Many small businesses operate with family connections at their heart. Like all relationships, they often start with no expectation of a breakdown further down the line. A recent case gives a good example of the challenges which come with mixing business with pleasure.
The recent High Court case of Davies -v- O Keefee (2023) involved a couple, Amanda Davies (D) and Patrick O’Keeffe (O), who were in a relationship for 20 years. They had two children together and also ran a construction business, which consisted of eight group companies.
D and O were directors and equal shareholders of the two companies at the centre of this case, a case which involved unfair prejudice proceedings, related to Greenfrost Ltd and PMO Property Ltd.
The two companies operated as quasi-partnerships. Like many such businesses, there were no formal meetings or decision-making processes, and the assets and liabilities of one company were routinely treated as belonging to others.
Breakdown
Amidst business and personal financial pressure, D and O split.
D alleged that O excluded her from management and misappropriated the business’ assets. Her share of Greenfrost Ltd (G Ltd) was sold, she was replaced as a director, and O secured personal borrowing against PMO Property Ltd’s (PMO’s) assets – all without consulting or informing D.
Unfair Prejudice Petition
Traditionally, shareholders (usually minority shareholders) are subjected to unfair prejudice by the conduct of other directors or shareholders of a company.
The unfair prejudice jurisdiction is laid out in the Companies Act 2006.
Shareholders may petition for relief where “the affairs of the company are being or have been, conducted in a manner that is unfairly prejudicial to the interests of shareholders generally, or some part of its members, in their capacity as such (including at least that member)” or “an actual or proposed act or omission of the company is or would be so prejudicial”
Unfair prejudice petitions are a mechanism by which shareholders of a company can have their interests protected.
As a general rule, the Court will be slow to interfere with the commercial decisions of a business.
To obtain relief from unfair prejudice, the claimant must show that their interests as a shareholder have suffered because of how the company has been run. This can be difficult to establish in cases where the various interests of the parties – as individuals, shareholders, directors and creditors – are intertwined.
In defending the petition, O argued that he had consulted D when necessary, but the court found that his evidence was unreliable. For example, board meeting minutes recorded D as present at a meeting approving the grant of security, but O admitted in court that D was not at the meeting.
Since O had frozen D out of the business and taken decisions in his own interests, in many cases without D’s consent or knowledge, the court was satisfied that her interests as a shareholder had suffered.
Decision
O was ordered to buy out D’s share in G Ltd and PMO, at £787,780 and £66,112 respectively.
How can your business avoid a similar situation?
A few examples of how family companies can help to avoid this kind of outcome are:-
- complying with company law, including treating the company as a separate entity and acting in its interests, along with ensuring all major decisions are recorded and meeting of the Board minuted;
- if personal differences hamper decision-making, consider appointing an independent third party to the board; and
- if a dispute escalates, consult a dispute-resolution professional who specialises in small business disputes. Mediation in particular is cheaper, quicker and more flexible than going to court.
Lloyd Clarke is a Partner of Attwells Solicitors LLP and specialises in Business Disputes. Lloyd operates flexible funding arrangements including popular retainer packages, fixed fees and reduced hourly rates.
Lloyd is also a qualified Workplace Mediator.
Contact Lloyd Clarke on 01206 239761 or lloyd.clarke@attwells.com for a free telephone consultation.
