Graham v Every & Ors

This is an appeal by Mr Jason Lorimer Graham, the petitioner in these proceedings, and a cross-appeal by Mr Simon Every, Mr Frederick Olsson, Mr Alexander De Pommes, Mr Nigel Carande and Mr David Rymer, the individual respondents in the petition, against the order dated 18 January 2013 of Mr Stuart Isaacs QC, sitting as a deputy judge of the Chancery Division allowing (in part) the individual respondents’ application to strike out the petition. The parties are the present or former shareholders in Below Zero London Ltd (“the Company”), which carries on the business of owning and operating an “ice bar” (that is, a bar where the furniture, walls and glasses are made from ice), and a restaurant. Originally, some of the parties were directors of the Company but Mr Graham was removed as director in 2009.

Following his removal, Mr Graham presented a petition for relief from unfair prejudice under section 994 of the Companies Act 2006. This provision is very well known and I need only set out sub-section (1):

Mr Graham’s petition contains allegations relevant to this appeal as follows:

the “understanding” allegation: that the Company had been formed on the basis of a common understanding between the parties, recorded in part in written Heads of Agreement of April 2005;

the “fitting out” allegation: that Mr Every and Mr De Pommes had failed to manage the cost of the fitting out of the Company’s business premises by Willowmead Ltd (“W Ltd”) and another company, Straight Impact Ltd (“S Ltd”), also associated with Mr Every, Mr Rymer and Mr Carande;

the “exclusion” allegation: that Mr Graham was excluded from the management of the Company;

the “loan agreements” allegation: that the respondents caused the Company to enter into "extortionate loan agreements" under which the Company borrowed money from W Ltd for the benefit of certain directors;

the “non-compliant share purchase” allegation: that Mr Every bought the shareholdings of Mr Rymer and Mr Carande without complying with a term of the Heads of Agreement that if a shareholder wished to sell his shares, he was to offer them pro rata to the other shareholders. I refer to this transaction below as “the non-compliant share purchase” and to this term as “the pre-emption agreement.” Mr Graham contends that, if he had been offered his rateable share of the shareholdings of Mr Rymer and Mr Carande, he would have become a 27% shareholder.

Mr Graham essentially contends that the judge was wrong to strike out certain paragraphs of the “understanding” allegation and the whole of the “non-compliant share purchase” allegation. The respondents contend that the judge should have struck out the petition in its entirety.

For my part, a key consideration in my decision on the proper disposal of this appeal is that Mr Nicholas Stewart QC, for Mr Graham, candidly accepts that Mr Graham’s petition fails to give a large number of the particulars which it ought to give. Mr Stewart has agreed that Mr Graham should give the further particulars which he ought to give within a defined period. In those circumstances, provided that the agreement is appropriately incorporated into an order of the court, I would be reluctant to make an order striking out this petition on the grounds of any pleading point unless it was inevitable that the allegation would fail.

In my judgment, for the reasons given below, the judge was right not to strike out the whole of the petition but he should have allowed to stand the whole of the “understanding” allegation, as it was sufficiently pleaded. In addition, in my judgment, the judge was wrong to strike out the “non-compliant share purchase” allegation at this stage. As I shall explain, it may involve the unfairly prejudicial conduct of the Company’s affairs when the petition is properly particularised.

The respondents’ case on their cross-appeal principally turns on the following points: they contend that Mr Graham's petition is an abuse of the process of the court because (1) their offer by email sent on 7 January 2010 (“the offer”) was a reasonable offer to buy out his shares; (2) Mr Graham’s allegations about the Heads of Agreement have no prospect of success in law because he never communicated his acceptance of the terms of that document and (3) his principal allegations are so lacking in particularity that the petition fails to make clear the case which the respondents have to meet.

In my judgment, for the reasons given below, the respondents’ offer did not make it unreasonable for Mr Graham to pursue his petition. In addition, in my judgment, there is an arguable issue as to whether Mr Graham communicated his acceptance of the Heads of Agreement. Furthermore, there is no difficulty in identifying the nature of the wrongdoing which he alleges.

