Unfair prejudice petitions — quasi-partnerships and the importance of fairness (Re Westshield Ltd Waldron v Waldron)

10 April, 2019

Dispute Resolution analysis: In Re Westshield Ltd Waldron v Waldron, the court considered the circumstances when a company might be described as a ‘quasi-partnership’ and the test to be applied with regard to fairness in the context of a section 994 petition. In particular, despite finding that there had been unfairly prejudicial conduct, the court declined to grant relief on the basis of the petitioners’ conduct and acquiescence in the respondent’s bad behaviour. Ed Weeks, partner and head of the commercial dispute resolution team at Cripps Pemberton Greenish, considers this decision and its practical implications.

Re Westshield Ltd Waldron and others v Waldron and another [2019] EWHC 115 (Ch), [2019] All ER (D) 108 (Feb)

What are the practical implications of the case?
The case of Re Westshield Ltd Waldron and others v Waldron and another is a reminder that a party seeking relief under sections 994–996 of the Companies Act 2006 (CA 2006) (the petitioner) must establish that they have suffered prejudice and that the prejudice is unfair. It is the question of whether what has happened is unfair that is often the most critical element.

Two factors that are regularly considered in this respect are whether the company is (what is known in shorthand as) a quasi-partnership and the petitioner’s own conduct. The first is relevant in terms of deciding whether what would otherwise be a lawful exercise of rights in fact amounts to a breach of some understanding or legitimate expectation on the part of the petitioner. The second can affect whether or not what has happened is unfair or, just as importantly, what remedy is appropriate.

These elements are often centre stage in disputes within family companies. In particular, the added emotional element of a family at war can mean that both sides behave badly requiring the court to exercise fine judgment. The case is a useful example of how the court can approach these issues.

What was the background?
The petitioners were siblings who were all shareholders in the family business, Westshield Ltd, which had been set up by their parents.

The respondent was their brother who had effective control of the company. Two of the petitioners worked in the company at the material time. Following an incident in which these two petitioners sought to gain access to their brother’s emails, the respondent dismissed them both and effectively excluded them from the company.

This had followed several years in which relationships between the siblings had become increasingly strained, primarily arising from differences of opinion with regard to how the company should be run.

The petitioners then sought relief under CA 2006, s 994. They sought an order that the respondent should be required to purchase their shares in the company on a pro rata basis—that is to say without any discount to reflect the fact that these were minority shares.

What did the court decide?
The parties in the dispute made numerous allegations and counter-allegations ranging from assertions of bad behaviour through to serious allegations of fraud.

The judge had to decide:
• was the company a quasi-partnership at the material time?
• was the petitioner’s conduct unfairly prejudicial?
• if so, what relief was appropriate?

In relation to the first of these issues, the judge carried out a helpful review of the authorities on the question of when a company is a quasi-partnership. He concluded that, in summary, he was looking for those characteristics in the relationship between the shareholders which might make it unfair for a majority shareholder to exercise what would otherwise be their lawful rights. This is not always an easy exercise in family companies as it can involve untangling legitimate expectations from those which are not based on shared understandings but rather on historic family grievances or contradictory points of view.

In relation to Westshield Ltd, there was a particular issue as to whether there could be a quasi-partnership if the required understandings did not extend to all shareholders. After a careful consideration of the authorities the judge concluded that this would not preclude a finding that the company was a quasi-partnership.

The judge also considered the nature of the test to be applied with regard to fairness or unfairness. He emphasised that it was an objective test on the basis that it was by reference to principle and authority rather than by reference to what any party believed. Further, he emphasised the need for the test to be undertaken by reference to all the relevant circumstances and background.

Counsel for the petitioners had argued that there needed to be causal connection between any bad behaviour on the part of the petitioners and the prejudice they had suffered in order for that behaviour to make what was otherwise unfair, fair. The judge was not willing to be constrained in this respect and in any event pointed out that such behaviour would be highly relevant to what remedy was appropriate.

Finally, the judge noted the importance of breaches of fiduciary duty, which would generally equate to unfairly prejudicial conduct. However, these must also be considered in the light of all the circumstances and in particular whether there had been any acquiescence by the complaining party.

Having reviewed the factual evidence, the judge noted that, in the course of evidence, one of the petitioners gave a false account in relation to his involvement with other companies and that he did not consider any of the three principal parties as being reliable witnesses.

The judge concluded that:
• there was a family understanding that constrained the respondent in the exercise of his powers
• the understanding was not changed by subsequent commercial events and the involvement of third party
investors
• a company owned by the respondent had acquired assets in breach of an understanding that these would be acquired by Westfield Ltd—this was unfairly prejudicial conduct by the respondent
• contrary to the evidence of the principal petitioners, they had offered an IT consultant money to wrongfully access the respondent’s emails and this was improper conduct on their part
• as a result, and looking at things in the round, the judge found that their exclusion from the company did not amount to unfair prejudice
• with regard to the unfair prejudice on the part of the respondent that had been identified (in relation to the acquisition of assets), the judge found that petitioners had acquiesced, as evidenced by the fact that they had known about the matter for some years and failed to take any action or even raise any significant complaint—accordingly, this did not entitle them to any relief either

In summary, bad behaviour by the petitioners had made what was a breach of their legitimate expectations nevertheless fair and their acquiescence in bad behaviour by the respondent had denied them any remedy in that respect either.

Ed Weeks specialises in the resolution of shareholder disputes and has particular experience dealing with disputes in family businesses.

Interviewed by Kate Beaumont.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor

This article was first published on Lexis®PSL Dispute Resolution on 1 April 2019.