Where does the law stand now on discounts for minority holdings in non quasi-partnership companies?
There has been little in the area of unfair prejudice petitions that has caused more controversy in recent years than whether successful petitioners, having established unfair prejudice against the wrongdoers, should see the price paid for their shares reduced, possibly almost to vanishing point, to reflect the minority status of their shareholding. This is a vexed question which has generated a wealth of authority at first instance in the last three years alone. There are cogent points to be made on both sides of the argument, and the results reached in a number of recent judgments reflect that fact vividly.
In this article, Hugh Jory QC and Matthew Bradley take a closer look at the impact of the controversial decision in Re Blue Index Ltd  EWHC 2680 (Ch) on a line of recent cases, the last having been handed down, in Dinglis v Dinglis  EWHC 1664 (Ch), on 28 June 2019.
Quasi-partnerships are dealt with in more detail by Tom Ogden and John Williams in their article in this series entitled “Recent developments in quasi-partnerships”. So far as valuation is concerned, the starting position in respect of quasi-partnerships is well-established and without real controversy. Where a petitioner has established unfair prejudice in the running of a quasi-partnership company, the shares of the minority should generally not be discounted, irrespective of terms in the articles of association that may provide for such a discount. As Lord Hoffmann contemplated in O’Neill v Phillips  1 WLR 1092, this general rule can be departed from in “special circumstances”, a quintessential example of which would be where the petitioner deserved to be excluded from the running of the company. However, absent such circumstances, the usual course will for no discount to be applied in this context.
The rationale for this position was explained by Nourse J in Re Bird Precision Bellows  Ch 419 as follows:
“I would expect that in a majority of cases where purchase orders are made […] in relation to quasi-partnerships the vendor is unwilling in the sense that the sale has been forced upon him. Usually he will be a minority shareholder whose interests have been unfairly prejudiced by the manner in which the affairs of the company have been conducted by the majority. On the assumption that the unfair prejudice has made it no longer tolerable for him to retain his interest in the company, a sale of his shares will invariably be his only practical way out short of a winding up. In that kind of case it seems to me that it would not merely not be fair, but most unfair, that he should be bought out on the fictional basis applicable to a free election to sell his shares in accordance with the company’s articles of association, or indeed on any other basis which involved a discounted price. In my judgment the correct course would be to fix the price pro rata according to the value of the shares as a whole and without any discount, as being the only fair method of compensating an unwilling vendor of the equivalent of a partnership share.”
The same decision stands as authority for another general rule, namely that where a shareholder purchases his or her shares at a discount to reflect the minority status of the shareholding, then it would usually be appropriate to reflect that discount upon an order for sale in an unfair prejudice petition.
Non Quasi-Partnership Companies
For a long time it had been thought that another simple rule of thumb applied in the context of non quasi-partnership companies, namely that a discount would usually be applied to reflect a minority shareholder’s status as such, upon a successful unfair prejudice petition.
The high watermark of this position is found in obiter comments of Arden LJ in Strahan v Wilcock  2 BCLC 555, in which she observed that “It is difficult to conceive of circumstances in which a non-discounted basis of valuation would be appropriate where there was unfair prejudice…but such a [quasi-partnership] relationship did not exist. However on this appeal I need not express a final view on what those circumstances might be”.
Blackburne J expanded upon the rationale for such a position in Irvine v Irvine  EWHC 583 (Ch), observing that “Short of a quasi-partnership or some other exceptional circumstance, there is no reason to accord it a quality which it lacks. [The company] is not a quasi-partnership. There are no exceptional circumstances. The shareholdings must therefore be valued for what they are: less than 50% of [the company’s] issued share capital.” The discount appropriate to the 49.96 percent minority holding was subsequently fixed by the judge at 30% in that case; i.e. the petitioner’s shares were valued at 30% less than they would have been valued on a pro-rata basis.
