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Corporate Divorce – The Hoffman Offer, 21st February 2013 - Click for larger version Corporate Divorce – The Hoffman Offer, 21st February 2013

In the past few months, our corporate and litigation teams have been jointly instructed in a number of shareholder disputes, in each case between owner-managers of the business in question.

The root cause(s) can be varied in nature - sometimes a long brewing personality clash, sometimes differing approaches to business, but often the result of pressure brought about by difficult trading conditions.

Matters can become heated and resort to the courts is not uncommon.

One tool in the armoury of a minority shareholder is S994 of the Companies Act 2006 which effectively gives relief to a minority shareholding the face of conduct which is unfairly prejudicial to them.

How can a majority shareholder respond to such a threat?

Relying on Lord Hoffman’s judgement in a House of Lords case*, if a fair offer for the minority’s shares can be shown to have been made, a S994 petition will be defeated.

What constitutes a fair offer to purchase?

An offer:
At a price which represents the value of the minority’s shares, being the share of the value of the company bearing the same proportion as does the minority’s holding to the total issued share capital, i.e., pro rata, without a discount for its being a minority holding;
Which provides that, failing agreement on value, the valuation will be submitted to the binding determination of a competent expert (or, on a failure to agree the competent expert, to an expert nominated by the President of the Institute of Chartered Accountants of Scotland). Fees and outlays of the expert to be borne equally by the parties or as the expert determines;
On the basis that both parties have equal access to all information about the company which bears upon the value of the shares, and on the basis that both parties will have the right to make submissions to the expert; and
On the basis that within a reasonable period of time following agreement or determination of the price, in return for payment to the minority of the price, the minority will deliver a transfer of the shares on standard terms.
If the offer can satisfy these requirements, it will be deemed to be fair and reasonable.

At the outset of shareholder disputes, we always try to understand the objectives of the parties. In almost all these situations, a parting of the ways is inevitable, and the essential goal is to attain the best possible bargaining position where the parties can agree terms to end their relationship as shareholders and fellow directors/employees.

Sometimes it’s necessary, (perhaps cathartic?) for the parties to air their grievances and have their day in court (we’ve advised, alongside counsel, in both the Sheriff and Court of Session in this calendar year alone), but at the end of the day, most parties cannot afford to continue their dispute indefinitely – the distraction and management time lost can be catastrophic for the business under dispute.

Lord Hoffman’s ruling gives us something of a template to a structured exit and allows the parties to part company and seek happier times ahead.

*O’Neil v Phillips [1999] UKHL 24

Last updated: 4.05pm, Thursday 21st February 2013

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