Any views expressed in this article are those of the author and should not be interpreted as ICAEW views or guidance.

Equitable Considerations

There have been several cases in which equitable remedies have been steered by the lodestone of fairness rather than being compassed by the quasi-partnership concept:

• Kohli and Lit (Sunrise Radio) involved a business in which the shareholding relationships had been those of quasi-partnership but were so no longer. The Judge was conscious that the majority shareholder would profit unfairly if a minority was bought out at a discounted price. He therefore ordered that the buyout should take place without a discount; 
• Murrell and Sanders and Swallow (Blue Index) was a case in which a 3% shareholder had paid a full price for his shares and was being unfairly prejudiced by the actions of two majority shareholders. Again, this was no quasi-partnership, but a buyout with no discount was ordered; 
• In the case of Waldron and Waldron the Judge emphasised that the concept of quasi-partnership relationships was a general guide along a path rather than a straitjacket; 
• In the case of McCallum-Toppin and McCallum-Toppin (AMT Coffee Limited) it was the widow of one of three brothers who was disadvantaged by excessive remuneration and drawings of the other two brothers. Once again the Judge focussed on the fact that the company belonged to the shareholders and that equitable considerations should guide his decisions. These words are from the written decisions: “A sale at a discounted value would present an undeserved windfall to the purchasing respondents.”

As with all legal decisions, it is important not to overstate the case and the degree of change: UK jurisprudence continues, in many cases, to examine if the relationships are those of quasi-partnership. This was the position in the case covered by this article: the Judge was concerned to explore the relationships between the parties and he concluded that a quasi-partnership did not exist. 

Peace and War

The dispute related to two brothers who were born 16 years apart. The older brother, Jasminder, appears to have been a very strong personality who, perhaps understandably in view of the age differential, initially treated his younger sibling, Herinder, in an avuncular way. He steered Herinder to obtain an accountancy qualification so that he had a professional standing in the development of his career. 

A pen portrait of Jasminder was given by the Judge:

“he is a very dominant and quite intimidating person, who does not readily tolerate anyone doing things of which he does not approve."

Aided by other investors, and with the use of high gearing, Jasminder had developed a very successful hotel business, Edwardian Hotels. He had led the company successfully through a near-death experience in the early 1990’s, including a need to refinance following the collapse of the infamous bank, BCCI.

The Seeds of Discord

With his successful leadership experience, his strong personality and the reality of his wealth generation, all combined with the position as older brother, it was perhaps close to inevitable that Jasminder would start to treat Edwardian Hotels as his personal fiefdom. This was despite the 19.9% trust and personal shareholding of Herinder. Prejudicial actions were stated to include the following:

• Running another business which involved a conflict of interest with Edwardian Group Limited; 
• Funding an exceedingly lavish wedding for his daughter through the company;
• Taking excessive directors’ remuneration. 

The disputes between the brothers had continued for many years: 

• at one stage Herinder refused to sign the statutory financial statements as a means of applying leverage, but imperilling the financing arrangements in consequence; 

• this break-down in relationships between the brothers led to Herinder being removed both as director and employee;

• an internal investigation had been undertaken relating to the conflict of interest, but it appears that this was undertaken by non-executive directors who chose not to investigate with any vigour.

Mutual Loathing

As so often, with family shareholder disputes, there appears to have been a further overlay of personal animosity between the brothers. The Judge was moved to comment:

This litigation has been conducted by all three sides on a grand scale, with few points left untaken, no detail overlooked and seemingly no expense spared.

Quasi-Partnership and Conscience

The Judge saw this issue as being at the centre of the litigation: he quoted from an earlier case which distilled the concept of equitable constraint into a pure spirit:

"… what is required is a personal relationship or personal dealings of some kind between the party seeking to exercise the legal right and the party seeking to restrain such exercise, such as will affect the conscience of the former."

The Judge used this term in his own Decision, referring to an agreement or understanding which affects the conscience of the members of the company.

The Judge was clear in his view that there was no quasi-partnership arrangement in place in the Company.  

Excess Remuneration and Dividends 

Jasminder had received remuneration of some £1 million a year in the years prior to 2011. In that year his remuneration jumped to over £3 million and it remained above £1.5 million from 2012 to 2016. In most of those years his remuneration exceeded £2 million. 

The Judge found that the directors of the Company were unfairly distributing profits of the Company to Jasminder, by way of apparent benefits in kind, rather than declaring dividends. That was done for the purpose of relieving Jasminder from a liability to repay large sums of money to the Company, not for the purpose of paying him reasonable and appropriate remuneration.

The Judge also found that the flawed investigation into the alleged conflicts of interest represented further unfairly prejudicial conduct. 

The Remedy

The Judge made a saturated remark, dripping heavily with meaning:

“The authorities do not speak with one voice on the correct approach to valuation where a share purchase order is made in relation to a non-quasi partnership company, as is the case here.”

The Judge considered the pro rata values and the market values to be two extremes of a spectrum of possible values to be applied: they did not represent binary choices. 

The Judge was mindful of the innate unfairness of a party being able to profit from undertaking unfairly prejudicial conduct. This was a point which he made more than once. Against that, he was of the view that the shares held by Herinder had never had the quality of a quasi-partnership interest. 

He recognised that the shares as purchased by Jasminder would have a majority, rather than a minority value. He therefore decided that one half of the difference in value should be added to the minority value of Herinder’s shares. The decision is complex: it requires a combined holding of 25.18% to be valued as part of a 95% holding; this then has to be compared with the aggregate of a 19.9% minority holding and a holding of 5.28% valued as part of a holding of just under 75%.  The difference is the marriage value and Herinder is to receive 50% of that as an uplift to his 19.9% minority valuation. 

In calculating the value of the shares, the Judge decided that the excess remuneration taken by Jasminder of some £15.8 million should be included as a quasi-cash balance. 

Author

Andrew Strickland, Consultant
Scrutton Bland

Any views expressed in this article are those of the author and should not be interpreted as ICAEW views or guidance.