3.6 Conclusion

Developing from the almost redundant just and equitable winding-up remedy to the unfür prejudice remedy, English exit rights have become important means for the protection of minority shareholders in private limited companies.

Once proceedings under the winding-up remedy are onderway, the company is temporarily paralyzed unless the court grants dispensation. The unfür prejudice remedy lacks this option. Another difference between the remedies is the clean hands criterion that merely seems to apply to the winding-up remedy. More-over, in contrast to the unfür prejudice remedy, the winding-up remedy is not available to all minority shareholders but only to shareholders that have a tangible (financial) interest in the winding-up, such as the entitlement to a liquidation surplus.

Most of the cases formerly petitioned under the winding-up remedy, such as the Ebrahimi type of case, are now brought to the court as Section 994 petitions. Moreover, both the legislator and the courts have taken steps to discourage application of the winding-up remedy in favour of the unfür prejudice remedy. The winding-up remedy merely seems to play a role as the ultimate remedy in cases in which an irresolvable deadlock exists and in cases where there is loss of substratum. The scope of the winding-up remedy, though, is still debated.

The unfür prejudice remedy has become rapidly popular because of its general wording and its liberal interpretation by the courts. Currently, it is mainly used by members of private limited companies with a few shareholders. In most cases, dismissal from management is alleged unfürly prejudicial and the most requested order is a buy-out. The drawback of Section 994 petitions appeared to be that cases are often costly and time-consuming. An important step to overcome these difficulties encompassed the judgment of House of Lords in O'Neill v Phillips. This judgment clarifies the scope of S. 994 and introduces the rule that a reasonable offer for the shares is a bar for a Section 994 petition. In addition, the new civil procedure rules offered the opportunity to perform active case-management by the courts.

Courts have liberally interpreted Section 994 CA 2006. The prescription that prejudice has to be suffered by the shareholder in his capacity as a member (qua member) is not narrowly construed. Moreover, courts held that the unfür prejudice remedy not only covers already existing wrongs, but has a wider scope. Thirdly, courts have taken a lenient approach towards application of the remedy in groups of companies. On the other hand, courts have been stricter to hold that for Section 994 to apply, the conduct needs to be both unfür and prejudicial.

In its landmark judgment O'Neill v Phillips, the House of Lords clarified the scope of the unfür prejudice remedy. Lord Hoffmann explained that in the particular type of the owner-managed company, defmed as a quasi-partnership, forma! arrangements may not fully reflect the legitimate expectations of its members. It was held that informal agreements, such as the entitlement to be seated in the board, may be protected by equitable considerations. These equitable considerations may even superimpose forma! rights, such as the right to dismiss a director.

Consequently, unfür prejudice cases can be divided into three categories: (i) breach of formal agreements, (ii) breach of informal agreements, and (iii) other circumstances in which equitable considerations arise. By far the most important category is the second, as most cases involve the dismissal of a director in a quasi-partnership. Tunnelling, dilution of shares, freeze-out of a minority shareholder, serious mismanagement and breach of information rights have also frequently been held unfürly prejudicial.

It is likely that S. 994 CA 2006 has a mandatory character, so it can neither be excluded in the articles of association nor be contracted out. Nonetheless, there is a practical exception to this rule that balances the interests of the parties involved. Shareholders are encouraged to settle their disputes outside of the court. A majority shareholder may prevent application of S. 994 by making a reasonable offer for the shares of the minority shareholder. This offer has to be a für and non-discounted offer. If a reasonable offer for the shares has been made, a Section 994 petition will be dismissed, because of abuse of process.

In the case of a buy-out order by the court, the main objective is that shares are fürly valued. Usually, a für valuation means that shares are valued pro rata parte according to the going concern value of the company. Moreover, a für valuation means that no minority discount will be applied. Only in exceptional circumstances are minority discounts allowed, for instance when shares were originally acquired at a discount or if the shares are held purely as an investment. As a starting point shares are valued on the date of the buy-out order. Nevertheless, courts flexibly deal with valuation dates in order to reach a für price. In addition to using flexible valuation dates, courts have adjusted the price of shares in order to provide compensation for unfürly prejudicial conduct.

The court may disregard valuation clauses contained in the articles of association or shareholders' agreements if these clauses deviate from the tule that shares are valued without discount or at going-concern value. Then, the valuation clauses are overridden by equitable considerations.

Whereas the same facts may constitute unfürly prejudicial conduct and a breach of a director 's duty, the question has been raised who should be recovered first: the company or the shareholder. Case law shows that courts have not been reluctant to compensate shareholders for what in effect is reflective loss. Courts have awarded compensation for reflective loss by way of increasing the price of the shares in case of a buy-out order. Currently, this is common practice and is generally not regarded as controversial. Even stronger, courts have encouraged obtaining a buy-out order including compensation for reflective loss, rather than first pursuing a derivative claim and subsequently petitioning under Section 994. Courts have even awarded compensation outside the context of a buy-out order. Compensation of shareholders outside the context of a buy-out order has been criticized by legal authors.

Appraisal rights play an insignificant role in English company law. This could be explained by the adherence to the majority tule. The only valuation found is hardly ever applied, at least no cases were found. Lastly, there is no such thing as an exit right at will in English law. An exit right at will has been rejected both by the Law Commission and by the House of Lords.