Equality of arms for minorities

The scenario is a common one. The minority shareholder (P) is unhappy at how the MD is managing the company. The MD, as majority shareholder, ensures that the dissentient shareholder’s removal from the board – thereby drastically limiting his access to information about the management of the company. P presents a petition under section 459 of the Companies Act 1985. He is aware of potentially unfairly prejudicial conduct by the MD and suspects that this is merely the tip of the iceberg. How can he make good his case? And how, without having to incur the bulk of the costs of a full trial (or perhaps two separate trials) on liability and quantum, can he find out how much his shares are worth?

Proper and early disclosure is crucial for P. His right to a fair trial bestowed by Article 6(1) of the ECHR is key, because this includes the right to equality of arms. This requires each party to be afforded a reasonable opportunity to present his or her case under conditions which did not place him or her at a substantial disadvantage vis-à-vis their opponent: See De Haes and Gijsels v Belgium (1998) 25 EHRR 1.

If P sues a fellow shareholder who is also a director of the relevant company, the right to equality of arms demands that if potentially relevant company documents are available to the defendant director, they should also be available to P. The need to ensure equality of arms can lead to disclosure even being ordered of relevant company documents to which legal professional privilege attaches, provided that they do not relate to hostile litigation between P and the company.

Equality of arms can also be prayed in aid to enable P to obtain advance disclosure of documents enabling him to value his shareholding. It cannot be right that the MD is in a position to make a CPR Part 36 payment at the outset of proceedings but P is not in a position properly to value the company (and hence his shareholding in it) and so to make a CPR Part 36 – complaint offer (and obtain the potential advantages that flow from it) until after disclosure (or, where a split liability/quantum trial has been ordered, after disclosure prior to the second, quantum, trial).

In order to achieve equality in procedure the court can require a party to provide his opponent with early information to enable the latter to make a realistic Part 36 offer to settle (or to respond to such an offer): see Gnitrow Ltd v Cape Plc [2000] 1 WLR 2327 (CA). A further reason for advance disclosure so as to enable P to value his shares is to enable a mediation to take place at any stage or proceedings without his being at a disadvantage. This is in accordance with the court’s duties pursuant to CPR Part 1.4(2), when furthering the overriding objective by actively managing cases, of encouraging ADR and helping the parties to settle the case.

A recent example of the application of these principles is Arrow v Edwardian Group ltd {2004} EWHC 1319 (Ch), where the court ordered advance disclosure from the company “to enable the Petitioners to make a realistic Part 36 offer or engage in meaningful mediation.

Daniel Lightman (Barrister)
Appeared for the petitioners in Arrow v Edwardian Group Ltd

“Serle Quarterly”: Issue 3