The recent case of re Dinglis Properties [2019] EWHC 1664 (Ch) is an interesting example of a decision made in respect of an unfair prejudice petition in a family business. The son had a 12% minority shareholding. He was not otherwise involved in the business. He applied to the court for help alleging unfair prejudice by the majority shareholder, a company owned and controlled by his father.
The father was found to be in breach of his director’s duties in respect of certain financial transactions and this conduct was found therefore to be unfairly prejudicial to the son’s interests. The son applied for an order for his shares to be bought by his father.
What is the remedy for unfair prejudice?
The most common remedy in cases involving unfair prejudice is for the court to order that the shares held by the minority shareholder should be purchased by the majority shareholder. However, in this case, as in many cases of this nature, the question was: what was the right sum to be paid for a minority shareholding?
The generally accepted evidence from valuers is that the value of a minority shareholding in a company will be significantly discounted against what might be expected to be its “pro-rata” value due to the fact that it would be difficult to sell on the open market as it is not a controlling interest.
Agreements to protect a minority shareholder
In order to counter this assumption, a minority shareholder will seek to refer to a shareholder agreement or articles of association which may contain a clause requiring that any buy out should be at a rate proportional to his shareholder and without a minority discount. Alternatively, in the absence of any express provisions of that sort, a minority shareholder may also seek to argue that circumstances in which the business was set up demonstrate that it amounts to a “quasi-partnership” of the sort referred to in the well known case of re Ebrahimi-v-Westbourne Galleries [1973] AC 360.
If the son had established circumstances amounting to a quasi-partnership, he would have been entitled to be paid a pro-rata proportion of the total value without a minority discount. In this case, the son had been given his shares in the first place by his father and had not participated at all in the business. Therefore, a discount should apply.
The judge considered that he had a discretion as to what discount to apply though he declined to state the extent of the discount that should be applied.
The dispute could have been avoided if the family had put in place appropriate changes to the Articles of Association or entered into a shareholder agreement defining the way for the shares to be valued.
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