Demystifying Shareholder Disputes A series of articles by 4 New Square September 2019 CONNECT WITH US: [email protected] +44 20 7822 2000 4 NEW SQUARE, LONDON WC2A 3RJ WWW.4NEWSQUARE.COM TABLE OF CONTENTS Introduction to “Demystifying Shareholder Disputes” | 2 Hugh Jory QC, Helen Evans and John Williams Unfair Prejudice Petitions: what makes prejudice “unfair”? | 4 David Halpern QC and Michael Bowmer Recent Developments in Quasi-Partnerships | 9 Thomas Ogden and John Williams Share Valuation in Shareholder Disputes | 19 Hugh Jory QC and Matthew Bradley Where does the law stand now on discounts for minority holdings in non quasi- partnership companies? | 30 Hugh Jory QC and Matthew Bradley Creative remedies in unfair prejudice petitions | 38 Helen Evans and Anthony Jones Expert Evidence on Share Valuations: When to use hot tubbing in unfair prejudice petitions | 42 Paul Mitchell QC and Nigel Burroughs Shareholder Disputes in Sport | 48 Hugh Jory QC and Richard Liddell About the authors | 62 Disclaimer: the articles in this series are not to be relied on as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought. Introduction to “Demystifying Shareholder Disputes” Hugh Jory QC, Helen Evans and John Williams | 02.07.2019 4 New Square continues to enjoy rapid growth in its profile in acting in shareholder disputes in England & Wales and internationally, including the recent unfair prejudice petition in Edwardian Group case in which Justin Fenwick QC and Anthony Jones acted for the successful Petitioner. Over the summer of 2019, 4 New Square produced a series of articles from specialist contributors on shareholder disputes which are now consolidated into this pack. A number of the topics covered will be addressed on our podcast later this year (please subscribe to our podcast on Apple Podcasts, Google Podcasts and Android so you do not miss out on future episodes). Shareholder litigation is very common. There are 4 million companies in England & Wales, ranging from football clubs to corner shops. Some are formally run, with well-regulated boards and good access to legal advice. Others are more informal, family affairs. Others still are badly run and prone to disagreements. Minority shareholders can feel aggrieved by a wide range of conduct by the majority. The applicable legal remedies therefore have to straddle a broad range of types of company, types of conduct, and financial consequences. 4 New Square’s articles address this broad range of disputes and the relevant legal principles that apply to them. They also give an experienced insight into the thorny issues of valuation that can make or break a petition. The series begins with a refresher from David Halpern QC and Michael Bowmer. In their article “Unfair Prejudice Petitions: what makes prejudice unfair”, they address the ingredients of a successful s. 994 petition and key restrictions of the remedy. This article is followed by a review of “Recent Developments in Quasi Partnerships” by Thomas Ogden and John Williams which explains how to identify and establish that a company is in fact operating as a quasi-partnership. The third article is by Hugh Jory QC and Matthew Bradley, it is entitled “Share Valuation in Shareholder Disputes” and explains both the rival ways to approach valuing shares and the type of issue that are often overlooked but can prove to be game-changers. Two further articles stick with the valuation theme: • One is entitled “Where does the law now stand on discounts for minority shareholdings in non- quasi partnership companies?”. This article, by Hugh Jory QC and Matthew Bradley first identifies the benefit of establishing a quasi-partnership and then grapples with whether it is 2 right that minority discounts should apply to other types of company. The article dissects the controversial decision in Blue Index. • The other is entitled “Creative remedies in unfair prejudice petitions”. Here, Helen Evans and Anthony Jones consider how minority discount problems in non-quasi partnerships can be avoided by the courts using other tools at their disposal. They also explain that share valuation is not just the province of experts: it involves serious issues of legal principle and is therefore a topic that repays close attention by lawyers. Next, Paul Mitchell QC and Nigel Burroughs address expert evidence in shareholder disputes. In “Expert Evidence on Share Valuations: When to use Hot Tubbing in Unfair Prejudice Petitions” they explain the pros and cons of this practice. Is the loss of control worth the benefit? Finally, Hugh Jory QC and Richard Liddell look at shareholder disputes in sport. The article is not just of interest to sports lawyers. Since unfair prejudice petitions are prevalent in the sporting arena, the case law has address a number of issues of wider application, including the courts’ remedial powers and striking out