Court upholds compulsory buy-out of minority shareholder

A minority shareholder was not unfairly treated when his former colleagues decided to buy him out against his will.

That was the ruling of the Court of Appeal in a case involving a private equity business.

The court heard that the business had been subject to a management buy-out from its previous owner. It was structured as a limited liability partnership with a comprehensive shareholders’ agreement.

By 2011, the appellant in this case and many more of the original buy-out team had either retired or were intending to step down. Between them, they owned more than 50% of the shares in the business.

The shareholders who were remaining with the business proposed a new structure that involved purchasing all the shares. All the non-continuing shareholders accepted an offer for their shares, except the appellant.

He considered that the offer for the shares was much too low. The articles were then amended to permit the appellant to be bought out without his consent. He presented an unfair prejudice petition under the Companies Act 2006.

He claimed that the remaining shareholders had repudiated an oral agreement for an independent valuation and purchase of his shares, that irregularities within the business had not been properly investigated, and that the takeover offer and amendment of the articles had been carried out improperly in order to buy his shares at a gross undervalue rather than for any genuine corporate purpose.

The High Court ruled against him. The judge held that there had been no oral agreement as alleged, that the appellant’s concerns had been properly investigated and that there had been no unfair prejudice in the takeover offer and amendment of the articles. She also rejected an argument that non-payment of dividends was unfairly prejudicial conduct.

The Court of Appeal has upheld that decision. It held that the original articles clearly permitted the majority shareholders to acquire all the shares of the minority provided that a majority of the non-purchasing shareholders agreed to the sale.

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