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    Director cannot require purchase

    A director of a quasi-partnership company who gave up his directorship for personal reasons was not entitled by section 459 of the Companies Act 1985 to require his co-directors to purchase his share of the company at a full undiscounted value.

    The Court of Appeal so held allowing an appeal by the respondents, Phoenix Office Supplied Ltd, and its directors, Jonathan Parish and Brian Ogden, from a decision of Mr Justice Blackburne on April 10, 2002 in favour of the petitioner, Shaun Larvin, ordering the directors to pay £290,000 for his one-third share of the company.

    Mr Grant Crawford for the respondents; Mr Edward Bartley Jones, QC, for Mr Larvin.

    LORD JUSTICE AULD said the company had been formed in 1989 and was originally wholly owned by the second respondent. The petitioner and the third respondent had become directors in 1995 and all three had taken equal shares.

    There had been discussion at that time about a put-option, so that any of the three who left could require the other two to buy his share. But no such contract had been agreed.

    When in autumn 2000, the petitioner had for personal reasons sought to leave the company, he had asked the other two to pay him one-third of the company’s net asset value. The two director respondents had refused and had rejected the petitioner’s request for copies of management accounts.

    The judge had found that the respondents were in breach of a common understanding between the three of them as to their involvement in the company’s affairs such as to give rise to a quasi-partnership entitling the petitioner to a distribution of one-third of the company’s net asset value on his leaving.

    It was not in issue that there was a quasi-partnership. The issue was as to its effect.

    His Lordship referred to dicta of Lord Hoffmann in O’Neill v Phillips ([1999] 1 WLR 1092, 1107-1108) dealing with “no fault divorce” in quasi-partnerships.

    Section 459 protected shareholders against breach of the terms on which they had agreed the company’s affairs should be conducted, and against some inequity that made it unfair for those conducting the company’s affairs to rely on their strict legal power.

    The section was designed to protect members of companies, not directors or employees as such. It was aimed not at unfairness in the exclusion of a member, but at the unfairness of his not being offered a fair price for his shares.

    Lord Hoffman had rejected the concept that section 459 provided a shareholder in a quasi-partnership with a right to exit at will.

    Such an entitlement could be ruinous to a small quasi-partnership. Something more than section 459 was required to give rise to an entitlement to “no fault divorce”.

    Section 459 without more did not imbue a member of a quasi-partnership company with a right to leave and be paid in full for shares or to elevate something which was not a binding contract into an obligation to that effect.

    Lord Justice Clarke agreed and Lord Justice Jonathan Parker delivered a concurring judgment.

    “The Times” December 2002