Exit rights of minority shareholders in a private limited company (IVOR nr. 72) 2010/3.3.10:3.3.10 Reasonable buy-out offer bars a Section 994 petition

Exit rights of minority shareholders in a private limited company (IVOR nr. 72) 2010/3.3.10

3.3.10 Reasonable buy-out offer bars a Section 994 petition

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Whereas proceedings onder the unfür prejudice remedy are time-consuming and expensive, in the case of ()Wein v. Phillips Lord Hoffmann introduced a practical rule in order to avoid proceedings. According to Lord Hoffmann, a petition has to be struck out if the majority shareholder has made a reasonable offer for the shares. After all, if what the petitioner aims to obtain by means of the proceedings has already been offered, there is no need for court intervention. At first sight, the practical rule only seems to apply in the situation of exclusion from management in a quasi-partnership. In the words of Lord Hoffmann in OWeil v.

"(...) the unfürness does not lie in the exclusion alone but in exclusion without a reasonable offer."1

If the reasonable offer requirement is satisfied, the exclusion may no longer be regarded as unfür and the petition may be struck out by the court, as an abuse of the process.2 Besides, it should be mentioned that Lord Hoffmann's dictum with respect to the reasonable offer is obiter. According to English law, courts are not bound to follow an obiter dictum, in contrast to binding precedents. However, the value of an obiter dictum lies in its strong persuasive authority.

The court's decision to strike out a petition when a process is being abused is, like other questions on abuse of process, an inherent power of the court. The discretion to strike out the petition is comparable with the discretion to strike out a petition under the just and equitable winding-up in the case of an alternative remedy.3 Under the new Civil Procedure Rules, active case management is possible, which sometimes may lead to a reasonable offer in an earlier stage in the proceedings without the need for a full trial.

In 0 'Neill v. Phillips, Lord Hoffmann elaborated the guidelines for the determination of a reasonable offer.4 His Lordship thought it as a matter of great practical importance to inform participants in quasi-partnerships about what is to be considered as a reasonable offer. In his view, parties have to be encouraged to make a purchase offer for the shares at an early stage, in order to avoid further costs and efforts.

In the opinion of Lord Hoffmann, a reasonable offer must include all that to which the petitioner is entitled if he were to go to court. In several other cases, courts have taken a similar stance.5 In the view of Lord Hoffmann in 0 'Neill v. Phillips, a reasonable offer should meet the following requirements:

(a)

The offer should reflect a für value for the shares. In principle, this means a purchase offer for the shares pro rata to the total value of the company and without a discount for its minority character. Only in very limited circumstances can a discount be considered to be für.

(b)

If there is no agreement between parties on value of the shares, the value has to be determined by a competent expert. In this respect, Lord Hoffmann gave two examples. For instance, parties may jointly appoint an accountant. Parties may also agree that an accountant will be nominated in default by the President of the Institute of Chartered Accountants.

(c)

The offer should reflect the value determined by the expert as being an expert and not necessarily as being an arbitrator. The objective of the valuation should be economy and expedition, even if this carries the possibility of a rough edge for one of the parties.

(d)

There must be equality of arms between the parties. Both parties should have the same right of access to information relating to the value of the company and the shares. Both parties have the same right to make submissions to the expert, although the expert can decide whether the submissions must be made in writing or orally.

(e)

The majority shareholder should be given a reasonable opportunity to make his offer, even when a Section 994 petition is already presented. In the situation that a reasonable amount of time has lapsed, a reasonable offer must also include the costs of proceedings the petitioner has already incurred.

The valuation of shares in the unfür prejudice remedy may also include adjustments of the price due to misconduct by the majority shareholder, as will be evident from § 3.3.12. In that case, the valuation involves issues of facts and of law. It is recognized that the laffer questions ought to be answered by the court and not by an accountant or any other expert.6 Therefore, if the valuation of the shares involves issues of law, a petition will not be struck out by the court, even though an offer for the shares is made.

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