petitions. This is currently a fast-moving area of litigation. We hope that you will find the articles interesting and informative. © Hugh Jory QC, Helen Evans and John Williams 3 Unfair Prejudice Petitions: what makes prejudice “unfair”? ”? David Halpern QC and Michael Bowmer | 03.07.2019 Unfairness is an essential ingredient in minority shareholder petitions. Prejudice alone is not enough. This article explores just what it is that a petitioner needs to prove to make prejudice “unfair” in order for a petition to succeed. The Elements of a Section 994 Petition Section 994 of the Companies Act 2006 permits a member of a company to petition the court for relief on the ground that the company’s affairs are being or have been conducted in a manner that causes unfair prejudice to the interests of members generally or of some part of its members (including at least himself). A petitioner under section 994 must therefore establish four elements to the satisfaction of the court: (1) the conduct of the company’s affairs; (2) has prejudiced; (3) unfairly; (4) the petitioner’s interests as a member of the company. In other words, the conduct must be both prejudicial and unfairly so; conduct may be prejudicial without being unfair or unfair without being prejudicial. Both elements need to be satisfied and, if either is not, the petition will not be well founded.1 The Company’s Affairs So far as the first element is concerned, it will usually be clear that the conduct about which complaint is made constitutes conduct of the company’s affairs. The expression “the company’s affairs” is of wide ambit.2 It encompasses all matters decided by the board of directors. That does not mean that it is not important to consider this issue, as it may be that the conduct complained of really only concerns the activities of shareholders in their personal capacity and between themselves and not corporate conduct.3 1 Re Saul D Harrison & Sons plc [1995] 1 BCLC 14 at 31, Neill LJ citing Peter Gibson J in Re Ringtower Holdings plc (1989) 5 BCC 82 at 90. 2 Gross v. Rackind [2005] 1 WLR 3505 [26] to [32], Sir Martin Nourse; Graham v. Every [2014] BCC 376 at [38] to [41], Arden LJ; Re Charterhouse Capital Ltd [2015] 2 BCLC 627 at [45], Etherton C. 3 Re Astec (BSR) plc [1998] 2 BCLC 556; Re Coroin Ltd [2013] 2 BCLC 583; Re Charterhouse Capital Ltd [2015] 2 BCLC 627. 4 Prejudice The second element of “prejudice” is also a very broad term. It obviously includes financial damage to the value of the petitioner’s shares. As a general rule, therefore, where a company is insolvent, the petitioner must show that his shares would have had a value but for the wrongdoing of the respondent4. But it is considerably wider than this. The court takes a wide view of prejudice suffered by a shareholder. Even if the shares are worthless, the petitioner may be held to have suffered prejudice in some capacity connected with his shareholding, such as under a loan made as part of the same investment as that which led to the acquisition of the shares.5 Prejudice is not even limited to financial loss. It may include, for example, prejudice caused by disregarding the petitioner’s right to participate in management.6 Unfairness: What Makes the Prejudice Unfair? However, the third element of unfairness is a rather more complicated and slippery term. In O’Neill v. Phillips7, the only case on unfair prejudice to have reached the House of Lords, Lord Hoffmann observed that fairness depends on the context in which it is applied; conduct which might be fair between competing businessmen might not be fair between members of a family. As he said, all is said to be fair in love and war. This means that what is fair is heavily dependent on the background facts and corporate setting. This makes it difficult to predict with any certainty whether the prejudice will be held to be unfair. Nevertheless, some broad guidance can be given, on the basis of the case law which has emerged in the two decades since O’Neill v. Phillips. (1) Non-Observance of the Constitution First, a member is usually entitled to require the affairs of the company to be conducted in accordance with the terms on which the parties, through the company, have agreed to do business together (a company being, as Lord Hoffmann said, “an association of persons for an economic purpose”). These terms are to be found in the company’s constitution – in other words its articles of association – but also in any shareholder agreements. They also include any applicable rights conferred by statute, and include by implication an agreement that any party who is to be a director will perform his director’s duties which are now codified in sections 171 to 177 of the Companies Act 2006.8 But not every breach 4 Re Tobian Properties Ltd [2013] 2 BCLC 567 at [11], Arden LJ.

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