3.5 Debate about additional appraisal rights and exit right at will

In England and Wales, there has been debate about whether the available range of appraisal rights needs to be extended. The Law Commission started this debate with its consultation paper Shareholder Remedies. In this consultation paper, several no fault situations are described in which an appraisal right or an exit rights at will could be introduced. These are:

The Law Commission raised the question whether the aforementioned appraisal rights should be adopted and, if so, whether these should be adopted in statute or should be implemented in Table A. Table A was a statutory model for articles of association applying in default. These articles constituted the articles of association of a company if not expressly excluded. Currently, comparable model articles of association that apply to private limited companies are found in the Companies (Model Articles) Regulations 2008 as Schedule 1.2

As a starting point, the Law Commission acknowledged that introducing the aforementioned appraisal rights would contravene one of the guiding principles for the law considering shareholder remedies, namely the sanctity of the contract.3 From this perspective, adding the exit rights to Table A would be more desirable than adopting the appraisal rights in statute. The implementation of the apprasail rights into Table A would not breach the sanctity of contract, while members may choose not to adopt Table A.

As described in the Report Shareholder Remedies of the Law Commission, the responses of the consulteer showed that there are only a few adherents of adding the aforementioned appraisal rights to statute.4 The implementation of the appraisal right mentioned in (a) in statute was rejected by using the subsequent argument:

With regard to the exit rights in (b) and (c), the Law Commission submitted that it would be most appropriate to deal with these matters in Table A and not in statute.6 As appears from the consultation, a large majority of respondents supported this view. The appraisal rights at (b) and (c) were further elaborated in a draft exit regulation.7 As described in § 3.3.13 the CLR eventually rejected the proposal of the Law Commission for an exit regulation in Table A. Neither the old Table A nor the new Schedule 1 includes an exit regulation.

In addition, there was debate about the question whether a no faalt exit right already exists onder the unfür prejudice remedy, when there is merely a breakdown of the confidence and trust between the members. This no-fault exit right is comparable to the exit right at will. In 0 'Neill v Phillips, the House of Lords, per Lord Hoffmann, addressed this question.8 Lord Hoffmann admitted that in the common situation of breakdown of mutual trust, it is usually a waste of time to examine which of the two parties is the most to blame. However, Lord Hoffmann refused to accept that in a no faalt situation, a member has the unilateral right to exit the company. A buy-out order can be requested when a petitioning member is excluded from the board and a quasi-partnership is present. Lord Hoffmann referred to the view of the Law Commission that the unfür prejudice remedy does not offer a no faalt exit. Lord Hoffmann held:

Some years later, a similar view was taken by the Court of Appeal in Larvin v Phoenix Office Supplies.10

The view that an exit right at will does not fit in with English law, is also expressed in English legal literature. One of opponents of an exit right at will is Davies, who is in favour of dealing with these matters by using the unfür prejudice remedy.11 He put forward that one of the fundamental rules of company law is that share capital is in principle a permanent contribution to the company. He submits that the regular way to exit is to sell the shares to a new investor.

Davies further contends that requiring a buy-out by the majority shareholder is not a favourable alternative either. Majority shareholders might be less willing to invite minority shareholders if there is a risk that they exit at an inappropriate time. More recently, Davies has stated:

In conclusion, I have not found any English legal literature in which an exit right at will is promoted.