Shareholder suffered unfair prejudice due to a failure to use up-to-date financial information

15 March 2024

The court has held that a shareholder in a company suffered unfair prejudice when an auditor failed to use up-to-date financial information as part of valuing the exiting shareholder’s shares pursuant to a contractual mechanism in a shareholders’ agreement.

What happened?

Wells v Hornshaw and others [2024] EWHC 330 (Ch) concerned an unfair prejudice petition brought under section 994 of the Companies Act 2006.

The petitioner, Stuart Wells, held 14.3% of the issued shares in a waste management company called Transwaste Recycling and Aggregate Limited. Two brothers, Paul and Mark Hornshaw each held half of the company’s remaining issued share capital. All three shareholders were also directors of the company.

The company and its shareholders entered into a shareholders’ agreement, which contained a specific procedure to value the shares of a shareholder who wished to exit the company.

In September 2015, Mr Wells sent an email stating that he wished to sell his shares in the company. In accordance with the shareholders’ agreement, the parties appointed the company’s auditor to value Mr Wells’ shares.

The auditor completed his valuation in June 2016, based on financial information up to 31 December 2014. However, Mr Wells did not agree with the auditor’s valuation of his shareholding for various reasons. As a result, the exit did not take place and Mr Wells continued as a shareholder despite expressing a continuing desire to exit.

In July 2019, Mr Wells launched an unfair prejudice petition. For more information on the nature of unfair prejudice claims generally, read our in-depth article on a case where a shareholder suffered unfair prejudice when company did not pursue exit.

This case is unusual because unfair prejudice petitions are usually invoked by a minority shareholder who, without assistance from the court, has no other means of exiting a company that is being managed in an unfairly prejudicial manner. This was clearly not the case here; there was a contractual mechanism for Mr Wells to exit the company, but he had simply disagreed with the auditor’s valuation.

Among other things, the court had to consider how the contractual exit mechanism in the shareholders’ agreement intersected with the statutory right to relief from unfair prejudice under the Companies Act 2006.

What did the Court say?

The court found that there had, in certain limited respects, been mismanagement of the company both before and after Mr Wells had expressed his desire to exit.

However, that did not automatically mean that Mr Wells had suffered unfair prejudice. This is where many unfair prejudice petitions fail. The petitioner may suffer some sort of prejudice, but that prejudice is not necessarily unfair.

To determine whether or not there had been any unfair prejudice the court had to analyse the allegations that pre-dated Mr Wells’ communication that he wished to exit (i.e. before September 2015) and, separately, those that post-dated it (i.e. after September 2015).

The Court found that mismanagement before September 2015 had negatively affected the value of Mr Wells’ shareholding. It was, therefore, prejudicial to Mr Wells. However, it was not unfair to Mr Wells, because the shareholders’ agreement stated that, when determining the value of Mr Well’s shares, there was to be an allowance for any identified matters of prejudice.

However, the way in which Mr Wells’ shares had been valued had been unfairly prejudicial to him. Although the auditor had taken the mismanagement of the company into account, he had used outdated financial information. By failing to use the most recently available financial information, he had not followed his instructions to ascertain the company’s fair market value as at the time of valuation. His valuation was not binding, therefore, on Mr Wells. The conduct was also unfairly prejudicial to Mr Wells, who had a right under the shareholders’ agreement to insist that any valuation be completed properly.

The court found that there had been no unfair prejudice arising from the mismanagement of the company after September 2015. This was because the date for valuing Mr Wells’ shareholding under the shareholders’ agreement was September 2015. Any conduct after that date could not affect the value of his shareholding as it stood in September 2015 and so was irrelevant. There could be no unfair prejudice.

The court held that the appropriate remedy was to order a valuation of Mr Wells’ shares in accordance with the shareholders’ agreement, but incorporating the findings made in the court’s judgment (including by using the most up-to-date figures). 

What does this mean for me?

Usually, the appropriate remedy for unfair prejudice is an order that the majority shareholder(s) buy the unfairly prejudiced shareholder’s shares for fair value, taking into account any unfairly prejudicial conduct.

If the shareholders’ agreement contains a procedure to ascertain the fair value of the shares, the court will likely order that that procedure is followed. When valuing the shares, the shareholders should ensure that the valuer uses up-to-date financial information and follows the valuation process as set out in the shareholders’ agreement. Failure to do so could provide the basis for a petition for unfair prejudice.

Even if conduct is prejudicial, it will not be unfair if, when determining the value of an exiting shareholders’ shares, there is a contractual mechanism that takes into account any identified prejudicial conduct and that prejudice is, in fact, taken into account in the valuation.

For clarity, parties should, when drafting shareholders’ agreements, consider fixing an appropriate reference date for calculating the value of shares.