In a recent Court decision the judge was asked to consider whether a shareholder’s forced sale of shares at a discount was legal or whether it was an act of unfair prejudice designed to obtain that shareholder’s shares at a discount.
Adam owned and controlled a company called “Adbrico”, that operated a national business. Brian was a minority shareholder in Adbrico. Adam and Brian were the joint directors of Adbrico.
Brian was dismissed and terminated as a director of Adbrico by Adam using his controlling interest and also the rights given by a shareholder agreement that had been signed by both of them, and allowed for Brian’s shares to be transferred at a discount if he was terminated as a director. Brian’s shares were transferred to Adam at a discount well below their market value. Brian accepted this discount transfer under protest.
Brian relied on Section 994 of the Companies Act 2006 to challenge the transfer and the discount. Brian alleged that the termination of his directorship was unfair, and that it was solely designed to obtain his shares at a discount.
Adam argued that the termination was justified due to Brian’s poor behaviour, and that it was not motivated by the share discount.
Before Brian’s sacking, he and Adam were already in serious dispute concerning a plan for share dilutions of each of their shareholdings in order to bring in new shareholders, pay for senior staff, governance, and the future direction of the business. This led to a mediation process, which did not bring about a resolution.
The Court decision found that Adam, as the controlling shareholder had good reason for terminating Brian’s directorship to bring to an end the problems Brian was causing. It was not a manoeuvre whose sole purpose was to buy Brian’s shares at a discount.
The Court also noted that the shareholder agreement had been accepted and signed by Adam and Brian, who had both had an opportunity to negotiate its terms and therefore the share discount procedure was appropriate.
Brian’s claim failed. The share transfer at a discount was found to be OK.
This decision shows the importance of harmonious relations between directors, but also the vital importance of making sure that the terms you are signing up to in a shareholder agreement actually says what you want them to say.