faith or improper motive and the amendments were for the benefit of the company as a whole. Those voting in favour of the amendments (being all of the shareholders, other than Mr Arbuthnott) honestly believed that they were acting in the best interests of the Company because the lack of alignment would be an impediment to raising a new fund and would have a serious effect on the business.

The amendment was not aimed specifically at Mr Arbuthnott, as he received the same offer as all of the other shareholders. The amendment to the Articles was to align shareholdings and executives.

The test is not whether all reasonable people would have agreed that the amendment was in the best interests of the company. It is sufficient that a reasonable person could have thought it was in the company’s best interests. It was for Mr Arbuthnott to satisfy the court that no reasonable person would have thought that. The amendment did not introduce any major change from clause 7.2 of the Shareholders’ Agreement and the unamended Articles and Mr Arbuthnott therefore failed to satisfy that requirement.


The Court accepted that the power of the Founder Majority under clause 7.2 of the Shareholders’ Agreement to compel the sale of shares by non-purchasing shareholders carried with it an obligation beyond solely self- interest. In the light of the factual background to the Shareholders’ Agreement, the Court of Appeal implied a term into clause 7.2 that the Founder Majority would not agree to pursue an exit except on terms which they honestly considered to be fair and reasonable. On the basis of the findings of fact in the case, including that the ongoing executives were the only likely purchasers of the shares, that implied term was satisfied.


It is important to remember that in this case, drag-along provisions already existed in the Articles and the Shareholders’ Agreement before the amendment and were viewed as part and parcel of the original bargain. The outcome may have been different if the drag-along provisions were new. However, given that Mr Arbuthnott was the only shareholder not to accept the offer, which was the same for all shareholders, and given that the shareholders were acting in good faith for the benefit of the Company as a whole to address the misalignment issue, a different outcome would have been unlikely, particularly given that the Companies Act 2006 contains compulsory acquisition provisions based on 90% acceptances of an offer.