Charterhouse Capital Ltd, Re [2015] EWCA Civ 536

Mr Arbuthnott, a minority shareholder in a private equity company, challenged the compulsory acquisition of his shares at £1,500 per share by majority shareholders via a special purpose vehicle. He claimed unfair prejudice under section 994 of the Companies Act 2006. The Court of Appeal dismissed his appeal, holding that the amendment to the articles of association and the acquisition were valid and not unfairly prejudicial.

Facts

Charterhouse Capital Limited was a successful private equity company owned by ‘Founders’ who had participated in a management buy-out in 2001. Geoffrey Arbuthnott held 8.9% of the shares. In 2008, Mr Arbuthnott retired from active involvement but retained his shares. By 2011, several shareholders had retired or announced retirement, creating a ‘misalignment’ between shareholding and active management. The continuing executives proposed acquiring all shares through Watling Street Limited (‘WSL’) at £1,500 per share (valuing the company at £15.15 million). The articles were amended to facilitate compulsory acquisition. All shareholders except Mr Arbuthnott accepted the offer. Mr Arbuthnott petitioned under section 994 of the Companies Act 2006, alleging unfair prejudice, claiming the shares were grossly undervalued (he alleged the company was worth at least £465 million).

The Company Structure and Remuneration Model

The business operated through a limited liability partnership (LLP), with 95% of fee income flowing to the LLP. Under the ‘remuneration model’, profits were distributed to active LLP members rather than passed up to the company as dividends to shareholders.

Issues

The key issues on appeal were:

• Whether the original arrangements permitted compulsory acquisition of minority shares by majority shareholders
• Whether the amendment to Article 39 was valid
• Whether the amendment and the WSL offer constituted unfairly prejudicial conduct
• Whether the offer price was fair

Judgment

The Court of Appeal (The Chancellor, Lord Justice Lewison, and Lord Justice McCombe) unanimously dismissed the appeal.

Interpretation of Original Arrangements

The Court held that Clause 7.2 of the Shareholders’ Agreement and the original Articles clearly permitted majority shareholders to compel sale of minority shares, provided a majority of non-purchasing shareholders approved. The Chancellor stated:

Clause 7.2 expressly contemplates a sale in which a Founder is a proposed purchaser or is connected with a proposed purchaser. There is nothing on the face of clause 7.2 which gives any indication that its provisions are subject to the major qualification that the clause will only apply if such a Founder, who is a proposed purchaser or connected with the proposed purchaser, holds only a minority of the shares.

Validity of Amendment to Articles

The Court set out principles governing amendment of articles, concluding that an amendment is valid if made in good faith in the interests of the company, or at least not such that no reasonable person could consider it beneficial. The Judge found no evidence of bad faith. The Chancellor observed:

In substance, as the Judge said, a ‘tidying up exercise’: removing from Article 36 a reference to ‘the Code’ which had no corresponding place in clause 7.2 of the Shareholders’ Agreement or Article 38.4, and extending to Article 38.4 the protective condition in Article 36 and clause 7.2 that the non-purchaser shareholders holding a majority of the remaining shares must agree to the proposed sale.

Unfair Prejudice and Valuation

The Court rejected arguments that the offer price was unfair. Mr Arbuthnott had contractually agreed under Clause 7.2 to be bound by terms accepted by the Founder Majority. The Court implied a term that the Founder Majority would not agree to an Exit except on terms they honestly considered fair and reasonable. This standard was satisfied.

I consider that clause 7.2 contained an implied term that the Founder Majority would not agree to pursue an Exit except on terms which they honestly considered to be fair and reasonable.

Remuneration Model

The Court upheld the Judge’s finding that the remuneration model was legitimate and that Mr Arbuthnott was precluded from challenging it by the waiver provisions in Clause 11.5 of the Shareholders’ Agreement.

Implications

This case provides important guidance on:

• The validity of ‘drag-along’ provisions in shareholders’ agreements and articles of association
• The limited grounds upon which amendments to articles can be challenged
• The standard of conduct required of majority shareholders when exercising powers to compel minority share sales
• The relevance of contractual waivers in unfair prejudice claims

The decision confirms that sophisticated commercial parties who agree to drag-along mechanisms providing majority protection will be held to their bargain, absent bad faith or improper motive by the majority.

Verdict: Appeal dismissed. The petition for unfair prejudice was properly rejected by the trial judge. The amendments to the Articles were valid and the compulsory acquisition of Mr Arbuthnott’s shares was not unfairly prejudicial.

Source: Charterhouse Capital Ltd, Re [2015] EWCA Civ 536