The next step will be for Mr Graham to provide particulars of his case. The order of the court would, if my Lords agree, leave it open to the respondents to take such further steps as they may be advised in the light of the particulars which Mr Graham gives. Mr Graham has therefore every incentive to give the fullest particulars he can to ensure that the petition is pleaded in a properly defined way. The respondents realistically agree that they have to buy out Mr Graham’s shares and that is the relief he seeks on his petition. The only question is how his shares should be valued, taking appropriate account of the matters which he raises in his petition. The parties need to settle down now to finding a way of valuing Mr Graham’s shares.

The respondents made their application to strike out the petition because of their concern about the burden of complying with orders of the court for disclosure. Meanwhile they have not complied with these orders. The petition was presented on 16 March 2012 and amended on 12 June 2012. On 1 June 2012, Mrs Registrar Derrett made an order for standard disclosure. Points of defence were served on 12 July 2012. The respondents served a request for further information ("the further information request"). On 20 September 2012 Mr Graham served replies (“the further information”) but the respondents were not satisfied that he had given proper particulars. On 24 October 2012 the respondents applied for an order striking out the petition. On 1 November 2012, Mr Registrar Nicholls confirmed the order for standard disclosure.

The court is well aware that it is often very burdensome for litigants to comply with orders for disclosure. But, as Mr Andrew Butler, for the respondents, fairly accepts, the proper course for a litigant, who wishes not to comply with an order of the court, is to apply to the court for an extension of time or stay or even appeal. In this case the respondents failed to appeal the order of Mrs Registrar Derrett. They sought to appeal the order of Mr Registrar Nicholls to the High Court but Proudman J refused permission. However, they could still have asked for an extension of time or stay pending their application to strike out. They did nothing following their unsuccessful application for permission to appeal until after the order made by the judge, which was long after the date on which the orders of the Court required them to give disclosure. Then they applied to Ms Registrar Barber at a case management conference to vary the order of disclosure but she declined to make an order in the light of this appeal. So the position is that the respondents remain in default of court orders to give disclosure. They maintain that their default was not contumelious. There is no application to us about that and so I say only this, lest there should be any doubt in the respondents’ minds; this is a serious matter. I am grateful to Mr Butler that he was prepared to recognise that.

Mr Graham appeals against the judge's order to strike out subparagraphs (f),(g) and (j) of paragraph 5 of his petition, which constitute part of the “understanding” allegation. The opening words and these subparagraphs are as follows:

Clause 5 is clearly designed to raise a case that the Company is what is termed a “quasi-partnership” company. This type of company will have a small number of members, many of the members will be involved in running the company’s business, restrictions will generally be imposed on the disposal of shares and profits will generally be paid as remuneration: see generally the leading authority of Re Westbourne Galleries Ltd [1973] AC 360. In fact, under the Heads of Agreement in this case, the directors were not initially to be remunerated by way of salary, and 50% of the profits were to be distributed as dividend. Mr Butler has rightly not suggested that that factor would prevent the Company from being a quasi-partnership. The advantage from Mr Graham’s point of view of alleging in effect that the Company was a quasi-partnership is that the court will in general look to determine the parties’ rights by reference to their agreements and understandings as well as the company’s memorandum and articles of association, which is likely to be in a standard form.

There is a dispute between the parties as to whether Mr Graham ever signed the Heads of Agreement. He contends that he did so in the privacy of his own home in 2005. He did not produce the signed document to the respondents until after he had presented his petition. The respondents contend that he did not sign that until after the dispute arose, and that he never communicated to the respondents that he had signed it. Moreover they contend that he had sent an e-mail on 23 February 2009 indicating that he had not signed them. The judge accepted the respondents’ submission that Mr Graham would have to have communicated his acceptance of the offer contained in the Heads of Agreement to the respondents, but held that:

In any event, continued the judge, Mr Rymer had also not signed the Heads of Agreement.

The only reason the judge gave for striking out sub-paragraphs (f), (g) and (j) of paragraph 5 of the petition was that those clauses did not form part of the Heads of Agreement.

