Can the minority bring an unfair prejudice claim, including in circumstances where they do not wish to sell their shares? This was the issue considered recently by the Court of Appeal in Birchfield v Birchfield Holdings Ltd.1 The Court’s decision contains a number of important takeaways for both sides in such a dispute.
Unfair prejudice claims
Section 174 of the Companies Act allows a shareholder to apply to the court for relief where that shareholder considers that the company’s affairs have been conducted in a manner that is “oppressive, unfairly discriminatory, or unfairly prejudicial” to the shareholder. If such conduct is established, a wide range of remedies are available, including ordering the company to acquire the shareholder’s shares or to set aside any action taken by the company in breach of its constitution or the Companies Act.
Facts of Birchfield
The claimant, Allan Birchfield, was one of four directors and shareholders of a family owned company, BHL. Mr Birchfield owned 25% of BHL’s shares, while his siblings owned the remaining 75%. Following a breakdown in the relationship, he was removed as a director.
BHL made an offer to buy out his shares for fair value to be determined in accordance with BHL’s constitution. Mr Birchfield rejected the offer and filed proceedings under section 174, claiming that BHL’s affairs had been conducted in an unfairly prejudicial manner. He sought reinstatement as a director and other wide-ranging relief in relation to the management of the BHL’s affairs. Mr Birchfield did not seek a minority buy-out order from the Court.
In response, BHL sought summary judgment on the basis that its buy-out offer cured any unfair prejudice that resulted from Mr Birchfield’s exclusion from BHL’s management. BHL made further offers after it commenced summary judgment proceedings, including to buy Mr Birchfield’s shares for fair value as determined by an independent expert, and to waive previous costs incurred by the company in relation to Mr Birchfield’s conduct.
BHL was granted summary judgment by the High Court.2 Mr Birchfield appealed.
Court of Appeal’s decision
Overview
The Court of Appeal held that there is no blanket rule that a reasonable buy-out offer cures all forms of unfairly prejudicial conduct. Rather, whether a buy-out offer cures any unfairness will be a question of fact which is “highly sensitive” to the circumstances of the particular case and the nature and terms of the offer that has been made.
Relevant factors
The Court held that the following factors will generally be relevant to assessing the reasonableness of a buy-out offer (and any rejection of that offer):
- The value that is offered for the shares or the method of valuing them (an offer will more likely be reasonable when carried out by an independent expert with full access to documents).
- Whether the claimant shareholder has had the ability to determine if the sum offered is reasonable before accepting or rejecting the offer.
- The substance of the claimant’s unfair prejudice complaints and whether those complaints may impact on the assessment of fair value of the shares (for example, where the allegations are of diverted business opportunities or misapplication of company funds).
- The ability of the majority shareholder to implement the offer that is made.
- The proximity between the buy-out offer and the unfairly prejudicial conduct that is alleged.
Timing
In situations where a defendant applies for summary judgment in response to a section 174 claim, the Court emphasised that the buy-out offer must be made before summary judgment proceedings are commenced, and that there must not be any material defects in the offer.
However, it also said that minor “modifications” to the offer are permissible after proceedings have been issued (such as extending the offer to cover the costs of court proceedings).
Circumstances where it is unlikely that an offer will cure the unfairness
The Court of Appeal also provided examples of circumstances where it is unlikely that an offer will cure the unfairness complained of:
- Where the conduct complained of may have had a material effect on the company’s value.
- Where proper accounting records have not been kept (which may have a material effect on the ability to assess fair value of the shares).
- Where the buy-out offer is made on terms which prevent the prejudiced shareholder from obtaining access to information needed in order to determine if the offer is fair.
- Where the company is in substance a “quasi partnership” (for example, where the shareholders work in the business on a full time basis).
On the facts
The Court held that the buy-out offer was capable of curing any unfair prejudice that was alleged by Mr Birchfield, and that there were no material deficiencies in the offer that was made (subject to it being adjusted to cover the costs of proceedings in both the High Court and Court of Appeal, which was described as “minor”).
None of the conduct alleged by Mr Birchfield was material to the valuation of the company, and it was inconceivable that, if Mr Birchfield succeeded in his unfair prejudice proceeding, that the Court would have reinstated him as a director (and therefore a buy-out offer would have been the only realistic relief that the Court would have awarded him).
Key points
There are a number of important takeaways from the Court of Appeal’s decision:
- A buy-out offer to a minority shareholder will not be capable of curing allegations of unfair prejudice in every case, and there is no “principle” that a buy-out offer will generally cure such prejudice.
- There will be tactical considerations for both majority and minority shareholders when considering making and accepting buy-out offers. An important factor will be whether the minority shareholder bringing unfair prejudice proceedings would have any prospects of receiving a different form of relief (or a better offer) if successful at trial.
- Minority shareholders who are seeking re-instatement as a director or renewed involvement in the company’s affairs ought to give careful consideration to rejecting a buy-out offer even in circumstances where that is not their preferred or desired remedy.
- There is some leeway for offers to be modified during the course of summary judgment proceedings, and unfair prejudice claims which relate only to “minor matters” of valuation of shares may not prevent a buy-out offer from curing those claims. We expect that the scope and extent of this rule will be developed and refined through future cases.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed, or your usual Bell Gully adviser.
1 Birchfield v Birchfield Holdings Ltd [2021] NZCA 428.
2 Birchfield v Birchfield Holdings Ltd [2020] NZHC 1516.