Unfair Prejudice: Valuations And Ignoring Professional Advice

Unfair prejudice towards the shareholders has serious consequences and can arise if, for instance, professional advice on seeking a valuation ahead of a share sale is ignored. The commercial dispute lawyers at ParrisWhittaker in The Bahamas are highly experienced in advising directors and shareholders on their rights and responsibilities around share transfers and business sales.

There is unfair prejudice in circumstances where a company’s directors/majority shareholders abuse their corporate powers to the detriment of minority shareholders. This can typically arise where an unfair or inadequate valuation (or none at all, in this case) of the shares is obtained before a sale or transfer. It could well lead to a costly claim against those responsible.

A decision from the UK’s High Court¹ illustrates how unfair prejudice can arise where no such valuation was obtained, despite clear professional advice to do so. The ruling has persuasive authority on the courts in The Bahamas.

What happened?

A manufacturing company in England produced environmentally-friendly noise barriers, scaffolding, and decking from recycled composite materials. The company was transferred out of sole ownership of its holding company (A) to a new holding company (B) for around £150,000.

Shareholder S held a 47.5% shareholding in A and argued that the true value of the company was £2.9m meaning his shares had been considerably undervalued. His case was that the transfer was part of a scheme hatched to transfer the company to the holding company while compensating him at a fraction of its true value.

He brought an unfair prejudice petition against the holding companies and against the sole director of A, Mr Diamandis (D), who also held 47.5% in company A and had driven the sale. The remaining 5% was held by the company secretary.

S argued that the sale was at such a significant undervalue that it amounted to unfair prejudice.  D claimed that the value of A at the date the transfer was effected was nil – and certainly no more than £150,000. As far as he was claiming, the sale was at full value.

The court found that D’s arguments had no meaningful basis. Not only was no valuation obtained before the transfer, he had even ignored his own lawyer’s firm advice to seek a professional valuation. The judge went as far as to stress that the lawyer had “made it abundantly clear” a professional fair valuation should be sought.

S’s petition succeeded. The value of the company was indeed £2.9m at the appropriate valuation date – as S had claimed. The transfer of the company at a mere £150,000 deprived S of the value of almost the entirety of his shareholding in company A.

The judge criticised D’s approach, describing him as “at the very least wholly reckless” as to the company’s true market value, saying that he could not have had a reasonable belief A was worth as little as £150,000. In fact, on the evidence D had a very good idea of the true value of the company.

D also failed to comply with his statutory duties under the UK’s Companies Act 2006, failing to exercise reasonable care, skill and diligence. The judge ordered D to buy out S’s shareholding.

What does this mean?

If a director/majority shareholder is seeking to sell a company or transfer shareholdings, an appropriate and fair professional valuation should always be sought. In the absence of such a valuation, there is a risk that the sale or transfer will be considered at an undervalue and an unfair prejudice claim could result.

A more general takeaway from this case is that if a company is given professional advice to take a particular course of action, think carefully before not acting on such advice.  Here, had D obtained a valuation as specifically advised by his lawyer, the outcome would have been very different.

If you are concerned about a potential unfair prejudice claim, or any other matter arising between shareholders and directors, take specialist advice from the award winning company and commercial lawyers at ParrisWhittaker.  Call us now on +1.242.352.6112

¹Simpson v Diamandis and others [2024] EWHC 850