Summary

A petition under ss.459-461 Companies Act 1985 was struck out and proceedings were found to be an abuse of process, resulting in indemnity costs. There had been no unfairly prejudicial conduct, nor were legitimate expectations relevant.

Facts

Emerson Electric Company ('E') applied to strike out a petition presented by a number of shareholders on 4 March 1998 seeking relief under ss.459-461 Companies Act 1985 ('the Act') in relation to a public limited company called Astec (BSR) plc ('the company'). In 1989 E had acquired a 45 per cent holding in the company, increased to above 51 per cent by March 1997. Until 9 March 1998 the number of E nominees on the board of directors were in a minority against the rest ('the independent directors'). By January 1998 differences were clear, and following press releases on 19 January 1998 an extraordinary general meeting ('EGM') was requisitioned, seeking replacement of several directors with E nominees. The company issued another press release deploring these plans and proposing a dividend, which E opposed. On 4 March 1998 the present petition was presented. At an EGM on 9 March 1998 several directors were replaced by E nominees; thereafter E's nominated directors formed the majority; several other changes occurred among the directorship. On 16 March 1998 E announced failed negotiations with the independent directors concerning purchase of the remaining shares, and E issued the notice of motion to strike out before the court. A claim pursuant to ss.459-461 of the Act would rely on conduct by the company which was "unfairly prejudicial". Where there was a controlling shareholder a distinction must be drawn between acts of the company and those of the shareholder (Scottish Co-operative Wholesale Society Ltd v Meyer (1959) AC 324 and Re A Company (1987) BCLC 141 at 143-144. In the present case nominee directors were a minority until the EGM, and it did not follow that the result in Meyer (supra) applied equally. The issues were whether there was an arguable case for s.459; that there had been conduct by the company unfairly prejudicial to the petitioners under any of the eight grounds presented; and whether the breach of legitimate expectation was relevant.

Held

(A) In relation to unfairly prejudicial conduct:

(1) Dividend policy: (i) The stance of a minority pre-decision cannot amount to "conduct of the Company" for s.459. (ii) Issue by E of a press release of 19 January 1998 could not satisfy s.459 since E issued on its own behalf, and later resiled. (2) Bad faith and an alleged "pattern of conduct" of negative comment by E, depressing market value, were not upheld and s.459 was irrelevant because the company had not issued the press release of 19 January 1998. (3) A s.459 complaint did not arise merely because a majority shareholder voted contrary to recommendations, or there was a lack of information about proposed appointees to the board of a plc, or there was no reason for removal of directors. Even if E nominees had breached any fiduciary duty before the EGM, that could not found a complaint under s.459 as the E nominees had then formed a minority. Nor could a pre-EGM breach found a forward-looking claim for quia timet relief: a petitioner must establish an actual or proposed act or omission of the company, or on its behalf, which would (if it materialised) be unfairly prejudicial (Re Ringtower Holdings PLC (1989) 5BCC 82 per Gibson J). (4) (i) Stock Exchange Listing Rules: Rule 3.13 was aimed at relations between the company and any controlling shareholder but did not prevent a shareholder voting its nominees on to the board of its subsidiary. Even if there had been a failure to follow the rule, that had not caused unfair prejudice to the petitioners; it was premature to petition on the basis that it might cause prejudice. (ii) Since the company was non-resident the City Code on Takeovers and Mergers was not binding but, in any event, there had been no breach because no takeover bid resulted from approaches to the independent directors. Any breaches would have been committed by E, not the company: the relevant statement of 19 January 1998 was made by E when the E-nominees were still in the minority. (iii) The Cadbury Code was a voluntary code of practice without legal force. Paragraph 2.2 provides that "The majority of non-executive directors should be independent of management..." but the petitioners had wrongly taken this to mean "independent of shareholders" . Paragraph 2.4 required a formal process of selection of non-executive directors, but was directed at appointments by the board; (5) Confidential information and departures of two directors were not pursued.

Absent any legitimate expectations on the part of the petitioners none of the allegations founded an arguable case under s.459.

(B) In relation to legitimate investigation: (i) There was no claim that E had exercised its voting rights in bad faith and only in exceptional circumstances could a resolution give rise to a complaint under s.459. (ii) A director of any company was subject to the possibility of being removed as a director by a resolution under s.303 of the Act, though in special circumstances there might be grounds for a s.459 complaint, as in Re Westbourne Galleries (1973) AC 360. (iii) A majority shareholder could appoint persons connected to it as directors and such persons could accept office. (iv) There was nothing unlawful in the actions of E when voting at the EGM, nor was that claimed, but such a conclusion did not preclude a finding of "unfair prejudice" under s.459: Re Saul D Harrison & Sons PLC (1994) BCC 475 per Hoffmann LJ. (v) Equitable constraints only applied in "exceptional" circumstances and where equitable considerations were superimposed the court was giving effect to "considerations of a personal character between one individual and another". (vi) In the instant case, the concept of legitimate expectation could have no place and would be a recipe for chaos. (vii) Even if legitimate expectation could apply for a plc, the fact that E took no measures to control the board was no basis for an expectation that it would not do so in the future. (viii) Whilst shareholders would expect best practice, that expectation could not found a s.459 complaint seeking equitable restraint on legal rights belonging to the company. The legitimate expectation arguments were without substance both in relation to the changes in the board at the EGM, and for corporate governance. (ix) The proceedings represented an abuse of process, being a misuse of the jurisdiction conferred by s.459: Re Ballador Silk Ltd (1965) 1 All ER 667 per Plowman J at 671-672. The petitioners admitted that the relief sought was a bid by E for all available shares, and that the court would not order that.

The Petition was unsustainable and should be struck out. Leave to appeal refused. Following argument, Indemnity costs were ordered on the basis of the abuse.

Petition struck out.