O'neill Vs Phillips Lord Hoffman example essay topic

Introduction - Since 1980 an aggrieved shareholder has been able to apply to the court for an order under section 459 of the Companies Act 1985 that he should be bought out of the company by the other shareholders on the ground that their conduct has unfairly prejudiced him. During the final two decades of the past century this was one of the great growth areas of company law. Almost any problem within the management of a company could be solved by a section 459 applications. However, recent cases should cause us to reconsider this.

In O'Neill vs. Phillips (1999) BCC 600 the House of Lords refused to make such an order against the holder of 75% of the shares in a small company when the 25% minority shareholder wanted to leave. The section 459 application was dismissed. If such a member wanted to leave he should sit down with the other shareholder and negotiate an exit. In Re Legal Costs Negotiation Ltd (1999) BCC 547 the Court of Appeal found that it was not unfairly prejudicial for a 25% shareholder to refuse to sell his shares to the majority shareholders in a company after he had left the employment of the company. More recently in Phoenix Office Supplies Ltd vs. L arvin (2002) EWC A Civ 1740 one member of a three-man company decided to withdraw from the company and move to another town following a change of his domestic partner. He asked the other members to buy his shares.

They refused. So he commenced section 459 proceedings. Lord Justice Auld said that section 459 was not intended to enable a member to negotiate a satisfactory sale of his shareholding simply because he had no further interest in the affairs of the company. The arrival of section 459 of the Companies Act was seen to have breathed in fresh life in the law regarding the rights of minority shareholders against a background in which the majority rule is fundamental [1]. It is derived from's 210 of the 1948 act, which was one of the most stagnant areas of company law, due to the strict requirements laid out in this section [2]. Since the implementation of's 459 the law in this area has arguably become most active [3].

It seems rather appropriate to state that O'NEILL vs. PHILLIPS has offered us a definitive account of this area of law, and is also regarded as the first case in the House Of Lords to undertake directly an examination of the finest details of this section. One will see that O'NEILL, especially read in conjunction with the case of Re Saul D Harrison (1995), is so far the most conclusive case on the subject of a's 459 petition, certainly by implication or at least by omission, even though in some areas it does not state everything clearly [4]. Lord Hoffman who gave the leading judgment, has made a praiseworthy attempt to interpret "everything" as meaning anything that warrants a clarification, even though it is difficult to offer an entirely definitive account of the law [5].'s 459 is based on unfair prejudice and one can say that it is impossible to define with precision what is meant by unfair prejudice. It now seems clear that it is concerned with the inequitable behaviour rather than the conduct, which in common parlance might be said to. Lord Hoffman in his judgment explains the most important aspects of this remedy's (s 459) functioning. Them being, namely -1. concept of fairness and equitable considerations, 2. legitimate consideration, 3 concept of "no fault divorce" and 4 the remedy of's 461, an offer to buy the petitioner's shares at a affair value.

One will discuss these four aspects and also the impact of the case on the extent and subsequent effectiveness of a's 459 remedy. 1. concept of fairness Concerning the concept of fairness one can determine that it is the overreaching principle around which's 459 operates [6]. The notion of fairness consists of two roles which are in constant tension. On one hand this remedy under's 459 must work towards the advancement and scope of minority shareholders protection, which's 210 of companies act 1985 had talked about in terms of oppression and was unduly restrictive about. On the other hand as Lord Hoffman stated in his judgment in O'NEILL vs. PHILLIPS that the precincts of its application cannot be used too widely, as in, minority shareholders must never be seen to substantially intrude with the majority rule [7]. Indeed he stated that the concept of fairness is not to be seen in a vacuum and that it is a concept which must be applied judicially based on rational principles [8]. Warner J in RE JE Cade and Son LTD said that "the court has very wide discretion, but it does not sit under a palm tree".

Nevertheless, the courts, in cases like Ebrahmi vs. Westbourne galleries (1975) have looked at the wording and purposive interpretation of the section which in turn has given wide powers to the courts to do what looks "just and equitable". Lord Hoffman in RE Saul D Harrison opted for the reasonableness test to determine fairness. He stated that the only test for unfairness was whether a reasonable bystander would think that the conduct in question was unfair. The court here applies an objective standard of fairness, looking at the impact of that unfairness on the petitioner rather than the nature of the fairness. This was also the basis of Nurse LJ judgment RE Ra Noble and Sons Clothing LTD (1983). In establishing whether or not conduct complained of was unfair or not one has to look at the context and factual background of each case which is fundamental to the court's approach to fairness.

