Unfair prejudice petitions – it’s not always a sign of weakness to make an offer

Navigating shareholder disputes can be something of a minefield. However, you can improve your chances of effective resolution with well-timed and pitched settlement offers. Not only does this help you to dictate the direction of travel, but it can help maximise costs recovery too.

There are several prominent cases that provide relevant commentary on this, but O’Neill v Phillips remains a leading authority on settlement offers in shareholder disputes. This landmark case provides valuable guidance on making tactical decisions in unfair prejudice claims, particularly when it comes to settlement offers. We have summarised the primary takeaways from O’Neill v Phillips to consider when navigating an unfair prejudice claim.

Key lessons from O’Neill v Phillips

Background of the case

Phillips owned an asbestos-stripping company, Pectel Ltd. O’Neill began working there in 1983 and quickly rose through the ranks to directorship with 25% ownership in 1985. As O’Neill assumed the day-to-day management of the company, the two split the profits between them.

However, when recession struck and business slowed, Phillips lost confidence in O’Neill’s leadership and resumed control. As a result, O’Neill’s 25% share of the profits were revoked. O’Neill launched unfair prejudice proceedings, arguing that the breakdown of confidence and trust resulted from Phillips’ conduct.

Having held talks with Phillips about increasing his shareholding to 50%, O’Neill argued that it was unfair for Phillips to instead retain those shares. He also petitioned against the withdrawal of his profit-sharing with Phillips.

The first instance judge rejected O’Neill’s petition. On appeal, however, both grounds were upheld. In the House of Lords (now the Supreme Court), Lord Hoffmann gave the final judgment, rejecting the petition on both grounds.

Ultimately, it was decided that as neither the profit-sharing nor the increased shareholding were formally agreed between the two parties, any unfairness that O’Neill suffered was as an employee and not a shareholder.

What are ‘legitimate expectations’?

In the Court of Appeal, the judge found that Phillips had created a ‘legitimate expectation’ for future shares. This was overturned in the House of Lords, with Lord Hoffmann stating that:

“The concept of a legitimate expectation should not be allowed to lead a life of its own”.

Here, Lord Hoffmann made a distinction between a legitimate expectation between shareholders who had ventured their own capital and those similar to O’Neill, where there were no ‘equitable principles’ in play.

Was it unfair prejudice?

The decision made in O’Neill v Phillips goes to the heart of what constitutes unfair prejudice – a question we explore in detail in a previous article. The key to eligibility is that one has suffered in their capacity as a shareholder – not as an employee, as O’Neill had. The judge’s commentary in this case set a precedence that agreements between shareholders must be formal to have legal standing.

What is the remedy?

Lord Hoffman decided, in this case, that Phillips was justified in fighting ‘to the end’. However, he also noted that:

“Parties ought to be encouraged, where at all possible, to avoid the expense of money and spirit inevitably involved in such litigation by making an offer to purchase at an early stage”.

If a compliant O’Neill v Philips offer is made and an unfair prejudice petition is subsequently issued it is likely to be struck out as an abuse of process. This is because such an offer gives the petitioner the best remedy possible and therefore the legal proceedings would be incapable of beating that remedy.

Should you make a settlement offer?

Is the offer being made ‘fair’?

An offer to purchase shares must be made at a “fair” value. Ordinarily, this simply relates to the value representing the equivalent portion of the total issued share capital, and essentially, being without any minority shareholding discount.

In cases where it cannot be agreed what constitutes a fair value, a competent, independent expert, often a forensic accountant, is usually appointed.

Is the offer being made at the right time?

An ‘O’Neill v Phillips’ offer ought to be made on an open (as opposed to without prejudice) basis so that it can be referred to the court. Despite this, such an offer can still afford costs protection for a respondent.

Such offers can be made at any time, including prior to the commencement of unfair prejudice proceedings. The timing of such an offer will be of the utmost importance if the court were to deliberate on its ‘fairness’ and will have an impact on whether a petition is struck out or not (and who will be responsible for legal costs). It’s therefore very important that both petitioners and respondents seek professional legal advice as early as possible.

The importance of making a fair and timely offer cannot be overstated; it will often play a large role in deciding whether a petition is struck out, and in turn, who will be responsible for the legal costs of the proceedings.

How can we help?

Seeking professional legal advice from the outset of an unfair prejudice claim can save you a significant amount of time, stress and cost down the road. Our expert team of litigators will assist in navigating the complexities of shareholder disputes and ensuring that the best possible resolution is found for your unique circumstances.

We routinely consider O’Neil v Philips’ offers, whether acting for the Petitioner or the Respondent, throughout the lifecycle of a dispute. When pitched appropriately, these offers can place real pressure on the opponent to come to the table. Another advantage for the petitioner is that a minority discount is not applied. Again, we have considerable expertise in ensuring that the discount is not applied where it’s inappropriate.

If you’re seeking advice on a shareholder dispute, get in touch with our expert team.