Mr Stewart submits that the judge overlooked the fact that Mr Graham alleged that the common understanding between the parties as to how they would run the company’s business was only partly to be found in the written Heads of Agreement. In addition, Mr Graham had signed a witness statement stating that, as pleaded in subparagraph (j) of paragraph 5, the fitting out would be carried out at cost. There appears to be no dispute that there was an agreement between the parties that W Ltd or S Ltd would do this work at cost.

Mr Butler submits that Mr Graham cannot rely on terms of the Heads of Agreement because, even if he accepted those terms, he never communicated his acceptance. In addition, there was no point including the allegation in clause 5(f) in the petition because Mr Graham did not allege any breach of that provision.

In my judgment, Mr Stewart is correct on these issues.

Clause 5(f) derives from the Heads of Agreement. Moreover, this court cannot determine on a strike out application that the Heads of Agreement could only be accepted by notification that the document was executed. Acceptance could have been by way of conduct: after all, the joint venturers carried on business together for some four years after the Heads of Agreement was drafted. As McCombe LJ powerfully pointed out in argument, there are cases where parties have been held to be bound by the terms to be in partnership even though they had not signed a partnership agreement which was intended to form the basis on which they had carried on business together.

Furthermore this court is not able, on a strike out application, to determine whether or not Mr Graham accepted, in his email of 23 February 2009, that he had not executed the Heads of Agreement. The email is ungrammatical and cannot be properly understood without hearing evidence and making findings of fact.

Clause 5(g) of the petition in part reflects the terms of the Heads of Agreement because clause 26 of that document requires unanimous shareholder consent for major changes in the Company’s business. In so far as it goes outside the Heads of Agreement, it merely reflects the rights of the Joint Venturers as directors. It was always accepted that at least four of the Joint Venturers would be directors of the Company. Finally, clause 5(g) set out the terms of the parties’ understanding, which is not confined to the terms of the Heads of Agreement. So clause 5(g) may be proved by some other evidence.

As stated, the “fitting out” allegation in paragraph 5(j) is established as an agreement outside the Heads of Agreement by the declaration of truth endorsed on the petition and also by paragraph 34 of Mr Graham’s witness statement dated 7 July 2012. The court cannot decide whether Mr Graham’s evidence is to be accepted on a strike out application.

The judge struck out this allegation, which (so far as still relied on) reads as follows:

The judge struck out this allegation because

It is not clear what the judge meant in this somewhat Delphic passage.

Mr Stewart submits that the non-compliant share offer was a breach of a term in the Heads of Agreement. The agreement about pro rata share offers was therefore as much a part of the shareholders’ agreement as paragraphs 5(f) and (g) and the judge should not have struck out the non-compliant share purchase allegation. In the light of my conclusion above, I need not deal again with the submission that this term is unenforceable because Mr Graham did not communicate his acceptance of those terms.

Mr Butler submits that the mere dilution of Mr Graham’s shareholding cannot be unfair prejudice. I reject this argument since it is clear that, if he was denied an opportunity to buy shares, then, even after giving credit for the cost, he lost an opportunity which might be of value to him. In particular, he lost the chance of obtaining a potentially valuable strategic position as a 27% shareholder.

Mr Butler also submits that the shareholder’s act of purchasing shares cannot be an act of the Company. In this regard he relies on the decision of Harman J in Re Unisoft Ltd and the dictum of Rimer LJ in Re Coroin Ltd (No 2) [2013] 2BCLC 583.

Mr Stewart accepts that a mere breach of a pre-emption agreement would not in itself constitute the conduct of the affairs of a company or an act of omission of the company within section 994. In my judgment, Mr Stewart is right to accept that the mere breach of the pre-emption agreement was not an act or omission of the company or the conduct of the company’s affairs for the purposes of section 994(1). The reason is obvious. The act of purchasing the shares was not effected by the Company or on its behalf.

If authority were needed for this proposition, it is to be found in Re Unisoft Ltd and Re Coroin. In Re Coroin, Rimer LJ held:

Likewise, in the same case, Moore-Bick LJ at [145] and I at [55] held that a breach by a shareholder of a clause in a shareholder’s agreement requiring him to act in good faith as regards his fellow shareholders could not be an “act or omission” of the company for the purposes of section 994(1).

