News and Events from May 2011

News Archive May 2011

Michael Howlin QC in unfair prejudice petition

Michael Howlin QC from the Hastie Stable has recently obtained Judgment in favour of the petitioner in an "unfair prejudice" petition under section 994 of the Companies Act 2006 (formerly section 459 of the Companies Act 1985).  In an extempore judgment[1] delivered after a lengthy proof, Lord Menzies, in the commercial court, found that the two respondent director-shareholders[2] of the company (Norco Group Limited), who were effectively in a quasi-partnership with the petitioner, had conceived and sought to implement a three-stage plan to get rid of him and buy in his shares.  Stage 1of the plan was to find some pretext for dismissing the petitioner as the CEO (i.e., as an employee) of the company, Stage 2 was to remove him as a director and Stage 3 was to invoke the "leaver" provisions under the company's articles of association so as to acquire his shares compulsorily at an advantageous price.  Readers who are already acquainted with unfair prejudice petitions will recognise the striking lack of originality in this plan.  Nevertheless, a number of things about the case were unusual.  In the first place, the proof was restricted to the "unfair prejudice" issue, leaving questions as to the appropriate remedy to be addressed later, either by agreement amongst the parties or by further judicial intervention.  Secondly, the "buy-out" remedy sought in the petition was buttressed by a part of the prayer which invited the court to appoint a single share valuation expert, to instruct the expert to value the petitioner's shares on the basis of assumptions and methodology specified by the court itself and to confer certain practical powers (such as the power to call for documents) upon him.

This approach contrasts with the more usual one of having expert witnesses on both sides preparing lengthy reports (at great expense) then being examined and cross-examined (again at great expense) on valuation issues.  As regards the substance of the case itself, one unusual feature was the fact (as found by the learned Judge) that despite their equity in the company being held in the proportions 60:20:20, the three corporators were bound by an informal agreement that available profits would generally be distributed amongst them in equal shares.

The case should serve as a warning for those advising shareholder-directors of a quasi-partnership company who are tempted to implement either a similar three-stage plan or a variant of it.  The respondents' solicitors seem to have tendered advice on discreet subjects such as (i) employment-law aspects of dismissing the petitioner as the CEO, (ii) company-law aspects of removing the petitioner as a director and (iii) company-law aspects of compulsorily purchasing the petitioner's "leaver" shares under the articles.  What seems to have gone wrong is that nobody "joined the dots", so nobody spotted the serious potential for an unfair prejudice petition.  The message here is that even if you get each and every one of the three stages right as a matter of law (which, by the way, the respondents did not!) the fact that what you are doing is lawful does not prevent it from being unfairly prejudicial in terms of section 944.

Michael Howlin QC wishes to pay tribute to the invaluable assistance which he received from his junior counsel, Chris Wilson, of Axiom Advocates.

9 May 2011

[1] Having been delivered extempore, the judgment, though subsequently handed down in writing, has not been published on the Scotcourts website.  Copies can be obtained from Michael Howlin QC (

[2] Their shares were held by a nominee company on their behalf, but that fact was not material.  By contrast, the petitioner held one share in his own name, the remainder being held by a nominee.  But for the one share held in his own name, the petitioner would have had no title to sue, as he would not have been a "member" of the company within the meaning of section 994.