Graham v Every [2014] EWCA Civ 191

Mr Graham, a shareholder in Below Zero London Ltd (an ice bar company), petitioned for relief from unfair prejudice under section 994 of the Companies Act 2006 after being excluded from management. The Court of Appeal allowed his appeal regarding struck-out allegations about shareholder understandings and non-compliant share purchases, holding these were arguable claims of unfairly prejudicial conduct.

Facts

Mr Jason Graham and several respondents were shareholders in Below Zero London Ltd, which operated an ice bar and restaurant. Following his removal as director in 2009, Mr Graham presented a petition under section 994 of the Companies Act 2006 alleging unfair prejudice. His petition contained several allegations including: a common understanding about how the company would be run (partly recorded in Heads of Agreement from April 2005); failure to manage fitting out costs by associated companies; exclusion from management; extortionate loan agreements; and a non-compliant share purchase where Mr Every acquired shares from Mr Rymer and Mr Carande without offering them pro rata to Mr Graham as allegedly required.

Procedural History

The petition was presented on 16 March 2012. The respondents applied to strike out the petition on 24 October 2012. Mr Stuart Isaacs QC, sitting as deputy judge, partially allowed the strike-out application, removing certain paragraphs regarding the understanding allegation and the entire non-compliant share purchase allegation. Mr Graham appealed and the respondents cross-appealed seeking to strike out the entire petition.

Issues

The key legal issues were: (1) whether paragraphs concerning the common understanding between shareholders should be struck out; (2) whether the non-compliant share purchase allegation could constitute unfairly prejudicial conduct under section 994; and (3) whether the respondents’ offer to purchase Mr Graham’s shares made it unreasonable for him to pursue the petition.

Judgment

The Understanding Allegation

Lady Justice Arden held the judge was wrong to strike out subparagraphs (f), (g) and (j) of paragraph 5 merely because they were not in the written Heads of Agreement. The petition alleged the understanding was only partly recorded in writing. Acceptance of the Heads of Agreement could have occurred through conduct:

“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.”

The Non-Compliant Share Purchase Allegation

While accepting that a mere breach of a pre-emption agreement would not itself constitute conduct of company affairs under section 994, the Court held this allegation should not be struck out. Arden LJ noted that the directors were to be remunerated by dividend rather than salary, making shareholding size directly relevant to remuneration:

“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.”

Lord Justice McCombe emphasised the importance of context:

“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.”

The Offer

The respondents’ offer to buy Mr Graham’s shares was held not to make pursuit of the petition unreasonable. The offer failed to comply with guidelines from O’Neill v Phillips [1999] 2 BCLC 1 as Mr Graham was not sent the valuation report, could not make submissions to the valuer, had no access to information before the valuer, and was not offered costs.

Implications

This case confirms that in quasi-partnership companies, allegations of unfair prejudice must be considered in their full factual context rather than being artificially compartmentalised. The court emphasised that section 994 petitions should not be struck out on technical grounds where arguable claims exist. The judgment also reinforces the requirements from O’Neill v Phillips for a reasonable buy-out offer, including equality of access to information and the opportunity to make submissions to any valuer. The case highlights judicial concern about parties using strike-out applications as tactical devices rather than engaging constructively with dispute resolution.

Verdict: Appeal allowed. The Court set aside the judge’s order striking out paragraphs 5(f), (g) and (j) and paragraphs 24-26 of the petition. Cross-appeal dismissed. Permission to appeal the costs order refused.

Source: Graham v Every [2014] EWCA Civ 191