Is it safe?

Hoffman’s ruling about minority shareholders relying only on promises 

O’Neill and Another v Phillips and Others

[1999] UKHL 24; [1999] 1 WLR 1092

This UK House of Lords case is a landmark for business owners, especially minority shareholders, as it clarifies when conduct by those with control of a company can be called unfairly prejudicial under section 994 of the Companies Act 2006.  

The Players and the Fight

The dispute in this case was between Mr. Phillips, the majority shareholder and original owner, and Mr. O’Neill, a minority shareholder and the managing director. They began with a handshake agreement to share profits 50/50. However, formal agreements for this shareholding were never finalized.  

When business turned tough, Phillips ended this sharing arrangement and reclaimed control. O’Neill claimed Phillips’ actions were “unfairly prejudicial” under section 459 of the Companies Act 1985 (now s994 of the Companies Act 2006), seeking justice for what he saw as Phillips going back on his promises. 

 

What Does Unfairly Prejudicial Even Mean?

 Lord Hoffmann, the lead judge, declared fairness isn’t just about legal rights; it’s about equity and good faith shaped by what the partners agreed and promised to each other. But fairness is not a free-for-all; it must be measured by judicial principles, not personal grudges. 

The court rejected the idea of “legitimate expectations” as a key to new rights. Stating that any such expectations must be grounded in clear promises or agreements, not hopes or informal discussions. Crucially, unfairness can’t be claimed just because trust has broken down or because partners fall out. 

The Offer That Was Made

Phillips made a formal offer on 28 November 1994, nearly three years before/after the petition, to buy O’Neill’s shares at one-quarter of the company’s fair value, determined by an agreed chartered accountant or one nominated by the Institute of Chartered Accountants President.  

This valuation basis reflected O’Neill’s proportionate holding without a minority discount, determined as an expert (not arbitrator) with equal party access to company information and submissions. O’Neill rejected it partly because it omitted his costs of ongoing litigation.

No Promises, No Prejudice

The House of Lords sided with Phillips. They found no formal, unconditional promise to give O’Neill more shares or ongoing equal profit-sharing. The negotiations never solidified into a deal. Phillips hadn’t excluded O’Neill from management; he simply changed their arrangement within his legal rights. 

O’Neill’s loss of profit share was linked to his role as an employee, not as a shareholder, so the court said he hadn’t suffered unfair prejudice as a company member.  

The Significance of the Offer

Lord Hoffmann’s guidance on the making of offers in unfair prejudice cases set out key principles. 

The ruling established that if a respondent to an unfair prejudice petition makes a “reasonable offer” to purchase the petitioner’s shares, the petition can be dismissed. The rationale being that the offer provided the petitioner with the best possible outcome they could achieve through litigation. 

Such an offer must be a reasonable one and should be for a fair value, generally without a discount for being a minority shareholding.   

The offer should be based on a fair valuation, often determined by an independent expert agreed upon by both parties.  

The offer should be open, not “without prejudice”: For the offer to be used in court as a defense, it must be made on an “open” basis so it can be referred to the court if the offer is rejected.   

Why This Case Matters

This case sets out a clear legal framework for what counts will consider unfairly prejudicial conduct to be under s994 of the Companies Act 2006, particularly in minority shareholder disputes. 

It firmly established that minority shareholders cannot claim relief without an actual breach of agreed terms or equitable obligations and highlighted the critical need for formal agreements and documented promises in business relationships. The judgment also stressed that legitimate expectations must come from real agreements, not merely informal talks or hopes.  

It established the principle that an offer that met the rigth criteria could be used to make pursuing an unfair prejudice petition through the courts either highly risky or completely unnecessary. 

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