The Court of Session has refused an appeal brought by a former director and shareholder of Braid Group (Holdings) Limited ("BGHL") that an order made under s 996 of the Companies Act 2006 for his shares to be purchased by the Company was wrong in law (Nigel Anthony Harden Gray and others for orders pursuant to sections 994 and 996 of the Companies Act 2006 in respect of Braid Group (Holdings) Limited).
The first instance decision
The judge found that the affairs of BGHL had been conducted in a manner that was unfairly prejudicial to the interests of some of its members. The judge then considered what order he should make to "give relief in respect of the matters complained of" (s 996(1)) and selected a share purchase order in terms of s 996(2)(e).
In order to determine how much the petitioners were to be paid for their shares, the judge looked at the value of BGHL and the cumulative value of the petitioners' holdings. The reasonable valuation of BGHL at the date of conclusion of the case was accepted by the court to be £32,000,000, with the cumulative value of the petitioners' holdings being £20,614,400. However, the respondents argued that due to Mr Gray's participation in bribery offences involving BGHL, he was regarded as a "Bad Leaver" under BGHL's Articles of Association. This meant that he was entitled on disposal of his shares to be paid whichever was the lesser of their fair value or their subscription or par value. The judge agreed with this argument and made an order for purchase of the shares at par value of £2,444,000.
The appeal
The appeal was in respect of the decision to order the share purchase for the sum of £2,444,000. The petitioners' arguments included the following:
- The order could not properly be regarded as giving relief in respect of the matters complained of. The order had the practical effect of reducing the value of the petitioners' shares by more than £18,000,000, ultimately benefiting the parties whom the judge had found had caused the affairs of BGHL to be conducted in a manner that was unfairly prejudicial to the petitioners;
- The Bad Leaver provisions in article 6.8.2.2 of BGHL's Articles amounted to an unfair and unenforceable penalty clause, and so could not properly form a model for an appropriate disposal of the petition.
The appeal decision
It was a close call, but in a 2-1 majority decision the appeal was refused.
The court had a wide discretion over the precise terms of an order made under s 996(2)(e). This was to enable the order to be fair and equitable but also to have regard to all of the circumstances of the case, including Mr Gray's conduct. The discretion exercised by the court when fixing the purchase price had to be exercised rationally and judicially, in accordance with settled legal principle, upholding any legal agreement between the parties and on the basis of evidence. The default figure for a s 996(2) purchase price was confirmed to be the value of the shareholding that was to be purchased. However, the way the shares were valued could be determined by the terms of the company's articles of association and any shareholders' agreement, in so far as conferring rights or imposing duties on the shareholders.
Although the large discrepancy between the values that could be attributed to the petitioners' shares was difficult to ignore, the penal or otherwise nature of Article 6.8.2.2 fell to be judged as at the date when it was entered into and not when it fell to be implemented.
It had already been established that it was for the court to decide the price at which the shares were to be purchased and for this decision to be rational, the price fixed had to be one which bore a relationship to the court's findings in fact. By looking at the evidence about how the business of the group was conducted and the personalities of those principally involved, it was accepted that the Bad Leaver mechanism did not apply. However, if this was viewed with regard to the fact that the BGHL board would have reasonably concluded that the petitioner had committed an act of gross misconduct (which would have been decided had it not been for litigation), then his employment would have been terminated and he would have been removed from all his group directorships and the article 6.8.2.2 provisions invoked, requiring the sale of his shares at par value.
The judge at first instance had not gone "too far too fast". He had been invited to determine a question of hypothetical fact. He was entitled to arrive at his decision by "a certain degree of cutting the Gordian knot", something he was able to do by virtue of s 996.
This may not be the end of the argument in this interesting case; a further appeal may be sought.
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