Mr Stewart next submits that the conduct of the affairs of a company is affected by a change in the composition of the shareholders since it leads to a “different power balance”. In other words, he submits the denial of the pre-emption rights had the clear effect that Mr Graham did not acquire a shareholding of more than 25% and so the way in which the Company’s affairs were thereafter conducted was unfairly prejudicial to him.

Mr Stewart relies on the decisions in Re Phoneer Ltd (13 December 2001, unreported) and Re Rackind Ltd [2005] IWLR 3505. The former case is closest to this case since Mr Roger Kaye QC (as he then was), sitting as a judge of the High Court of Justice, Chancery Division, held that the act of a director in seeking to renegotiate the basis of his participation in a company was a departure from the shareholders’ agreement as to the way in which they were to carry on the company’s business, and thus within section 459 of the Companies Act 1985 (the predecessor of section 994). Re Rackind concerned the conduct of a subsidiary’s affairs and thus is of less assistance.

Mr Stewart goes on to suggest that it was unfairly prejudicial for the respondents to conduct the Company’s affairs on the basis that the shares (“the impugned shares”) that Mr Every acquired from Mr Rymer and Mr Carande were duly acquired by him.

Is there an arguable case that non-compliant share purchase was an act within the conduct of the Company’s affairs for section 994(1) purposes? There is no suggestion that the non-compliant share purchase caused Mr Graham any loss or other prejudice as a result of the way that voting has taken place at general meetings. Nor, at present at least, is there any allegation that that is proposed to happen in the future, which might raise a case about an “act or omission” of the Company. We know that, after Mr Every acquired the impugned shares, the Company changed its articles of association. This involved passing a special resolution which Mr Graham could have blocked if he had taken up his share of the impugned shares. However, there is no allegation in the petition that Mr Every used his control of the impugned shares to pass this, or any other, shareholder resolution of which Mr Graham did not approve. When the Company removed Mr Graham as a director, the shareholders passed an ordinary resolution, which he could not have blocked even if he had acquired his due proportion of the impugned shares.

The requirement in section 994 for an “act or omission of the company” means that the petitioner must identify something which the company does or fails to do. The alternative requirement - that “the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial” to members or the petitioner - does not contain the same stipulation. Mr Graham can rely on the actions of some other persons, including his fellow shareholders. But the actions must still amount to the conduct of the company’s affairs.

On its own, non-compliance with a pre-emption agreement for the sale of shares in the company would not be an act which amounts to the conduct of the company’s affairs since the events have nothing to do with the company save when the shares are registered in the names of the new holder, which is a purely ministerial act. An act done in the conduct of the shareholder’s personal affairs is not the conduct of the company’s affairs.

However, Mr. Stewart puts the point more widely than this. And it is true to say that, if Mr Graham establishes his allegation about the terms of the Heads of Agreement, then, in so far as those terms set out how the Company’s business is to be run, breach of those terms would fall within section 994(1).

In the normal way, pre-emption agreements fall outside section 994(1) but in the present case the directors were, as I have explained, not to be remunerated by salary but by way of dividend. Thus the size of a director’s shareholding would dictate his reward for his work on the Company’s business. How directors were to be remunerated and the Company’s distributions policy are within the conduct of the company’s affairs. So, by denying Mr Graham’s pre-emption right at a time when Mr Graham was still a director, Mr Every was arguably interfering with the way in which the parties had agreed that the Company would remunerate its directors.

On this basis, there is sufficient for this court to allow the allegation to stand on the basis that Mr Graham provides proper particulars to justify Mr Stewart’s submission to us that the non-compliant share purchase allegation is an allegation that the affairs of the Company have been or are being conducted in a manner which is unfairly prejudicial to the interest of Mr Graham as a member. There is a possibility that he will be able to do so. The point is important because Mr Graham seeks an order that his present shareholding ought to be valued on the basis that he could have acquired the impugned shares. However, Mr Stewart’s submission to us can only be made good if there is an appropriate link between the impugned share sale allegation, the conduct of the Company’s affairs, unfair prejudice to Mr Graham and the relief.

