Strahan v Wilcock

JurisdictionEngland & Wales
JudgeLady Justice Arden,Lord Justice Richards,Lord Justice Mummery
Judgment Date19 January 2006
Neutral Citation[2006] EWCA Civ 13
Docket NumberCase No: A3/2005/0721
CourtCourt of Appeal (Civil Division)
Date19 January 2006

[2006] EWCA Civ 13



ON APPEAL FROM The High Court of Justice

Chancery Division

HHJ Howarth

Royal Courts of Justice

Strand, London, WC2A 2LL


Lord Justice Mummery

Lady Justice Arden and

Lord Justice Richards

Case No: A3/2005/0721


Anthony Elleray QC (instructed by Messrs Beachcroft Wansbroughs) for the Appellant

Lesley Anderson (instructed by Messrs Taylors) for the Respondent

Lady Justice Arden

This is an appeal from the order of HHJ Howarth (sitting as an additional judge of the Chancery Division) dated 22 March 2005. By his order, the judge ordered Mr Wilcock to purchase all the ordinary shares in Plan-It Welding Services Ltd ("the company") held by Mr Strahan at their full value with no discount for the fact that those shares represented a minority shareholding. This appeal concerns a situation that often arises in a closely-held company. The sole or principal shareholder of the company brings in a person ("the new participant") to help him run the company. The new participant is given an executive role. The parties get on well, and the principal shareholder gives him or sells him an equity stake. Then, after some time, the parties fall out and the principal shareholder causes the dismissal of the new participant. He and the principal shareholder part company. In these circumstances, should the principal shareholder purchase the shares of the new participant and if so, should he do so on terms that the new participant receives the full value of the shares, i.e. their non-discounted value, or should those shares be valued on the basis that they represent a minority shareholding, i.e. on terms that their value is discounted to reflect their non-saleability in the open market? The general principle is well settled. Normally, in "quasi-partnership" companies the appropriate basis of valuation is on a non-discounted basis. This is established by the decision of this court in Re Bird Precision Bellows Ltd [1984] 1 Ch. 419 and the speech of Lord Hoffmann in O'Neill v Phillips [1999] 1 WLR 1092, at 1107 with which the other members of the House agreed. But Lord Hoffmann added:

"That is not to say that there may not be cases in which it will be fair to take a discounted value. But such cases will be based upon special circumstances …"


Is the normal principle excluded by showing that the parties had, or also had, purely commercial arrangements about the participant's acquisition of shares in the first place? Do these circumstances constitute "special circumstances" for the purposes of Lord Hoffmann's dictum?


The jurisdiction of the court to make the order in this case derives from the statutory remedy for unfair prejudice contained in sections 459 to 461 of the Companies Act 1985 ("the 1985 Act") . The material parts of sections 459 and 461 of the 1985 Act are as follows:

"459 (1) A member of a company may apply to the court by petition for an order under this Part on the ground that the company's affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members (including at least himself) or that any actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial …

461 (1) If the court is satisfied that a petition under this Part is well founded, it may make such order as it thinks fit for giving relief in respect of the matters complained of.

(2) Without prejudice to the generality of subsection (1) , the court's order may –

(d) provide for the purchase of the shares of any members of the company by other members or by the company itself and, in the case of a purchase by the company itself, the reduction of the company's capital accordingly."

Background and the judge's judgment


The company was formed by Mr Wilcock in 1987. Its business was light and heavy engineering. The authorised and issued share capital of the company was £1,000 divided into 1000 shares of £1 each, of which 900 shares had been issued to Mr Wilcock and were registered in his name and the remainder were registered in the name of his wife. In due course, Mrs Wilcock's shares were acquired by Mr Wilcock.


