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O’Neill v Philips

[1999] UKHL 24

Case summary last updated at 23/01/2020 18:13 by the Oxbridge Notes in-house law team.

Judgement for the case O’Neill v Philips

D, who owned all the shares in a company, gave 25% share to C and appointed him as director; additionally allowed C to take 25% of profits of company. D told C that he hoped C would be able to take over whole day-to-day management of business, in which case C would be able to have a 50% shareholding. D did retire as director to allow C to run business, and discussion took place about increasing C’s shareholding to 50%; however company’s fortunes then declined, and D retook control of company and withdrew C’s portion of the profits. C sought buy-out on grounds that D had caused him unfair prejudice, by failing to allocate him extra 25% of shares and withdrawing profits from him. Held:
Lord Hoffmann
·       Is need for a balance between:
i)         Court’s discretion under s.994
ii)        Need for legal certainty
·       Relationship of parties is fundamentally contractual
·       Thus “unfairness” usually only arises 
i)         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
ii)        or where there are equitable restraints on exercise of a legal power by D(see below)
“Legitimate Expectations”
·       Phrase “legitimate expectations” is too broad
Ø  Better view is that where D has exercised a legal right, court will nevertheless find unfair prejudice if this exercise of rights should be subject to equitable restraints
Ø  Only here does C have legitimate expectation
–       i.e. expectation is a consequence, and not a cause, of the equitable restraint
·       To be equitable restraints, D’s exercise of his legal right must be contrary to what parties have earlier agreed, by words or conduct
Ø  however no need for this earlier promise to be independently enforceable as matter of contract
1)     D never promised to increase C’s shareholding to 50%
Ø  Thus although C had expectation of being given extra 25% of shares, this was not ‘legitimate’
–       i.e. as D’s action in not giving C the shares was not unconscionable
Ø  Therefore D did not behave unfairly by withdrawing from negotiations for increase in C’s shareholding
2)     D never promised to continue sharing profits
Ø  D had merely said C could take some profits whilst C managed the company
Ø  However D deliberately retained control of company thus retained right to withdraw C’s profits if he wanted
–       Thus was not unconscionable for D to withdraw C’s profits
Ø  Therefore D did not behave unfairly by withdrawing C’s profits

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