In the light of Mr Stewart’s acceptance that the allegations in the petition have to be particularised, I would not strike this petition out at this stage but give Mr Graham the chance to provide the promised particulars. The respondents can apply to the court to strike out the allegation if he does not provide the required particulars.

The offer was as follows:

In O’Neill v Phillips [1999] 2 BCLC 1 at 16, Lord Hoffmann, building on recommendations by the Law Commission in its report on Shareholder Remedies (1997) Law Com No 246, issued while I was Chair of the Law Commission, set out the basis on which the court could strike out a petition where the respondent shareholders had made an offer to buy out the petitioning shareholders. The other members of the House agreed. Lord Hoffmann held:

Mr Butler contends that the Offer was properly made: at the time it was made there was no suggestion of any impropriety concerning the fitting out of the Company’s premises. Furthermore, the offer was made on the basis of a pro rata share of the value of the Company with no discount for a minority shareholding. The valuation was done by the Company’s auditor who knew its business. It was also apparently done at the expense of the Company. It also offered him immediate payment.

Mr Butler also makes the point that Mr Graham had himself suggested that there should be a valuation of the Company’s shares on 17 September 2008. But it is to be noted that what Mr Graham suggested was that an independent “mid-tiered” accountancy firm who had experience with West End bars and restaurants should be instructed.

We did not call on Mr Stewart on this point. Clearly the offer made did not comply with the guidelines in O’Neill v Philips. Mr Graham was not sent a copy of the valuation report at the time of the offer. The respondents sent it to him at a later date when it is said that the offer may still have been available. I am not impressed by the argument that the respondents disclosed the existence of the report, and Mr Graham could have asked for a copy of it. However that may be, Mr Graham was not able to make any submissions to the valuer before the valuation was completed or to have access to the information which was to be placed before the valuer. His witness statement disclosed that he had information he would have wanted to place before the valuer. These are important rights. Moreover, he was not offered his costs. In addition, the valuation takes no account of his allegations about the financial mismanagement of the fitting out. In the circumstances, I conclude that his failure to accept this offer was not unreasonable.

I would therefore dismiss the cross appeal on this point.

Mr Butler submits that the petition was simply a “cut and paste” of the letter before action. The allegations were non-specific. The respondent had no option but to apply to strike out the petition given the disclosure orders which the court had made.

He further submits that Mr Graham is effectively putting the onus on the respondents to show that they have not acted wrongfully and that this is an improper reversal of the onus of proof. It appears from the further information that Mr Graham has material to make his allegations, but he does not disclose what that is.

Mr Butler also points out that there continues to be an allegation that sums were paid to the associated companies at “the instigation and connivance” of two of the directors. He submits that that is an allegation of fraud.

Mr Butler submits that the attitude of Mr Graham to giving particulars is that he will not do so until disclosure has been given. That produces what Vos LJ rightly termed in argument “a trial management nightmare”.

Mr Butler relies on the observation of Hoffmann LJ (as he then was) in Saul D Harrison & Sons Ltd [1994] BCC 475 that an unfair prejudice petition should not be allowed to proceed to trial “simply in the hope that something may turn up”. For, as Neill LJ pointed out in the same case, citing Hoffmann J in Re a Company (No 007623 of 1984) [1986] BCLC 362 at 367:

Mr Butler points out that the respondents have made a further offer which involves appointing an expert to give an opinion on whether the cost at which the premises were fitted out was fair. However, Mr Graham had rejected this aspect of the proposal on the grounds that he could not consider whether it was appropriate until he had seen the disclosure.

Mr Stewart fairly accepts the flaws in the particulars given in the further information and in the petition itself. He also accepts that Mr Graham has failed to respond constructively to the proposals which the respondents have made. He is prepared to give the requisite particulars in the next 21 days.

