M&A Diligence: the Court’s “imaginative solution” on an unfair prejudice claim in attributing value to the shares of a business which was balance sheet insolvent upheld
In the recent case of Thomas v Dawson [2015] EWCA Civ 706, the Court of Appeal held that even though the High Court’s solution to an unfair… Read more
In the recent case of Thomas v Dawson [2015] EWCA Civ 706, the Court of Appeal held that even though the High Court’s solution to an unfair prejudice claim was “in certain respects unusual”, it nevertheless upheld the granting of an option to acquire a 50% stake in a business at a significant value, even though evidence was put to the Court showing that the company was balance sheet insolvent.
Mr Thomas and Ms Dawson were, together, the sole directors and shareholders of Invicta Care Homes Limited (“Invicta”), each holding 50% of the equity. Their joint management of Invicta broke down after each of them made unauthorised withdrawals from Incita’s bank account and ensuing litigation on both sides led to judgements against each for the missing sums and to an interim order finding unfair prejudice under the Companies Act 2006 (“Companies Act”). A shareholder may petition the Court for relief under section 994 of the Companies Act citing unfair prejudice where the affairs of the company are conducted in a manner which is unfairly prejudicial to her interests as a shareholder (or where an actual or proposed act or omission is or would be prejudicial). If the Courts finds that the petition is well founded and that unfair prejudice is made out, it may make “such order as it thinks fit for giving general relief in respect of the matters complained of” (under section 996 of the Companies Act).
Once unfair prejudice has been established, the most common remedy is for the shares of the member bringing the petition to be acquired by the other shareholders at a value determined by the Court. So it was in the Thomas case, with the Court permitting the parties to present to the Court valuation evidence from a jointly-appointed expert. Read together with Invicta’s accounts, the expert’s report showed that Invicta was actually balance sheet insolvent, as the reported value of the business (£480,000) had to be set against the aggregate of its liabilities (more than £850,000). Despite this, the High Court decided that the company had value to Thomas, not least because – by becoming sole shareholder and director – he would be in a position to enforce the derivative judgement against Dawson and secure non-enforcement of the larger derivative judgement against himself. The relief granted was an option for Thomas to acquire Dawson’s entire shareholding for £55,000.
Thomas appealed. However, given the wide scope of the discretion afforded to the Court under section 996 of the Companies Act, the Court of Appeal was of the view that the question to be determined was not whether the judge’s analysis was correct (as there may have been any number of reasonable ways in which the Court could have deal with the problem) but rather “whether his analysis falls short of a proper exercise of the broad discretion to fashion a just solution”. On that basis, the first instance judgement was held to be well within the statutory power granted to the Court and the appeal was dismissed.
Comment
The Thomas case shows that even if armed with a third party valuation, there is no certainty as to the outcome of an unfair prejudice claim. The Court’s wide discretion when determining relief can lead to some novel orders, if the Court believes the proposed solution is a just and fair one.
For more information, please contact Andy Moseby, Corporate partner
