In the Matter of KR Hardy Estates Ltd v Richard Hardy & Ors (2014)
The value at which a minority shareholder's shares in a family-run company were to be bought out under an unfair prejudice petition was to be assessed as at the date of the court order. That date had the advantage of certainty and was the most fair out of several possible valuation dates.
The petitioner (P) sought an order that the first defendant (R1) and the second defendant company (R2) purchase her shares in the third defendant company (R3).
R3 was a property development company that owned several commercial sites. R2 was a construction company that carried out most of the day-to-day tasks associated with R3's properties. They were family-run companies that had been incorporated by the father of P and R1. P was a minority shareholder in R3 and received a salary for an administrative position, although for many years she had not worked. P did not receive company accounts and was not involved in any decision-making. R1 and another sibling held shares in both companies, but after a falling out between them in 2007 it was agreed that the other sibling would be bought out. After taking legal and accounting advice, R1 decided that funds needed for the buy-out would be raised by a loan being made to R2 from R3, which would be funded by a bank loan to R3. Thereafter, R1 decided to re-arrange the inter-company relationships. In 2008, P's salary was stopped and she was referred to advisors for advice about her retirement. In 2010 P sought legal advice in relation to her position as a shareholder and P rejected an offer from R1. P presented a petition alleging that R3's affairs had been conducted in a manner unfairly prejudicial to her and sought an order that her shares be bought out at a fair value to be determined by the court. The issues were (i) what prejudice P had suffered; (ii) whether there had been any unjustified transfers of value from R3 to R2; (iii) the valuation date; (iv) whether there was evidence of negligence in the management of R3 by R1.
(1) P had agreed to the funding arrangement to buy out their sibling and could not complain of any prejudice arising solely from that arrangement. The failure to provide P with R3's accounts was a serious lapse of duty and had infringed her legitimate interest and shareholder rights over many years. Arbitrarily withdrawing her salary represented manifestly unfair treatment that seriously harmed her financially. The financial effects of the reorganisation would qualify as unfair if an appreciable unjustified value shift was established (see paras 38, 58, 63 of judgment). (2) There had been a relatively small shift in value from R3 to R2, and P's prejudice as a result was barely perceptible. In any event, the value shift had been justified. It had emerged as a function of a legitimate reorganisation that had been judged by R1, on advice, to have been proper following the buy-out (para.85). (3) It would not be right to value the shares as at the date of withdrawal of P's salary, not least because she had adduced no evidence for not seeking to be bought out or presenting a petition much earlier than 2010. Moreover, the withdrawal of her salary could only have had a positive impact on the value of her shares. It was not appropriate to choose the dates on which the offer was rejected, the petition was presented or the points of defence were served. P's legal and expert teams could not have been expected to tender advice on whether to concede and agree a valuation even by the date of rejection of the offer. The date of actual valuation would be consistent, but suffered from uncertainty. The date of the court order had the advantage of certainty and was the most fair (paras 89-93). (4) There was no evidence that R3 could have performed better under different management (para.97).
LTL 15/12/2014 :  EWHC 4001 (Ch)