Unfair Prejudice: Get A Fair Valuation
When a company is being sold or transferred, it is important to act on expert advice such as obtaining an appropriate and fair valuation – or risk a costly unfair prejudice claim from shareholders. A recent case1 clearly exposes the risk of unreasonably, or even recklessly ignoring such advice before going ahead with a transfer or sale.
A company manufactured environmentally-friendly noise barriers, scaffolding, and decking from recycled composite materials. It was transferred out of the sole ownership of its holding company (A) to a new holding company (B) at a £150,000 price tag.
However, the company’s true value was £2.9m - according to shareholder Mr Simpson (S) who held a 47.5% shareholding in A.
S brought an unfair prejudice petition against the holding companies and against the sole director of A, Mr Diamandis (D). D also held 47.5% in company A (the remaining 5% was held by the company secretary). S argued that the sale, for which D was responsible, was at such a significant undervalue that it amounted to unfair prejudice.
Unfair prejudice
There is unfair prejudice where a company’s directors/majority shareholders abuse their corporate powers to the detriment of minority shareholders. D resisted S’s claim on the basis that the value of the company at the date of the transfer was nil - and certainly no more than £150,050. Therefore, the transfer was at full value.
The court disagreed with D’s approach and valuation. Crucially, D’s lawyer had “made it abundantly clear” that a professional fair valuation should be sought. However, despite that advice D did not seek such a valuation.
The High Court concluded that the transfer of the company for £150,000 resulted in depriving S of almost the entire value of his shareholding in company A.
The judge found that D was “at the very least wholly reckless” as to the company’s true market value and could not have had a reasonable belief that it was worth as little as £150,000. Furthermore, had a very good idea of just how valuable the company actually was. He acted unfairly causing substantial prejudice to S.
D had also failed to exercise reasonable care, skill and diligence under s174 Companies Act 2006 and he was ordered to buy out the petitioner’s shareholding. The value of company transferred, as at the valuation date was – as S had claimed - £2.9m.
What does this mean?
Companies who are considering selling or transferring businesses, eternally or between holding companies, should seek expert advice around the issue of valuations – and act on it.
In this case, D had been firmly advised to obtain a market valuation of the company before the transfer. He should have done so but disregarded the advice – transferring the company at a comparatively nominal price. A decision that later cost him hugely.
It is a reminder that the directors should act reasonably and obtain appropriate valuations, or risk a claim.
1Simpson v Diamandis and others [2024] EWHC 850
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