Phoenix Contracts (Leicester) Ltd, Re [2010] EWHC 2375 (Ch)

Mr Shepherd, a 50% shareholder in a quasi-partnership company, was wrongfully excluded from management by co-director Mr Williamson following a protected disclosure about bid-rigging. The court found unfair prejudice under s.994 Companies Act 2006 and ordered Mr Williamson to purchase Mr Shepherd's shares at their value on the date of exclusion.

Facts

Phoenix Contracts (Leicester) Limited was a fit-out contractor company. After two founding members departed, Mr Shepherd and Mr Williamson became equal shareholders and directors. In October 2007, Mr Shepherd became concerned about potential bid-rigging practices discussed at a management meeting. After Mr Williamson dismissed his concerns, Mr Shepherd made an anonymous telephone call to a major client warning of collusive practices. Mr Williamson, discovering the call, suspended Mr Shepherd from employment in November 2007, changed the locks, and commenced disciplinary proceedings. An Employment Tribunal later found Mr Shepherd had made a protected disclosure in good faith.

Exclusion and Subsequent Events

Mr Shepherd remained suspended for nearly a year. The disciplinary process was found by the Tribunal to be unfair and designed to achieve a predetermined outcome. Mr Williamson’s invitation for Mr Shepherd to return to work in November 2008 was followed immediately by a contrived redundancy process. Mr Shepherd’s 2007 bonus was withheld without valid reason, and Mr Williamson made misleading statements to the Tribunal regarding his own bonus payment.

Issues

1. Whether the company constituted a quasi-partnership after Mr Walker’s departure.

2. Whether Mr Shepherd suffered unfair prejudice to his interests as a member under s.994 Companies Act 2006.

3. The construction of Article 8.11 regarding deemed sale notices upon cessation of employment or directorship.

4. The appropriate date for valuation of Mr Shepherd’s shares.

Judgment

Mrs Justice Proudman found in favour of Mr Shepherd. The court held that the company became a quasi-partnership after Mr Walker’s departure, exhibiting all elements described in Re Westbourne Galleries: mutual confidence, participation in management, and restrictions on share transfer.

“At latest when Mr Williamson and Mr Shepherd became the sole directors and shareholders the Company became a quasi-partnership. The elements mentioned by Lord Wilberforce in Westbourne Galleries at 379 are all present.”

The court found Mr Shepherd was bound by the Employment Tribunal’s findings of fact, including that he acted in good faith in making the telephone call. Applying s.172 Companies Act 2006, Mr Shepherd was entitled to balance customer relations against the company’s reputation in light of the OFT investigation.

“The suspension as such will not be unfairly prejudicial and he will be entitled to have the petition struck out. It is therefore very important that participants in such companies should be able to know what counts as a reasonable offer.”

The court rejected Mr Williamson’s argument that Mr Shepherd’s interests as a member were unaffected, holding that exclusion from management directly prejudiced his membership interests.

“It is wholly artificial to draw a distinction between Mr Shepherd’s role as an employee on the one hand and as a director and shareholder on the other.”

Implications

This case reinforces that in quasi-partnerships, exclusion from management without a fair offer constitutes unfair prejudice under s.994. It establishes that where a shareholder is wrongfully excluded, valuation should be at the date of exclusion rather than the date of order, preventing wrongdoers from benefiting from subsequent decline. The case demonstrates how Employment Tribunal findings may create issue estoppel in subsequent company law proceedings where the same parties are involved.

Verdict: The petition under s.994 Companies Act 2006 succeeded. Mr Williamson was ordered to purchase Mr Shepherd’s shares at a price to be determined by reference to their value on 28th November 2007, the date of Mr Shepherd’s exclusion from the company.

Source: Phoenix Contracts (Leicester) Ltd, Re [2010] EWHC 2375 (Ch)