M&A Weekly Update: unfair prejudice; revisions to AIM Rules; Listing Rule changes; and more

A recent decision by the High Court in Re Charterhouse Capital Ltd Arbuthnott v Bonnyman and others [2014] EWHC 1410 (Ch) is a useful reminder of the test for unfair prejudice and the inherent difficulties in the valuation of companies. The well-publicised case involved a retired partner from a private equity business (Charterhouse) claiming unfair prejudice in relation to the acquisition of his shares in Charterhouse Capital Ltd (CCL) by the remaining partners. The judge rejected Mr Arbuthnott’s claim for unfair prejudice under section 994 of the Companies Act 2006 and/or under the rule in Allen v Gold Reefs of West Africa [1900] 1 Ch 656.

The judgment (paragraph 214 onwards) is a useful overview of the relevant law and the distinct requirements for establishing unfair prejudice. It also sets out the ‘well-known’ principle that ‘the exercise of the power of the majority by special resolution to alter the articles of association may be subject to restraint in equity if it is abused’, referring to Allen v Gold Reefs. The judge noted: ‘Any resolution that offends the Allen principle will inevitably be unfair and prejudicial for the purposes of section 994, but an alteration of the articles does not have to offend the Allen principle in order to amount to unfair prejudice. Unfair prejudice is a wider concept, judged in accordance with an objective standard, and gives rise to greater and more flexible remedies.’

The case makes interesting reading, not least in relation to the method to be applied when valuing a business. While the case was decided on its facts, applying the principles under section 994 and Allen v Gold Reefs, a point to highlight in relation to the application of Allen v Gold Reefs is that the case was distinguished from the application of Allen v Gold Reefs to other situations where articles were amended to insert a drag provision. In this case, drag rights already existed in the shareholders’ agreement and articles and were simply being altered. Secondly, an argument by the claimant that tried to attribute the actions of a newco to CCL, for the purpose of establishing the actions of the company under section 994, failed but is a salient reminder to ensure all parties are adequately independently represented…

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