Prescott v Potamianos & Anor

Factual and Procedural Background

This opinion concerns two appeals arising from an order dated 28 September 2018 by a Deputy Judge of the High Court, following his judgment of 30 July 2018. The disputes involve Company A and its wholly owned subsidiary, Company B, and two principal individuals, referred to as the Appellant and the Appellee.

The first proceeding was a claim by Company B against the Appellee and his service company concerning intellectual property rights in software developed by the Appellee (the "Source Code Claim").

The second proceeding was a petition by the Appellee, a minority shareholder in Company A, under sections 994-996 of the Companies Act 2006, alleging that the affairs of Company A were conducted by the Appellant, the majority shareholder, in a manner unfairly prejudicial to the Appellee's interests. The Appellee sought an order for the Appellant to buy out his minority shareholding at a reasonable price.

The trial court ordered that Company B's claim to ownership of the source code succeeded and directed the Appellee to facilitate its delivery, which has been complied with and is not appealed. On the unfair prejudice petition, the court ordered the buyout of the Appellee's 40% shareholding at a price to be determined, subject to a further trial on whether offers made by the Appellant to buy the shares negated unfair prejudice. The purchase was to be at full pro rata value without minority discount. Additionally, a "Balancing Payment" was ordered to compensate the Appellee's service company for payments made to the Appellant's service company after the Appellee's exclusion from management. Costs were reserved, and permission to appeal was granted on most grounds.

Company B was incorporated in 1987 by the Appellant and a business associate. The Appellee, a specialist software creator, joined Company B in 1997 through his service company and became a director in 1999. The parties operated through service companies primarily for tax efficiency, an arrangement acknowledged as artificial but genuine in contractual terms.

In 2007, the Appellee acquired a 40% shareholding in Company B, with the Appellant holding 60%. A shareholders' agreement governed their relationship, including deadlock procedures. Company A was incorporated in 2012 as a holding company for Company B, with shareholdings mirroring those in Company B.

Disputes arose from 2014 onwards concerning management succession, exclusion of the Appellee from management, disagreements over accounting personnel, and particularly over the ownership and access to the source code. The Appellant formed a sub-committee to manage the business excluding the Appellee, who was eventually removed as a director. The Appellee issued the unfair prejudice petition in September 2017, following the source code claim initiated by Company B in June 2017.

Legal Issues Presented

1. Whether Company A constituted a quasi-partnership entitling the Appellee to participate in management and protection against unfair exclusion.
2. Whether the exclusion of the Appellee from management was unfairly prejudicial, particularly in light of breaches of fiduciary duties related to the source code dispute.
3. Whether the Appellant's offers to buy out the Appellee's shares were reasonable and if their rejection by the Appellee negated claims of unfair prejudice.
4. Whether the buyout price should be at full pro rata value or discounted due to the minority shareholding.
5. Whether the "Balancing Payment" ordered to compensate the Appellee's service company was appropriate given the contractual and breach of duty issues.

Arguments of the Parties

Appellant's Arguments

• The exclusion of the Appellee from management was justified due to his breaches of fiduciary duties, particularly in relation to the source code.
• The quasi-partnership rights of the Appellee to participate in management ended with his breaches of duty.
• The Balancing Payment was wrongly ordered as the Appellee had caused his own exclusion and was in breach of contract and fiduciary duties.
• The buyout of the Appellee's shares should reflect a discount due to the minority nature of the holding and the price originally paid.
• The offers made to buy the Appellee's shares were fair and reasonable, and their rejection should negate the unfair prejudice claim.