In my judgment there is very considerable force in the point that the allegations in the petition and in the further information are lacking in appropriate particulars. I need only give some examples: (1) In paragraph 9 of the petition Mr Graham alleges that “Mr Every and Mr De Pommes failed to prevent the Company from overpaying and further they failed to manage the fit-out cost so as to ensure that it was completed within the agreed budget.” But he does not explain what form these failures took. It is no answer for him to say that he does not have disclosure. It is always open to him to give the best particulars he can on the information that is available to him. (2) On several occasions, in the further information, Mr Graham states that he is able to make allegations on the information currently available to him but he does not give any insight into what that information might be.

On the other hand, this is not a case where the respondents cannot understand the nature of what is being alleged against them. Their very understandable objective is to define and confine the case against them. The appropriate way to do this would have been to seek further information additional to that which they already had and to ask for an order striking out the relevant paragraphs if that information was not provided. Their further information request was hardly extensive. It is also open to them to seek further particulars of the answers which have been given. In addition, if there were a sufficient change in circumstances, it may be open to them to seek a variation of the order for disclosure to enable disclosure to be given by stages.

In those circumstances I regard the application for strike-out as premature. It may be that, unless Mr Graham is willing to engage properly in defining in detail what his case is, the court would have to take the step of striking it out, in whole or part. However I do not consider that that stage has been reached yet.

I do not conclude that the words "at the instigation or connivance" of one or more of the respondents require to be struck out. These words are not to be construed as alleging that the respondents in question have been fraudulent. Mr Graham has expressly disclaimed any intention to allege fraud. The expression cited covers the situation where the respondents, for example, either initiated or permitted payments from the Company to W Ltd or S Ltd which exceeded the amounts which ought to have been paid under the terms of the agreement between the respondents and Mr Graham for the costs at which W Ltd and S Ltd would carry out the work of fitting out the bar and restaurant.

Mr. Butler renews his application for permission to appeal against the judge’s order that neither Mr Graham nor the respondents should have their costs of the strike-out application.

As is well known, the judge who hears an application has a large margin of discretion in the orders which he makes as to costs. No error of principle is here alleged. Mr Butler contends that the judge should have given the respondents some or all of their costs because Mr Graham had made serious allegations which had been struck out, such as an unparticularised allegation in conspiracy. He had effectively forced the respondents to make an application to strike out the petition because of his omission to give proper further information.

We did not call on Mr Stewart on this issue. I would refuse the respondents’ application. The judge was well-placed to assess the measure of success each party had achieved. My conclusion on paragraphs 5(f), (g) and (j) cannot materially alter that view. There is nothing to show that the judge exceeded the reasonable ambit within which disagreement is possible. On the contrary, the order he made seems to me to have been a wholly appropriate option on the facts of this case.

I would allow the appeal and set aside that part of the judge’s order which struck out paragraphs 5 (g), (h) and (j) and 24 to 26 of the petition, and refuse permission to appeal on the judge’s costs order. I would dismiss the cross-appeal.

If my Lords agree, the petition will have to be further amended to reflect the court’s order. Any application which the respondents make concerning the particulars which Mr Stewart has agreed to give must be made to the court below.

Much time has passed since Hoffmann J made his observation, cited in paragraph 53 above, that the jurisdiction to grant relief for unfair prejudice had to be carefully controlled, but his dictum remains true. Unfair prejudice cases often require events over the life of a company to be investigated and so they can often give rise to long and complex trials. However, in the intervening period since Hoffmann J spoke, the courts have acquired greater case management powers and expertise following the reports of Lord Woolf on Access to Justice. The courts thus now have a wide range of powers which may mitigate the potential for oppression to which Hoffmann J referred. With those powers in mind, in Re Coroin at [14], I observed that the courts “must, where possible, find ways and means of reducing the hearing times for [unfair prejudice] cases.”

To achieve this, the court needs the co-operation of the parties. The parties now owe the court an express duty to co-operate with the court in dealing with the case justly, and that includes of course making appropriate savings in legal costs (see CPR 1). So, in this case, once the particulars promised by Mr Stewart have been duly given, the parties should formulate proposals to achieve the most economical trial of the issues, if trial proves to be necessary in this case, and seek appropriate directions from the trial court.

