O’Neill v Philips [1999] UKHL 24

KEY POINTS

• The concept of unfair prejudice within company affairs is a critical issue. This typically arises when a majority shareholder withdraws from negotiations with a petitioner regarding the equitable distribution of shareholding and profit-sharing.

• The pivotal question in such cases centers on whether the conduct can be categorized as "unfairly prejudicial" to the petitioner's interests as a shareholder. This evaluation is crucial in determining whether the petitioner expects to be treated fairly within the company's operations.

• The legal framework for addressing such matters is often governed by the Companies Act of 1985 (c. 6), specifically, section 459(1), which has been subsequently amended by the Companies Act of 1989 (c. 40), section 145, Schedule 19, paragraph 11.

• Private company disputes frequently revolve around allegations of unfair prejudice in company affairs, particularly when a majority shareholder discontinues negotiations for equal shareholding and profit-sharing with a petitioner. The Companies Act provides the legal foundation for addressing these issues, ensuring that shareholders have reasonable expectations of fairness in their dealings with the company.

FACTS

• In 1985, O'Neill (O)., a manual worker, received 25 shares and a directorship in P. Ltd., a private company, from Philips (P), who owned the entire issued share capital. P. expressed hope for O. to take control of the company, with a promise of 50 percent of profits. O. managed the company and received half the profits. 

• In 1989-1990, negotiations hinted at a potential increase in O.'s shareholding to 50 percent. However, in 1991, P. resumed control, reducing O.'s share to 25 percent.

• O. filed a petition under the Companies Act 1985, claiming P.'s conduct was prejudicial.

• The initial judge dismissed it, stating that P. hadn't unconditionally promised equal profit-sharing or more shares. The Court of Appeal sided with O., ordering P. to purchase O.'s shares due to O.'s legitimate expectation and unfair prejudice.

• P. appealed this decision.

JUDGEMENT

• The appeal was allowed. It was determined that, while in specific circumstances, it might be considered unfair for those overseeing a company to solely rely on their legal powers, typically, unfairness to a member necessitated a breach of the terms under which they had consented to the company's operations.

• It was established that P. had not unconditionally agreed to provide O. with additional shares or to distribute profits equally. Therefore, P. could not be deemed to have acted unfairly by discontinuing negotiations in that direction.

• It was determined that a company member who had not been dismissed or excluded from participating in the company's management could not demand the purchase of their shares solely due to a breakdown in trust and confidence between the parties.

COMMENTARY

• Unfair prejudice in company affairs, especially when a majority shareholder withdraws from negotiations on shareholding and profit-sharing, raises questions about the petitioner's shareholder rights and legitimate expectations of fairness.

• The legal framework, primarily the Companies Act of 1985, section 459(1), and its amendments in the Companies Act of 1989, addresses such disputes in private companies. Allegations of unfair prejudice often focus on negotiations for equal shareholding and profit-sharing, governed by the Companies Act, ensuring fairness for shareholders.

• In this case, although the Count of Appeal initially ruled in favor of O., the decision was later reversed on appeal. It was clarified that unfairness necessitated a breach of agreed terms. As P. hadn't unconditionally promised more shares or equal profit-sharing, and as O. wasn't dismissed or excluded from management, demanding share purchase due to trust issues wasn't warranted.

ORIGINAL ANALYSIS

• Defendant, who owned all the shares in a company, gave 25% share to Claimant and appointed him as director; additionally allowed Claimant to take 25% of profits of company. Defendant told Claimant that he hoped Claimant would be able to take over whole day-to-day management of business, in which case Claimant would be able to have a 50% shareholding.

• Defendant did retire as director to allow Claimant to run business, and discussion took place about increasing Claimant’s shareholding to 50%; however company’s fortunes then declined, and Defendant retook control of company and withdrew Claimant’s portion of the profits.

• Claimant sought buy-out on grounds that Defendant had caused him unfair prejudice, by failing to allocate him extra 25% of shares and withdrawing profits from him.

Lord Hoffmann

• Is need for a balance between:

  1. Court’s discretion under s.994

  2. Need for legal certainty

"Unfair”

• Relationship of parties is fundamentally contractual

• Thus “unfairness” usually only arises

  1. Where there is breach of terms on which it was agreed company’s affairs should be conducted

     • ‘Terms’: i.e. as found in articles of associations/shareholder agreements

  2. Or where there are equitable restraints on exercise of a legal power by Defendant (see below)

“Legitimate Expectations”

• Phrase “legitimate expectations” is too broad

  • Better view is that where Defendant has exercised a legal right, court will nevertheless find unfair prejudice if this exercise of rights should be subject to equitable restraints

  • Only here does Claimant have legitimate expectation

    • I.e. expectation is a consequence, and not a cause, of the equitable restraint

• To be equitable restraints, Defendant’s exercise of his legal right must be contrary to what parties have earlier agreed, by words or conduct

  • However no need for this earlier promise to be independently enforceable as matter of contract

Facts

1. Defendant never promised to increase Claimant’s shareholding to 50%

   • Thus although Claimant had expectation of being given extra 25% of shares, this was not ‘legitimate’

     • I.e. as Defendant’s action in not giving Claimant the shares was not unconscionable

   • Therefore Defendant did not behave unfairly by withdrawing from negotiations for increase in Claimant’s shareholding

2. Defendant never promised to continue sharing profits

   • Defendant had merely said Claimant could take some profits whilst Claimant managed the company

   • However Defendant deliberately retained control of company thus retained right to withdraw Claimant’s profits if he wanted

     • Thus was not unconscionable for Defendant to withdraw Claimant’s profits

   • Therefore Defendant did not behave unfairly by withdrawing Claimant’s profits