In other words, general principles as to the concept of fairness are of limited assistance. Sometimes as it has been seen that a lawful conduct may be held to be unfair on just and equitable grounds (Ebrahmi) whereas sometimes directors do not comply with the law but yet their conduct is not held unfair (Jester vs. jarrod). Thus, we can conclude that as stated earlier it is the impact of the unfairness on the petitioner rather than the nature of the unfairness [9]. It is firmly established that in a case of section 459, the background (against which the concept of fairness has to be applied) has two features [10]. First, a company is an association of persons for an economic purpose, usually entered into by legal advice and some degree of formality.

The terms of association are contained in the articles of association and sometimes in collateral agreements between the shareholders. Thus, the manner in which the affairs of the company may be conducted is closely regulated by rules to which the shareholders have agreed. Since one has to keep promises and honour such agreements to keep commercial fairness, one has to ask whether conduct of which the shareholder complains of was in accordance with the articles of association. These articles govern the entire relationship between the members. Thus, they who enter incorporation are bound by its terms and it would make the corporate structure meaningless if they were able to freely revoke the provisions of the article because of some commercial hardship which might be taken as "unfair". Secondly, company law is developed through law of partnership which was treated by equity.

One of the traditional roles of equity as a separate jurisdiction, was to restrain the exercise of strict legal rights in certain relationships in which it is considered that this would be contrary to good faith. This has been carried on to company law. Lord Hoffman in Re Saul D Harrison said that a's 459 petition could not possible be used in the case of just technical and negligent infringement of the articles. But adhering completely to strict legal rights even when it is lawfully required could sometimes be unfair for the company. One can now see that the first feature leads to the conclusion that a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of terms on which he agreed, that the affairs of the company be conducted. But on the other hand, the second feature leads to the conclusion that there will be cases in which equitable considerations make it unfair for those conducting the affairs of the affairs of the company to rely on their strict legal powers.

Thus, unfairness may consist of a breach of rules in using rules in a manner which equity would regard contrary to good faith. In O'NEILL vs. PHILLIPS Lord Hoffman while giving his reasons makes it clear that injustice in the sense of "just and equitable" and unfairness under a's 459 petition are so "similar as to be almost synonymous" only in terms of content though, and therefore in both situations the starting point is Lord Wilberforce's speech in Ebrahmi V Westbourne galleries and the equitable considerations it gave rise to [11]. 2. equitable considerations- After establishing fairness one has to define the circumstances in which these questions of equity and fairness arise. It can be arguably said that looking at the obstacles in O'NEILL'S case which presents a's 459 inapplicable the question still remains as to what is now needed to state the circumstances in which these questions of equity and fairness arise [12]. There should be a personal relationship between the parties before incorporation, and it should be such a relationship as in to give rise to mutual confidence.

Equitable consideration relies on such facts. In many cases the basis of association is adequately put down in the articles. Although the imposition of equitable consideration requires "something more" (GIBBS PALMER (holdings) vs. GIBBS PALMER (midland) as per Lord Caplan 1999), for example an agreement that all or some of the shareholders shall participate in the conduct of the business, another being the transfer of the member's interests in the company is restricted so that in case of confidence lost, he cannot take his stake and go elsewhere [13]. Also in his judgment Lord Hoffman said that "unfairness may be present when a majority maintains the parties association in circumstances where minority can reasonably say it did not agree to".

Such companies with above mentioned features are called as "quasi partnership". It is a good way to differentiate cases where winding up is on just and equitable grounds and where an unfairly prejudicial conduct is sought [14]. This as one can see is a very liberal approach as it says that there are individuals with rights, expectations which are not necessarily written into the company's structure. It can arguably be said that's 459 put emphasis on the "interests of the members" not just their legal right, and should thus follow in the path of equitable considerations as Lord Wilberforce had stated in the case of Ebrahmi and Westbourne Galleries. Lord Hoffman accepted this but favoured a more restrictive approach. He accepted it by saying that the manner in which the equitable principles operate is tolerably well settled and it would be wrong to abandon them in favour of some wholly indefinite motion of fairness.

Though, he preferred the restrictive approach as he stated that "a balance be struck between the breadth of the discretion given to the court and the principles of legal certainty". He argued that because it is such a lengthy and expensive journey to bring in a claim under's 459 that therefore legal certainty is much more important. One can thus conclude that Lord Hoffman by his decision in O'NEILL has restricted the approach of the principle of fairness. 3. legitimate expectations- He also held that the Court of Appeal's reasoning under legitimate expectations is incapable of having a wholly separate existence. Lord Hoffman completely rejected the Court of Appeal's reasoning on the basis of Legitimate expectations. He said that it has excessively relied on it. The Court of Appeal had reasoned that Mr. O'Neill had a legitimate expectation that he would get shares and profits for his efforts after the company reached the promised profit.