I am grateful to Arden LJ for her very clear and succinct statement of the facts of this case, its procedural history and the issues arising. I find myself in entire agreement with her upon the result that we should reach in this case, essentially for the reasons that she gives. I merely wish to add a few observations of my own upon that aspect of the case which Arden LJ calls “The “non compliant share purchase” allegation”. I do not consider that the learned Deputy Judge was right in striking out that part of the petition alleging a failure properly to comply with the share pre-emption provisions in the Heads of Agreement document, assuming of course for these purposes that that document properly reflected the parties’ agreement as to how the affairs of the company were to be managed.

One of the problems that, to my mind, has long beset litigation under section 994 of the 2006 Act and its predecessors, has been the tendency (to some extent to be found in this case) of engaging in satellite litigation by way of applications to strike out petitions on pre-conceived technicalities.

The words of the section, which my Lady has set out in her judgment, could not be more general. The purpose of the section was to provide a practical remedy for unfairly prejudicial conduct in the running of a company’s business. It sought to remedy the undue technicality that had developed with regard to the operation of section 210 of the Companies Act 1948 and to develop the practical law relating to the break-up of quasi-partnership relations that came from the seminal judgment of Lord Wilberforce in Re Westbourne Galleries [1973] AC 360.

It seems to me that, inadequately pleaded as this petition is, in the various respects identified in my Lady’s judgment, what is being alleged here is a systematic exclusion of Mr Graham from the management of this joint venture company. One of the elements of that alleged exclusion is said to have been the failure by three of the parties, and I include the first respondent in this, to adhere to the provisions of clause 5 of the Heads of Agreement. If that is correct, the failure to observe the requirements of that clause was an essential feature of the unfairly prejudicial conduct alleged in the petition overall. In my judgment it would be artificial to strike out this allegation on the basis that, looked at in isolation, it might not be an “act of the company”. It seems to me that fails to give due regard to the general words of section 994(1)(a) which speaks of the company’s affairs being “conducted in a manner that is unfairly prejudicial…etc.”. I would also pray in aid the following passage in the speech of Lord Hoffmann in O’Neill v Phillips [1999] 2 BCLC 1 pg.7:

While endeavouring to avoid “sitting under a palm tree”, there are features of the allegations made in this petition which clearly fall, if proved, within section 994 of the Act. As Lord Hoffman said context and background are very important and I think it would be unwise to strike out this allegation (relating to the share sale) when the task of the court is required at trial is to review the situation of the company and its shareholders as a whole on the facts as established by all the evidence.

I note the comments made by Rimer and Moore-Bick LJJ in the Coroin case and of Harman J in Unisoft. However, I do not see them as providing the “knock out blow” to this part of the petition.

In cases of this sort, I regard the factual context as being of great significance. On Mr Graham’s case the affairs of the Company, which he contends were conducted in an unfairly prejudicial manner, consisted of his exclusion from the management in breach of a collateral agreement between shareholders. On his case, the transaction in issue was an important aspect of the campaign. I do not see it is necessary thereafter to point to some subsequent use of the changed shareholding as an aspect of the impugned conduct, for the transaction to be a relevant aspect for the purpose of s.994. It is to me striking that the effect of the dealing was to put the other shareholders, at Mr Graham’s expense, into a position in which those others might pass a special resolution against Mr Graham’s opposition, which, if Mr Graham had acquired the additional shares to which he says he was entitled under the pre-emption agreement, they could not have done.

I would add that the argument on this aspect of the case only developed at a late stage of the hearing before us and I am not satisfied that the authorities could be sufficiently explored in the time available to counsel. For this additional reason, I would allow the appeal from the learned Deputy Judge’s decision on this point.

In summary, therefore, I would allow the appeal and dismiss the cross appeal.

I agree with Arden LJ as to each of the matters she has dealt with on the appeal and the cross-appeal. I too would like to add something in relation to what she has termed the “non-compliant share purchase allegation”.