Appellee's Arguments

• The Appellee contended that the offers to purchase his shares could not remedy future unfair prejudice as they predated his exclusion.
• The offers were not legally binding upon acceptance and thus unreasonable.
• An offer at a fixed price rather than expert valuation was not necessarily reasonable.
• The judge erred in postponing the determination of the reasonableness of the offers and the Balancing Payment to a second hearing.
• The Balancing Payment should be quantified and paid without delay, as the Appellee was unfairly excluded and entitled to compensation.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
O'Neill v Phillips [1999] 1 WLR 1092	Definition and treatment of quasi-partnerships; effect of reasonable offers to buy shares on unfair prejudice petitions; valuation principles for minority shareholdings.	The court held the company was a quasi-partnership; applied Lord Hoffmann's guidance on offers to purchase shares; ruled buyout should be at full pro rata value; rejected minority discount absent special circumstances.
G v G (Minors: Custody Appeal) [1985] 1 WLR 647	Standard of appellate review: "generous ambit within which reasonable disagreement is possible."	The court applied this standard to the evaluation of facts and discretionary decisions, deferring to the trial judge's evaluative conclusions unless plainly wrong.
Assicurazioni Generali SpA v Arab Insurance Group [2003] 1 WLR 577	Appellate approach to evaluative factual findings and discretion.	Reinforced deference to trial judge's evaluative decisions, treating them akin to discretionary judgments.
Re B (A Child) (Care Proceedings: Threshold Criteria) [2013] 1 WLR 1911	Appellate review of evaluative determinations on undisputed facts.	Supported approach that appellate courts should only interfere if the trial judge's decision was wrong, not simply if a different conclusion could be reached.
Henderson v Foxworth Investments Ltd [2014] 1 WLR 2600	Limits on appellate interference with factual findings.	Confirmed appellate courts should not interfere unless findings are plainly wrong or unjustifiable.
R (on the application of AR) v Chief Constable of Greater Manchester Police [2018] UKSC 47	Review of proportionality assessments and evaluative decisions.	Appellate courts must identify flaws such as gaps in logic or failure to consider material factors to justify interference.
Biogen Inc. v Medeva plc [1997] RPC 1	Appellate caution in reversing trial judge's factual evaluations.	Emphasized the imprecision surrounding factual findings and the need for restraint in appellate re-evaluation.
Fage UK Ltd. v Chobani UK Ltd. [2014] EWCA Civ 5	Deference to trial judge on findings of fact and evaluation.	Reiterated appellate courts should rarely overturn factual evaluations absent compelling reasons.
Mears v R Mears & Co. (Holdings) Ltd. [2002] 2 BCLC 1	Justification for exclusion of a shareholder from management due to misconduct.	Distinguished from current case where misconduct was less serious and related to bona fide dispute.
Grace v Baglioli [2006] 2 BCLC 70	Exclusion of shareholders for breaches of duty.	Referenced as authority on serious misconduct justifying exclusion; not analogous to present facts.
Re Flex Associates Ltd., Hussain v Cooke [2009] EWHC 3690 (Ch)	Offers to purchase shares and their effect on unfair prejudice petitions.	Considered conditional offers and their insufficiency to defeat petitions if not binding.
Kelly v Hussain [2008] EWHC 1117 (Ch)	Shareholder disputes and exclusion.	Referenced concerning breach of duty and exclusion; facts distinguished.
Woolwich v Milne [2003] EWHC 414 (Ch)	Serious breaches of duty justifying exclusion.	Distinguished from current case due to severity of misconduct.
Harborne Road Nominees Ltd v Karvaski [2011] EWHC 2214 (Ch)	Reasonableness of offers to purchase shares and abuse of process.	The court rejected treating reasonableness of offers as decisive; offers are one factor among many.
CVC/Opportunity Equity Partners Ltd v Demarco Almeida [2002] UKPC 16	Valuation bases for shares in unfair prejudice petitions.	Outlined valuation bases and emphasized fairness to both parties; applied in assessing offers.
Re Woven Rugs Ltd [2010] EWHC 230 (Ch)	Timing of offers and their relation to unfair prejudice conduct.	Offers predating prejudicial conduct may not remedy future unfairness; relevant to offer timing here.
West v Blanchet [2000] 1 BCLC 795	Practicality and likelihood of offers being implemented.	Offers must be realistically capable of being fulfilled to be reasonable.
Hosking v Marathon Asset Management LLP [2016] EWHC 2418 (Ch)	Forfeiture of fiduciary remuneration for breach of duty.	The court rejected analogy for forfeiture of Balancing Payment, emphasizing statutory unfair prejudice jurisdiction.

Court's Reasoning and Analysis

The court began by affirming that Company A was a quasi-partnership, referencing established principles from O'Neill v Phillips. The court accepted the trial judge's detailed findings that the parties had an implicit agreement entitling the Appellee to participate in management and that the relationship of trust and confidence persisted despite disputes.

The court carefully considered the Appellant's contention that the Appellee's breaches of fiduciary duties, particularly relating to the source code, justified his exclusion. It accepted the trial judge's finding that while the Appellee acted evasively and in breach of duty in relation to the source code, this did not justify his complete exclusion from management or removal as a director. The court emphasized the trial judge's superior position to evaluate the facts and conduct, applying the legal standard of deference to evaluative decisions.

The court addressed the valuation and buyout issues, agreeing with the trial judge that the buyout should be at full pro rata value without discount, rejecting arguments that the minority nature of the holding or the original purchase price justified a discount.

On the Balancing Payment, the court upheld the trial judge's reasoning that the payment reflected the parties' original bargain and the unfair exclusion of the Appellee, despite the Appellee's cessation of services. The court rejected novel arguments that fiduciary breaches should forfeit this payment, viewing the payment as compensation for ownership rights rather than remuneration.

Regarding the Appellant's offers to buy the Appellee's shares, the court analyzed the principles from O'Neill v Phillips and subsequent authorities. It rejected the trial judge's decision to defer assessment of the reasonableness of the offers pending expert valuation evidence, finding sufficient material to conclude that the offers did not negate the unfair prejudice claim. The court considered the timing, nature, and context of the offers, concluding that early offers made before the breakdown of the relationship could reasonably be rejected by the Appellee. The court held that the offers did not render the Appellee’s exclusion fair and thus did not defeat the petition.

The court acknowledged the complexity of the case management directions but emphasized that the valuation exercise for the buyout and the assessment of offer reasonableness are distinct and should not be conflated. It left unresolved issues concerning the quantification and timing of the Balancing Payment to the trial judge, noting related ongoing litigation and cost considerations.

Holding and Implications

The court DISMISSED the Appellant's appeal in its entirety, affirming the trial judge's findings that the Appellee's exclusion was unfairly prejudicial and that the buyout should be at full pro rata value without discount. The court ALLOWED the Appellee's appeal to the extent that it held the trial judge erred in deferring the determination of the reasonableness of the buyout offers and the Balancing Payment to a second hearing; these issues should be considered at the liability stage.

The decision confirms the applicability of established principles governing quasi-partnerships and unfair prejudice petitions, particularly the need for careful judicial evaluation of conduct and offers to buy shares. It clarifies that offers predating unfair conduct may be reasonably rejected and that the valuation for buyout and assessment of offer reasonableness are distinct inquiries. The judgment does not establish new precedent but reinforces existing legal standards and procedural approaches in shareholder disputes.