s. 459 Companies Act 1985 allows a minority shareholder to apply for court-sanctioned relief where her interests as a member of a company have been unfairly prejudiced. Its development has provided an alternative to winding up a company, which is unfair to the petitioner if company assets are minimal. Whilst the court has an unfettered discretion in awarding such order as it thinks fit, it usually provides that the majority must purchase the shares of the minority at a pro-rata rate; thus, the offer to purchase the shares at market value negates the unfairness. In claims against large or public companies, the courts are reluctant to grant relief under s. 459, mainly because market forces and the availability of sale via the Stock Exchange provide for speedier and cheaper exit. Moreover, as shareholders in public companies are entitled to believe that the Articles of Association and the Companies Act 1985 contain the constitution of the company, the courts are averse to looking beyond their formal rights. Therefore, this discussion will focus on quasi-partnerships, companies that are established on the basis of mutual confidence and trust between the members.
The conduct complained of must be both unfair and prejudicial to the interests of the petitioner: unfairness or prejudice alone will not suffice. The test for unfairness is objective in the sense that the respondent need not have acted in knowledge of the unfairness or in bad faith; the effect of the conduct prevails over the motive of the respondent. The court will ask whether a reasonable bystander observing the consequences of the conduct would regard it as having unfairly prejudiced the interests of the petitioner. Despite the court subsequently holding that more should be done than examining the views of an imaginary ‘company watcher’, and that the court would be the arbiter of unfairness, the objective test was confirmed in O’Neill v Phillips. Conduct found to be unfairly prejudicial will entitle the petitioner to a remedy under s. 461(2) Companies Act 1985.
However, O’Neill also ruled that s. 459 claims will not succeed where the only complaint is of an irretrievably broken down relationship with a fellow shareholder. Both the Law Commission and Re Guidezone Ltd. complement this notion. A member cannot normally complain of unfairness unless the terms upon which the conduct of the company was agreed have been breached: here, a member can escape being ‘locked in’ by virtue of an independent agreement, such as a mandatory share purchase provision, being inserted into either the Articles of Association or a shareholder agreement. If there is no such provision, the court will assume that there was no intention to allow the minority to escape upon being locked in. A further exception to the rule arises if the breakdown in the relationship results from conduct that is contrary to good faith. As company law has developed from the equity-governed law of partnership, strict legal rights should be restrained if they are contrary to good faith because this constitutes unfairness. An example is where the majority calls a board meeting in an obscure location with the intention that the minority will not attend; this will amount to unfairly prejudicial conduct. In short, wider equitable considerations take precedence over legal rights. Although the courts are willing to enforce these exceptions, the general position is that no remedy is available for a no-fault breakdown. O’Neill also limited the idea of legitimate expectations. The court may have once found a legitimate expectation on the part of the minority shareholder to participate in the management of the company, for example. Now, even if the petitioner has suffered in his capacity as a ‘stakeholder’ in the company, the courts will not go beyond what has been expressly contracted for, unless under one of the above exceptions. Lord Hoffmann was keen that legitimate expectation “should not be allowed to lead a life of its own” .