The position remained relatively settled until it began to be prised open in a number of cases, beginning with the decision of HHJ Purle QC in Re Sunrise Radio Ltd  1 BCLC 367. In that case, it was held that “there is no inflexible rule” that a minority shareholder should see their shares subjected to a discount in the non-quasi partnership context. Observing that in a winding-up on the “just and equitable” ground, each shareholder would receive a rateable proportion of the realised assets and that a minority should not ordinarily be worse off than in a winding-up upon a share purchase order, he declined to apply a minority discount in that case.
Next came the decision in Re Blue Index Ltd  EWHC 2680 (Ch), in which Mr Robin Hollington QC re-interpreted previous authorities to reach a diametrically opposed position to that espoused by Arden LJ in Strahan v Wilcock. He held that the only general rule in favour of ordering a share purchase at a discounted price was where the shares had in the first instance been purchased at a discounted price. On his analysis, absent such a starting position, the general rule is that shares should be purchased without any discount at all, irrespective of whether the context is one of quasi-partnership.
At the risk of over-simplification, the underlying rationale for the position adopted in Re Blue Index was that “It would substantially defeat the purpose of the […] remedy if the oppressing majority were routinely rewarded by the application of a discount for a minority shareholding”. The essence of the decision can perhaps be summarised as follows:
- The whole framework of section 994 of the Companies Act 2006 is designed to confer on the court a very wide discretion to do what is considered fair and equitable in all the circumstances of the case, in order to put right and cure for the future the unfair prejudice which the petitioner has suffered at the hands of the other shareholders of the company. That discretion does not end when it comes to the terms of the order for purchase in the manner in which the price is to be assessed.
- The reality is that a minority shareholding in a private company has very little value because there is virtually no market for such a thing. If a shareholding in a private company is to be subjected to a discount to truly reflect those facts, a shareholder who has been the subject of wrongdoing within section 994 will never be able to achieve fair compensation.
The decision was followed by Mr Edward Bartley Jones QC (sitting as a Deputy Judge) in Re Addbins Ltd  EWHC 3161(Ch).
However, the existence of a new “general rule”, in polar opposition to that espoused in Strahan v Wilcock and Irvine v Irvine, left many uneasy. Whilst the objections to the old orthodoxy in Re Blue Index come from a recognised expert and textbook writer in this area of law sitting as a deputy High Court Judge, in so far as Re Blue Index sought to overturn the orthodox view expressed by experienced company law judges such as Arden LJ and Blackburn J, it is controversial. In particular:
- In a simplistic case where, say, a 60% shareholder acquires the remaining 40% from the minority who has been unfairly prejudiced he will have 100% of the shareholding and could theoretically sell the company on that basis immediately and make a tidy margin from having bought 40% at a discount. The assumption behind the reasoning espoused in Re Blue Index that the respondent should not be “rewarded” appears to assume that he wishes to buy the minority holding and is therefore pleased that he has forced the respondent into a position where has to sell it. In practice that is an uncommon scenario. There may well be no advantage to the respondent in having to fund the purchase of the shares from petitioner. Obviously in a case where he was trying to obtain the minority shareholding in order to trade it on as part of a sale of the company for example that would be a relevant factor in determining the fair price. However, that would be an unusual case.
- Whilst it is undoubtedly the case that most minority holdings are completely unmarketable and therefore of no real value at all unless the other shareholders actively wish to purchase them, the flipside of that fact is that a minority shareholder is only able to realise a value for his shares if he is able to say he has been unfairly prejudiced and can compel the majority shareholder to purchase those shares off him. The fact that no principle of no-fault divorce applies in this context only underlines that position. So, in many cases, the opportunity arising from being unfairly prejudiced is one of being able to realise a value for a shareholding which is otherwise nothing more than capital tied up in a company over which, outside a quasi-partnership situation, the shareholder is likely to have little or no influence. He may well be delighted to have the opportunity to employ that capital in something else of more immediate benefit to him.
It might be said, however, that those latter observations rather overlook the fact that even a minority shareholder in a non-quasi partnership situation has a basic right not to see the affairs of the company run in a way that is unfairly prejudicial to his interests. In reality, a 4% shareholders’ shares are unlikely to be worth much, if anything, if a realistic discount is applied to reflect the marginal status of such a shareholding. Should such a shareholder be deprived of a meaningful remedy by reference to a judge-made “general rule”, when the statutory wording of section 994 permits a far less fettered approach?