And on this basis the court held that it would be unfairly prejudicial to deny such expectations. Lord Hoffman said that the principle of Legitimate Expectation that he had stated in the case of RE Saul D Harrison had unduly broadened the ambit of a successful remedy under's 459 petition and he stated that the Court of Appeal were misled by the expression into taking it as a cause, rather that a consequence, of equitable restraint [15]. One can see from Lord Hoffman's judgment that according to him legitimate expectations could never apply to the facts of O'NEILL, because the issue which was in dispute was not even an unconditional promise, but a conditional agreement that would have been solid if the facts of the case had reached the aims set out for him. Lord Hoffman reasoned that "the real question which arises is that whether or not O'Neill had shares in fairness or equity". On this point one comes up against the point of what seems to be an obstacle of the judge's finding that Mr. Phillips had never agreed to them [16]. 4. no-fault divorce Other facts of the cases, that of a "no - fault divorce" was raised by Mr. Hollington, who is Mr. O'neill's counsel. He argued that in quasi-partnerships it did not matter whether Mr. Phillips had done anything unfair.

He stated that the fact that there was mutual confidence and that it had been broken down, the unfairness lay with Mr. Phillips who was not prepared to settle it in an agreeable way. By this reasoning, O'Neill should be able to claim his shares automatically. Lord Hoffman when speaking about no-fault divorce meant in a very general sense of winding up. A remedy which is granted for a no-fault divorce scenario is under section 122 (1) (g), where if the mutual trust and confidence of the parties have broken down to such a degree that it would be "just and equitable to wind up the company".

Here thus, one can conclude that Mr. Hollington was trying to merge's 459 and's 122 (1) (g) together. Lord Hoffman was highly dismissive of such a "stark right of unilateral withdrawal" [17] and agreed with the law commission that in allowing recourse to such notion would fundamentally contravene with the sanctity of the contract binding the members of the company. Thus we see that Lord Hoffman has clearly preserved the notion of's 122 (10 (g) and at the same time has kept it's scope restricted an limited. 5. share valuation-remedy under's 461 of the Companies Act 1985 Where a petitioner is successful in establishing that he has been treated in a unfairly prejudicial manner the remedies available to court are extensive under's 461. Under's 461 (2) (a) companies act 1985, comes the most important remedy which says that a respondent should buy out the petitioners shares [18]. Although in O'NEILL there had been no conduct which was unfairly prejudicial, this remedy was given great importance and encouragement to avoid money and time involved in such litigation. Lord Hoffman stated that the rule for buying out shares would be to fix the price pro rata according to the value of the shares as a whole, and not on a discount [19].

This would provide certainty and perhaps less resort to the courts when the majority has implemented share value machinery which would take account of these facts. Although the above analysis by Lord Hoffman brings in legal certainty in the law regarding share valuation, it does not state the time at which the shares should be valued. There is thus obscurity as to the timing of share valuation. Should it be valued when the unfairly prejudicial conduct occurs, date of petition or the date of judgment. Thus one can clearly see the inconsistencies, which has also been stated in various cases as for example in London school of Electronics LTD case it was held that valuation should take place on the date of order or actual valuation, on contrast in the case of RE Cuman e it was held to be the date of the petition [20].

Thus, we see the confusion caused by the non-mentioning and clearing the timing of share valuation. However, the overriding principles of unfairness "would by exceptions reduce it to no rule at all" [21]. CONCLUSION- Does the House of Lords interpretation of's 459 in the case of O'Neill V Philips make the law obscure? One can conclude that restricting unfair prejudice actions to the range of situations identified in the case of O'NEILL is likely to deny rights to the shareholders in many cases where unfairly prejudicial conduct has occurred. As for example, minority in a subsidiary company, could not, it seems, seek redress under's 459 where the company was operated exclusively in the interests of the parent company, even if the board's action was undoubtedly unfair and prejudicial [22]. This does tend to make the law obscure because Lord Hoffman does not seem to mention such situations that could arise under's 459.

One would, therefore favour a less restricted scope of unfair prejudice victims. The interpretation of this section can also be held to be obscure as's 459 is concerned with "interests of the members" rather than their legal rights. And such a restrictive interpretation completely fails to take into account equitable considerations. One then can question if we have "really" departed from the earlier restricted rules on this area? One can also say that the House of Lords, while pointing out the exact scope of each criterion and applying breaks to certain areas, after Lord Hoffman's judgment in Re Saul D Harrison, the formulation became too enlarged. Although there are issues which are in a confused state and need to be dealt with as we have seen, it is very difficult to give a definitive account of the law without any obscurity.

One can say that the interpretation made by Lord Hoffman in the House of Lords is admirable both for its brevity and clarity. Although the liberal interpretation is restricted, it has, in turn made the law more certain than obscure.