Landmarks • Spring-Summer 2025  • Land

Trends in Shareholder Dispute Valuations in the UK

By Andrew Strickland

Setting the Scene

Readers will be aware of the protections provided by UK Courts under section 994, Companies Act 2006 in respect of conduct unfairly prejudicial to one or more shareholders. Company law can be said to be built on the dominance of the majority over the minority. Section 994 provides an exception to this: it serves to constrain the more extreme actions of controlling shareholders, if their conduct is not in the interests of all shareholders. It achieves this by superimposing equitable considerations above the normal power relationships in a limited company.

The oft-quoted seminal case is that of Ebrahimi and Westbourne Galleries Limited [1973] AC 360. Lord Wilberforce of the House of Lords set a new precedent by putting the concept of a Quasi-partnership centre stage when considering shareholder disputes.

He described three tests to help discern the existence of a quasi-partnership within shareholder relationships:

i) an association formed or continued on the basis of a personal relationship, involving mutual confidence
(ii) an agreement, or understanding, that all, or some (for there may be 'sleeping' members), of the shareholders shall participate in the conduct of the business;
(iii) restriction upon the transfer of the members' interest in the company.

The power and relevance of this analysis is demonstrable by the number of occasions it has been cited in later Court decisions.
We can see that the second and third elements apply to a great majority of private companies. It is the first test which is therefore normally the most telling and which is examined by the Courts.

Relevance

The importance of the distinction between companies which are quasi-partnerships and the remainder has been the basis of valuation used. Interests in partnerships are not normally discounted, but are valued pro rata to underlying values. One of the concepts underpinning the quasi-partnership is that the shareholders are, when measured by reference to their personal relationships, partners acting through a corporate structure for convenience.

This single factor is likely the most significant variable in determining the value of a fractional interest in a corporate entity. The difference between a 20% interest valued with and without a discount for its non-control status can be a factor of four or more.

Evolution

One of the glories of common law is its ability to evolve and adapt as decisions build upon past precedents. The concept of the quasi-partnership remains centre stage, but it is not the single determinant of whether a discount should be applied.

That evolution is demonstrable in several ways:

There is a focus on fairness, rather than using the quasi-partnership as the sole deciding factor, closely related to this is the question of conduct. The Courts will strive to protect minority shareholders if there has been dominant abuse by controlling shareholders;
Except in outrageous circumstances, agreements freely reached as to the arrangements between shareholders are not to be trumped by the quasi-partnership concept.
Kohli v Lit (Sunrise Radio) [2009] EWHC 2893

The Judge in this important case was swayed by the unjust enrichment that would accrue to the majority shareholder if a discount was applied to the shares held by Ms Kohli. This had been a quasi-partnership but that had come to an end when Ms Kohli resigned.

The Judge developed an earlier decision in the case of Bird Precision Bellows that there was no valuation rule of universal application relating to quasi-partnerships. He neatly inverted this idea to state that there was no rule excluding an undiscounted valuation when a quasi-partnership was not present.

The Judge appears to have been swayed both by the yearning for fairness and a recognition of the unsatisfactory conduct of Dr Lit.

Murrell v Sanders and Swallow [2014] EWHC 2680

The company concerned was Blue Index Limited which traded in contracts for difference in the London markets.

The conduct of both Sanders and Swallow was relevant in this case: they had beguiled Mr Murrell to pay a price far greater than market value for a holding of only 3%. They had also engaged in insider trading, with privileged information on forthcoming transactions. This resulted in criminal convictions and custodial sentences.

The Judge clearly had considerable sympathy for the plight of Mr Murrell. He developed previous thinking in such cases and stated the following: “For the reasons I have already given, in my view the general rule is that there should be no discount for a minority shareholding unless Mr. Murrell acquired his shares at a discounted price in the first place.”

The Judge was clear that Mr Murrell’s status as a shareholder did not protect him if he had brought a claim for exclusion from involvement in the management of the company (this is by far the most common reason for section 994 petitions). However, his investment had been made on the basis of a relationship of trust and confidence. The directors therefore owed him a duty of good faith.

McCallum-Toppin and McCallum-Toppin [2019] EWHC 46

This case related to a company called AMT Coffee which retailed coffee at outlets on railway stations and elsewhere. Three brothers were running the company, all sharing the same initials.

Angus died prematurely: the other two brothers, Alistair and Allan, were found to have paid themselves excessive remuneration, to have taken out some very large overdrawn director loan accounts and not to have considered the payment of dividends. These were the largest factors in the section 994 petition brought by Angus’ widow.

The two brothers were also constantly falling out and issuing section 994 petitions against one another. The company suffered as a result of all of these shenanigans.
The Judge stated: “A sale at a discounted value would present an undeserved windfall to the purchasing respondents. Now this Company, like all companies limited by shares, belonged to its shareholders. In these circumstances, I consider that nothing less than a sale and purchase of the shares at an undiscounted valuation will do justice, and amount to a "fair price".”

It seems that fairness and conduct were intertwined within the decision reached in this case.

Dr Agbaje and The Robert Frew Medical Company Limited [2022] EWHC 1373

The clearest demonstration of the existence of a quasi-partnership is when an existing partnership is incorporated. This was very close to that paradigm: the limited company was used to hold the premises occupied by a medical partnership, with the partners as shareholders.

A Shareholders’ Agreement had been put in place. This included the following measurement rules relating to valuation for an exiting shareholder: “..taking into account any restrictions on such sale or the size of the holding being sold…” The Shareholders’ Agreement further stated that the discounted valuation should then be subject to a further discount of 10%.

The single joint valuation expert appointed had applied a discount of 50%, and then the further discount of 10%, both in line with the rules in the Shareholders’ Agreement.
The Judge upheld what the expert had done: in essence, if parties have agreed between themselves how something should be valued, that is not in some way trumped by the quasi-partnership concept or by what the court might think: the parties have agreed and that should not be disturbed.

Wells and Hornshaw [2024] (EWHC 330 (Ch)

Mr Wells had 14.3% of the shares of Transwaste Recycling and Aggregates Limited (“TRAL”). Two brothers had 42.85% each.
It was accepted by Mr Wells that this was not a quasi-partnership as he had resigned from the company in 2015. It was argued on his behalf that he had not paid a discounted price on the way in. This was a clear echo of the cases of Sunrise Radio and Blue Index.

It was also argued that it would be just and equitable for the company to be wound up: in such circumstances there would be no discounts by reference to sizes of shareholdings.
The Judge was not prepared to overturn previous agreements freely reached by the shareholders: they had set out rules relating to the exit of a shareholder and these remained relevant. The Judge stated: “Here, I see nothing unfair in holding Mr Wells to the contractual framework he signed up to, to govern precisely the situation which arose, in which he wanted to leave TRAL and dispose of his minority shareholding to the remaining shareholders.”

Summary

Section 994 decisions are complex and nuanced, and decided on their own peculiar facts. Decisions take account of the cocktail of relationships, conduct, concerns as to fairness and pre-existing agreements.

The existence of a quasi-partnership remains a very strong indicator as to whether or not a discount should be applied. Common law develops on the basis of existing precedents applied to new circumstances. This represents evolution rather than revolution.

It is interesting that the quasi-partnership flow of thought, with its headspring firmly in company law, has been leaching into the family courts and is commonly cited as a reason for valuing interests without discount.