Mr Strahan did not join the company until 1991. The judge found that:

"The Petitioner ("Mr Strahan") joined the company in the spring of 1991 as a production consultant, but within a short time, Mr Wilcock asked Mr Strahan to take over the running of the company and to become the deputy managing director, which Mr Strahan agreed. At this time Mr Wilcock and his wife were separated and divorce proceedings were under way. Mr Wilcock had two young children, who were taking up a lot of his time. As a result, Mr. Wilcock was devoting considerably less time to the company's business and affairs. Mr Strahan was in day-to-day control of the running of such business and affairs and Mr Wilcock, when he was not on holiday, was calling at the premises of the company at regular intervals. After about a year, Mr Strahan was made the managing director of the company and Mr Wilcock became the chairman." (judgment, paragraph 3) .


At some point, the parties also agreed that, initially for a period of five years, Mr Strahan would have an option to purchase all Mr Wilcock's shares at a price per share based on a valuation of the company at £1.25m. I will call this option "the first option". There is some uncertainty about its precise terms, which were never ultimately recorded in a written agreement between the parties, but that uncertainty does not matter for the purposes of this appeal. In December 1996, Mr Strahan was advised by his own accountant that the option price under the first option was high.


In 1997 Mr Strahan's remuneration was increased to £30,000 per annum with a bonus dependent on profits. The judge found that at about the same time Mr Strahan was given another option to buy up to 10 per cent of Mr Wilcock's shares, which I will call "the second option". The circumstances leading to the second option were as follows. The judge found that Mr Strahan was unable to buy the company at the option price of £1.25m. Accordingly, he went back to Mr Wilcock in 1996. His evidence was as follows: "I approached Bill [Mr Wilcock] and told him that in return for my part in the company's renewed success I would like a further incentive for my efforts. I suggested the possibility of me acquiring shares in the company, thinking that this would reduce the total funds that I would then have to produce to buy the company from him." (witness statement, paragraph 17) .


The judge held:

"Part of these new terms was that Mr Strahan was to have an option to acquire shares in the company from Mr Wilcock. The purchase price for such shares was to be paid out of the bonus due to Mr Strahan. The purchase price was to be £625 for each share …" (judgment, paragraph 6)


Mr Wilcock agreed that Mr Strahan could purchase up to 10 per cent of the share capital of the company out of his bonuses. However, his case was that the reason for this arrangement was simply that Mr Strahan took the view that he might wish to make a further attempt to purchase the business and that if he acquired some shares in the business this might have the effect of reducing the overall sum to be paid in the event of exercising the option (witness statement paragraph 26) . Mr Strahan was advised that the option price fixed by the second option placed a value on the company in excess of its true value, which he was advised was only £600,000. Mr Wilcock, however, took the view that the company was worth £1.25m and so he perceived the option price under the second option agreement to be generous to Mr Strahan.


By exercising the second option, Mr Strahan acquired 21, 25 and 4 ordinary shares in the company from Mr Wilcock in respectively 1998, 1999 and 2000. In 2000, however, he invested only part of his bonus in buying shares from Mr Wilcock. He said that he was advised that it would be better to put the remaining monies into his pension scheme.


However, on 20 September 2001, Mr Strahan was dismissed from his employment with the company. Negotiations took place between the solicitors for Mr Strahan and the solicitors for the company as a result of which Mr Strahan compromised his claim against the company arising out of his dismissal and resigned as a director.


Mr Strahan then asked Mr Wilcock to buy his shares at their full value on a non-discounted basis. Mr Wilcock declined, and Mr Strahan presented a petition for relief from unfair prejudice under Section 459 of the 1985 Act based on his exclusion from management and Mr Wilcock's failure to buy out his shares at their non-discounted value. In his petition he also relied on the creation and issue of further classes of ordinary share capital on which dividends were paid and from which Mr Strahan was excluded. The judge found in favour of Mr Strahan on those matters, but it is not necessary to consider those findings on this appeal.


On Mr Strahan's case based on his exclusion from management and Mr Wilcock's failure to purchase his shares, Miss Lesley Anderson, for Mr Strahan, submitted to the judge that equitable obligations were owed to him as the company was a "quasi-partnership". (I will examine the meaning of that term below.) The judge's conclusions on this submission were as follows:

"48. What is a quasi partnership? In my judgment it is an association of shareholders in a company where if they were conducting the same business without having formed or acquired...

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