Subsequent decisions have given voice, whether implicitly or expressly, to the fact that there exists something of a “via media” between the two diametrically opposed “general rules” espoused in Strahan v Wilcock and Re Blue Index.
In Re C F Booth Ltd  EWHC 457 (Ch), in which Re Blue Index appears not to have been cited, Mark Anderson QC sitting as a Deputy High Court Judge summarised the Court’s task as follows:
“The task is to find a fair price. That may require no discount, it may require the full discount which would expected in an arm’s length sale, or it may require something in between”.
Whilst he again gave voice to the view that the starting point was that minority holdings generally attract less than a full pro rata value, and held that a discount should be applied, he also made clear that a “fully discounted” valuation, i.e. one which reflected only the price which could be achieved by selling the shares on the open market, was not the approach ineluctably to be followed. He distilled the following principles as providing useful guidance:
“i. The discount is usually applied to reflect the simple truth summarised by Blackburne J in Irvine v Irvine (no 2)  1 BCLC 445, “A minority shareholding . . . is to be valued for what it is, a minority shareholding, unless there is some good reason to attribute to it a pro rata share of the overall value of the company. Short of a quasi-partnership or some other exceptional circumstances, there is no reason to accord to it a quality which it lacks.”
ii. However valuing shares for the purposes of fashioning a remedy under section 996 is not the same as ascertaining the value they would achieve in a sale in the open market.
iii. In some cases it may be unfair to treat the petitioner as a willing seller because he may only be selling because of unfair prejudice which has left him with no alternative. That consideration may apply outside the context of a quasi-partnership.
iv. Consideration only of the value which the petitioner could achieve by selling his shares elsewhere may be unfair without considering the value of the shares to the respondent, especially if the conduct giving rise to the petition was influenced by a desire to buy the shares.
v. A relevant factor may be the amount which the petitioner would receive if the company were wound up. If the conduct complained of would justify a winding up on the “just and equitable” ground, the petitioners should not ordinarily be in a worse position by invoking section 994 than they would have been if they had petitioned to wind it up.”
A not dissimilar approach was adopted by Fancourt J in Estera Trust (Jersey) Ltd v Singh  EWHC 1715 (Ch), which is dealt with in more detail by Helen Evans and Anthony Jones in their article in this series entitled “Creative remedies in unfair prejudice petitions”. Whilst rejecting the existence of a presumption in favour of a non-discounted share price in the non quasi-partnership context (and so not following Re Blue Index), Fancourt J stressed that “Any basis of valuation selected must be fair in all the circumstances. It must also provide a remedy that is proportionate to the unfair prejudice suffered by the Petitioners.” What he had to determine was “a basis for a fair price for JS (or the Company) to pay HS and Estera for their shares, in circumstances where a share purchase is appropriate and necessary to relieve HS/Estera against unfair prejudicial conduct that they have suffered as shareholders. That question is not, in my judgment, a simple choice between a pro rata share of the Company’s overall value and the market value of the shares. Those are, as it were, the two extremes of price that could be ordered to be paid, but between them there are various possibilities for specifying a basis of valuation that results in a fair price as between these minority shareholders and the Respondents against whom relief is granted.”
In Re AMT Coffee  EWHC 46 (Ch) HHJ Matthews considered all of the above authorities and followed Re Blue Index, in the result, by declining to make any discount on the price to be paid for shares, in a non quasi partnership context. He declined to express a view on whether or not a general rule did or did not exist which pointed to such a result, holding:
“So far as concerns the debate between the contrasting views […] it is not necessary for me to express any concluded view, but it is at least clear that the weight of authority is that there is a discretion to be exercised.”
In that regard, the decision is on all fours with the dicta in both Re C F Booth Ltd and Estera Trust (Jersey) Ltd.