It seems to me to be important to distinguish clearly between the two limbs of Section 994(1) of the Companies Act 2006. It is only the first limb that may be engaged in this case. It provides that a member of a company may apply to the court for an order on the ground that “the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself)”. As Arden LJ has said, it could not and has not been suggested that the second limb could be engaged since it requires there to be “an actual or proposed act or omission of the company” which is not alleged.

Paragraphs 24-26 of the Petition (without the conspiracy allegation in the last sentence of paragraph 25, which the judge struck out, and against which there is no appeal) say simply that Mr Rymer and Mr Carande breached the alleged Agreement by failing to offer to Mr Graham a pro rata proportion of the shareholding that they sold to Mr Every, and that Mr Every procured that breach. The consequence is pleaded in paragraphs 26 and 30 to have been that Mr Graham was (in effect) unable to increase his influence within the Company, and that the affairs of the Company have been conducted in a manner that is allegedly unfairly prejudicial to Mr Graham’s interests.

The judge held that these allegations could not constitute unfair prejudice, and that Mr Graham should make a claim for damages for breach of contract.

In my judgment, the judge was wrong to hold that these allegations could not amount to unfair prejudice to the interests of Mr Graham. Diluting the shareholding of a member may amount to unfair prejudice to his interests, and this is the consequence of the alleged actions of the Respondents. The judge, therefore, asked the wrong question. He should have asked whether the pleaded allegations, if true, were capable of establishing that the company's affairs were being or had been conducted in such an unfairly prejudicial manner.

As it seems to me, the petition as presently drafted pleads both that (a) the consequence of the Respondents conduct was that Mr Graham sought to and was unable to increase his influence within the Company: i.e. that he was diluted, and that as a result (b) the affairs of the company have been conducted in a manner that is allegedly unfairly prejudicial to his interests. It is true that these allegations are not particularised in the way they should be, and that they do not explain how it is alleged that Mr Every used his control of the impugned shares to take decisions of which Mr Graham did not approve, or why the non-compliant share purchase caused Mr Graham any loss in the way that the Company’s affairs were thereafter directed, but those lacunae can be dealt with in the way that Arden LJ has suggested.

As Mr Stewart explained in argument, the allegation is, in effect, that the Respondents denied Mr Graham the additional shares he ought to have had, and have thereafter used their greater control of the company’s affairs to his disadvantage by, for example, excluding him from the management of the company and reducing the (greater) profit share he would otherwise have had. These matters have been unfairly prejudicial to his interests.

In a quasi-partnership, it is common for a group of partners to act in such a way as to reduce another partner’s shareholding in a variety of different ways. It would be surprising if such conduct, if proved, could not, at least in theory, be prayed in aid in seeking to establish under section 994(1)(a) of the Companies Act 2006 that the company’s affairs were being conducted in a manner that was unfairly prejudicial to the interests of the diluted member. After all, in such situations, the whole purpose of diluting the member inappropriately or unlawfully is to reduce his control of or influence in the quasi-partnership so that it will act more closely in accordance with the wishes of the majority, and in their interests. Moreover, the sub-section was amended to introduce the interests of “members generally” as well as the interests of “some part of [the] members”. That change underlined the fact that the unfair prejudice in question might depreciate the business of the company as a whole, not just some members’ interests.

Here it seems to me that Mr Graham’s allegation that he has been excluded from management taken together with the dilution of his shareholding may, if proven, lead to the conclusion that the company’s affairs have been conducted in a manner that was unfairly prejudicial to the interests of the members generally or his interests.

The allegations could and should be better particularised, but I think the judge was wrong to strike them out and I would allow the appeal in the way that Arden and McCombe LJJ have suggested.

I should not leave this judgment without commenting on the unfortunate procedural history of this litigation. Mr Graham’s determination to obtain the disclosure that was ordered seems to have prevented him giving full and proper consideration to the Respondents’ attempts to short-circuit the litigation by finding a way to buy his shares at an appropriate valuation. Neither side has behaved entirely appropriately as Arden LJ has pointed out. It may be hoped that they will now co-operate with each other and with the court to find the speediest and most cost-effective way to resolve what otherwise promises to be an intractable dispute which will benefit nobody.