Home Information Cases In The Matter of Sprintroom Ltd sub nom Edwin John Prescott v (1) Aristides George Potamianos (2) Sprintroom Ltd : Aristides George Potamianos v (1) Edwin John Prescott (2) Sprintroom Ltd (2019)

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In The Matter of Sprintroom Ltd sub nom Edwin John Prescott v (1) Aristides George Potamianos (2) Sprintroom Ltd : Aristides George Potamianos v (1) Edwin John Prescott (2) Sprintroom Ltd (2019)

Summary

The Court of Appeal considered two appeals concerning a decision on an unfair prejudice claim brought by a minority shareholder.

Facts

The court was required to determine two appeals in relation to an unfair prejudice claim.

The claim was one of two claims which had been brought in joined proceedings. The first claim was brought by a software development company (SEL) against one of its former directors (P) and his service company (B) in respect of certain intellectual property rights in software created by P (the source code claim). The second claim was a petition by P, as a minority shareholder in SEL's parent company (SRL), claiming that the affairs of SRL were being carried on by its majority shareholder (X) in a manner which was unfairly prejudicial to P's interests (the unfair prejudice claim). In those proceedings, P sought an order that X should buy out his minority shareholding at a reasonable price. In relation to the source code claim, the judge found that SEL owned the code and P was ordered to facilitate its delivery up. In relation to the unfair prejudice claim, the judge found that the exclusion of P from the management of SEL was unfair. He ordered that P's 40% shareholding should be bought out at a price to be determined by the court. That was to be subject, however, to future determination of whether various offers made by X to buy the shares meant that there had, in fact, been no unfairly prejudicial conduct, with the result that the petition should be dismissed (the offers issue). The judge found that any purchase of P's shares should be at full pro rata value, without discount for the fact that his was a minority holding, and ordered that a balancing payment of £4 should be paid to B for every £6 paid to X's service company (S) in the relevant period.

X submitted that the judge was wrong to (1) find that P's exclusion from the management of SEL was unfair, because the exclusion had been justified by his conduct, and to find that P had a right to continue to participate in the management of the company (which the judge held to be a quasi-partnership) after he had committed breaches of duty; (2) hold that P's shares should be valued without any discount, in view of his having acquired them at a discount; (3) direct the balancing payment.

P challenged those parts of the judge's order that postponed the determination of the offers issue.

Held

Evaluative decision

On a challenge to an evaluative decision, the appeal court should not carry out a balancing task afresh but ask whether the judge's decision was wrong by reason of some identifiable flaw in his treatment of the question to be decided, B (A Child) (Care Proceedings: Appeal), Re [2013] UKSC 33, [2013] 1 W.L.R. 1911, [2013] 6 WLUK 280, IBM United Kingdom Holdings Ltd v Dalgleish [2017] EWCA Civ 1212, [2018] I.C.R. 1681, [2017] 8 WLUK 40, R. (on the application of R) v Chief Constable of Greater Manchester [2018] UKSC 47, [2018] 1 W.L.R. 4079, [2018] 7 WLUK 692, Fage UK Ltd v Chobani UK Ltd [2014] EWCA Civ 5, [2014] E.T.M.R. 26, [2014] 1 WLUK 663 and Biogen Inc v Medeva Plc [1997] R.P.C. 1, [1996] 10 WLUK 486 applied. In the instant case, the judge concluded that, although P's conduct in relation to the source code dispute justified excluding him from all matters relating to the source code, his conduct was not so serious as to justify excluding him from management altogether. Those were conclusions which it was open to the judge to reach. He applied the correct legal principles in making an evaluation which, on the basis of his total familiarity with the evidence and ability to view P's conduct in the context of the parties' whole relationship, he was well placed to make. Cases such as Mears v R Mears & Co (Holdings) Ltd [2002] 2 B.C.L.C. 1, [2001] 10 WLUK 270, Company (No.005685 of 1988) (No.2), Re [1989] B.C.L.C. 427, [1989] 1 WLUK 55, Grace v Biagioli [2005] EWCA Civ 1222, [2006] B.C.C. 85, [2005] 11 WLUK 179, Flex Associates Ltd, Re [2009] EWHC 3690 (Ch), [2010] 2 WLUK 173, Kelly v Hussain [2008] EWHC 1117 (Ch), [2008] 5 WLUK 41 and Woolwich v Milne [2003] EWHC 414 (Ch), [2003] 2 WLUK 457, in which the exclusion of a participant from management had been held to be justified on the grounds of breach of duty, did not undermine the judge's assessment of the overall position in the instant case, Mears, Company, Grace, Flex, Kelly and Woolwich considered. Nor could it be said that the judge should have concluded that P's breaches of duty brought the quasi-partnership, and thus the right to participate in management, to an end. Partnership law could not be carried over into the assessment of a relationship which was not one of partnership, O'Neill v Phillips [1999] 1 W.L.R. 1092, [1999] 5 WLUK 312 andEbrahimi v Westbourne Galleries Ltd [1973] A.C. 360, [1972] 5 WLUK 13 applied. Accordingly, the judge was not wrong to make a "buy-out" order and it could not be said that the route to his conclusion was flawed (see paras 60-87 of judgment).

Discounted share value

The judge was entitled not to be deflected from the general rule that the normal order in such cases was for purchase without discount, O'Neill v Phillips andBlue Index Ltd, Re [2014] EWHC 2680 (Ch), [2014] 7 WLUK 1035 applied (paras 89-95).

Balancing payment

The judge had been entitled to find that P's exclusion from SEL was not justified. Accordingly, X could not argue that the balancing payment should not have been ordered on the basis that P had brought about his own exclusion. Nor could it be said that the judge was wrong in any event to direct the balancing payment on the grounds that B was in breach of contract and not ready and willing to perform its obligations and/or in the light of P's breaches of duty. The judge found P to be in breach of his fiduciary duty, but ordered the making of the balancing payment in exercise of the statutory jurisdiction, in light of the exclusion that he found to be unjustified and the agreement as to payments from SEL which he found that the parties had reached at the outset. The essential rationale for the payments was not to afford remuneration to P for service as a fiduciary but to reflect his joint ownership of the business (paras 97-108).

Offers

It could not be said that the judge should have found that as a matter of law offers to purchase a minority shareholder's interest could not remedy future unfair prejudice. Nor was the judge wrong to reject the submission that to be reasonable, an offer had to be capable of becoming legally binding as soon as it was accepted by the minority shareholder, or to find that an offer at a fixed price could constitute a reasonable offer if it transpired that the fixed price was fair. However, the judge was wrong to postpone consideration of the offers issue to a second hearing. There was sufficient material to establish that the making and rejection of the offers were not factors that defeated P's petition by making his exclusion from the company fair. The judge's order that the period and total amount of the balancing payment should be decided at a second trial would be left in place (paras 110-147).

Judgment accordingly

Court of Appeal (Civ Div)
McCombe LJ, Leggatt LJ, Rose LJ
Judgment date
6 June 2019
References
[2019] EWCA Civ 932