The final authority in which Re Blue Index has been considered is the very recent decision of Adam Johnson QC in Dinglis v Dinglis  EWHC 1664 (Ch).
In that case, the Respondent mounted a sustained attack on Re Blue Index. The Petitioner did not argue vigorously against what was characterised as the “conventional conceptual justification” for applying a minority discount, namely that a minority shareholding does not confer any control over the relevant company and so in purely commercial terms is disproportionately less valuable than a majority shareholding, which does confer such control. The essential counter-submission against the attack on Re Blue Index was that, properly understood, the broad point for which the decision stands is that it may not always be fair to apply a discount to reflect a commercial market value (i.e. “open market value”), in all non-quasi-partnership cases. The argument advanced was that:
- Applying an “open market discount” will almost certainly not be fair in a quasi-partnership case, because it is obviously unfair to apply a commercial market analysis to someone who is being forced against their will to exit what is in substance a partnership.
- Applying an “open market discount” might, however, also be unfair in other cases, depending on the facts, and therefore the proper approach was for the court to ask itself in the round whether it is fair to apply a discount which flows from a commercial market analysis to the Petitioner’s exit from the company, given the history.
The court accepted that the latter “broad approach” was the correct one, given the breadth of section 996. However, it also assumed “as a working hypothesis” that, outside the quasi-partnership scenario, it will be a very unusual case which calls for no discount to be applied at all. That observation jars a little with the approach adopted and the results reached in Re AMT Coffee and Estera Trust (Jersey) Ltd.
The result ultimately reached on the facts in Dinglis v Dinglis was that, even adopting the “broad approach”, a “commercial market discount” fell to be applied in that case.
Where does that all leave us? What is now abundantly clear is that, if it had been thought, post Strahan v Wilcock and Irvine v Irvine that a minority shareholding would always be valued at a discount by reference to its nominal “open market value”, which in many cases could be very low, the law as it stands today is not so simple.
It may be that in time, Re Blue Index will be held not to be an accurate statement of the law. However, it has undoubtedly given it a shake and encouraged judicial thinking away from a doctrinal application of the comments in Strahan v Wilcock and Irvine v Irvine, in a way which may have risked depriving the s.994 remedy of any real meaning in many non quasi-partnership cases, particularly where shareholdings were below 25% (and therefore unable even to block special resolutions) or where the value of the company compared unfavourably to the cost of presenting a s.994 petition if a minority discount was factored into the equation.
There is no doubt that advising respondents and petitioners as to what they may expect in terms of share price upon a successful petition in the non-quasi partnership context is a more fact sensitive and uncertain task than ever before. To the extent that a “general rule”, per Strahan v Wilcock, continues to live on at all, whether not it actually applies calls for careful inquiry on the facts of each individual case and for the identification of factors militating against it by potential non quasi-partnership petitioners. A heightened need for detailed, bespoke and careful scrutiny of an individual client’s case may, however, be a fair price to pay to ensure the s.994 remedy is not sidelined in non quasi-partnership cases in a way which the wording of the section does not justify. However, as the cases following Blue Index illustrate, the risk for such petitioners that a discount will be applied is one which they will continue to run in addition to the other risks inherent in s.994 proceedings unless and until there is clear guidance from the Court of Appeal on the point, to build on or qualify what was said by Arden LJ in Strahan v Wilcock.
Hugh Jory QC and Matthew Bradley
4 New Square
About the Authors
Hugh Jory QC specialises in commercial and commercial chancery litigation and company and insolvency law. He is ranked in the legal directories as a leading silk and has acted in shareholder disputes for over 20 years. Prior to that he worked as an investment analyst with an investment bank in the City focussing on the valuation of shares. He has been involved in shareholder disputes ranging from companies which are listed to those which are private including those which are family run, and he has acted for and against shareholders ranging from private equity funds to private individuals.
Matthew Bradley specialises in commercial and commercial chancery litigation & arbitration. He is ranked by the legal directories as a leading junior in the fields of commercial disputes and company law and regularly acts and advises on unfair prejudice petitions and related company law matters.