High Court Grants Unfair Prejudice Petition On Grounds Of Auditor's Flawed Valuation Of Claimant's Shares In Contractual Exit Process

• Published date: 01 April 2024
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Shareholders
• Law Firm: Herbert Smith Freehills
• Author: Mr Neil Blake and Richard Mendoza

The High Court has broadly interpreted what amounts to a "company's affairs" for the purposes of an unfair prejudice petition under s.994 of the Companies Act 2006, and also considered the impact on such a petition of an exit mechanism in a shareholders' agreement: Wells v Hornshaw [2024] EWHC 330 (Ch).

This case is relatively unusual since s.994 petitions are typically brought by minority shareholders who have no means of exiting a company that is being managed in an unfairly prejudicial way. Here, however, the claimant had an exit mechanism available to him under the shareholders' agreement. Consistent with previous cases involving similar scenarios (eg O'Neill v Phillips [1999] 1 WLR 1092), the court found that the existence of such a mechanism will usually provide a bar to relief from unfair prejudice.

However, the decision shows that where there is a contractual process for valuing shares on exit, a claim for unfair prejudice may still succeed if that process is not followed. In such circumstances, the court may grant relief comprising an order for a revaluation based on proper adherence to the contractual process.

The case is also notable for the court's broad interpretation of what amounts to the conduct of the "company's affairs" for the purposes of s.994. In this case, it extended beyond the conduct of the Company's officers and employees to a valuation carried out by a third-party auditor.

Background

The claimant was the minority shareholder of the third defendant (the "Company"), holding 14.3% of the issued shares. The remaining 85.7% was held equally by the first...