Clarifying minority shareholder’s buy out rights

Birchfield v Birchfield Holdings Limited [2021] NZCA 428

The Court of Appeal considered recently the issue of a minority shareholder’s rights in a case where the minority shareholder refused to accept buy-out offers and then claimed the company had acted in an unfairly prejudicial manner towards him.  In so doing, the Court of Appeal also provided useful guidance on how the majority can use the summary judgment fast track procedure to buy out the minority.

Background

The appellant, Allan Birchfield, was one of four director-shareholders in the family-owned mining company, Birchfield Holdings Limited (BHL).  Mr Birchfield held a 25% shareholding.  His two brothers and sister were the other director-shareholders and together held a 75% shareholding.  There was a breakdown in the siblings’ relationship and Mr Birchfield was removed as a director in April 2019.

BHL made various offers to buy out Mr Birchfield’s 25% shareholding at fair value in accordance with BHL’s constitution.  Mr Birchfield, who had initially asked to be bought out, rejected the offers and filed proceedings in the High Court under s 174 of the Companies Act 1993, claiming that BHL’s affairs had being conducted in a manner which was oppressive, unfairly discriminatory and/or unfairly prejudicial to him.  Mr Birchfield sought to be reinstated as a BHL director, and sought a range of relief in relation to the management of BHL’s affairs.

In opposition, BHL applied for summary judgment, relying on various English authorities to support its position that its offers to purchase Mr Birchfield’s shares at fair value cured any alleged unfair prejudice there might otherwise be as a result of Mr Birchfield’s exclusion from BHL’s management, and that the offers provided all the relief that he could possibly obtain in the unfair prejudice claim.  

BHL made further offers after issuing the summary judgment proceedings, including offering to buy out the shares for fair value to be determined by an independent expert, with no minority discount.  Mr Birchfield also rejected those offers.

The High Court granted BHL summary judgment.  This was the first time the High Court had relied on buy-out offers as the basis for granting summary judgment for the defendant, dismissing an unfair prejudice claim.  The High Court considered there was no realistic prospect of a court granting the extensive relief sought by Mr Birchfield.  The High Court did however require BHL to make a fresh offer and nominated an independent valuer to assist.

Mr Birchfield appealed to the Court of Appeal.

Court of Appeal decision

The Court of Appeal recognised the clear rationale of the minority shareholder buy out regime which is intended to provide a simple, cost-efficient way to resolve many shareholder disputes without resort to lengthy and expensive court proceedings.

The Court noted that whether an offer to buy out a shareholder cures any unfairness, oppression, or prejudice to that shareholder, there will always be a question of fact which requires consideration of the terms of any offer made. 

Relevant factors

The Court held that there are several relevant factors which will require consideration when assessing the reasonableness of a buy-out offer and rejection of that offer:

·         The value offered or the means proposed for arriving at that value. For example, an independent valuation by a fully informed expert is likely to be considered a more credible offer.

·         The ability of the minority shareholder to be satisfied that the figure offered is reasonable before accepting or rejecting the offer.  This includes providing access to company information to enable the minority shareholder to see how the offer and share price has been determined and consider whether it is reasonable.

·         The substance of the unfair prejudice allegations, and the implications of those allegations for the assessment of fair value.  This takes into account situations where the allegedly unfair or prejudicial conduct may have arguably had a material effect on the value of the company.  In such circumstances, an offer to buy out the minority shareholder for fair value is unlikely to cure the alleged prejudice, because the shares would be worth more but for that unfairly prejudicial conduct.

·         The likelihood of the majority shareholder being able to implement the offer made.

·         The proximity of the offer in time to the unfairly prejudicial conduct complained of.

Nature and timing of a buy-out offer

The Court further held that where summary judgment was sought in response to an unfair prejudice claim, the buy-out offer must be made before summary judgment is sought.  Given that summary judgment will only be granted if the court is satisfied that any arguable unfairness has been cured by the offer, it follows that the offer must have been made before summary judgment proceedings commence and open for acceptance for a reasonable period.  

Further, the offer must not have any material defects although minor modifications to the offer, such as adjusting the offer to cover the costs of proceedings, are allowed. In so doing, the Court emphasised that it encourages parties avoiding unjustifiable waste of resources.

Conclusion

In this case, after considered the various factors, the Court considered that BHL’s buy-out offers cured any alleged unfairness.  First, the conduct alleged by Mr Birchfield did not have a material effect on BHL’s value.  BHL was also not a quasi-partnership and Mr Birchfield was not engaged full-time in the conduct of its business.  Further, it was difficult to envisage any remedy granted by the Court other than a buy-out offer as it was “inconceivable” that the Court would make the orders sought by Mr Birchfield in relation to the future management of BHL, and in particular his proposed reinstatement as director.  Finally, there was also no material deficiency in the offer provided it was adjusted to provide for the costs of proceedings.  The Court, therefore, considered that BHL’s August 2020 offer with the costs adjustment fully addressed any alleged unfairness.  There was no arguable unfair prejudice claim.

Comment (Tom Pasley)

This is a useful decision which clarifies the law on the intersection of minority shareholder buy out rights and unfair prejudice claims.  The Court of Appeal makes it clear that while a buy-out offer to a minority shareholder will not necessarily cure unfair prejudice, if such an offer is objectively fair and reasonable (with reference to the relevant factors set out by the Court) then it will generally win the day.  This is a starting point, and we can expect that these factors and rules will be further developed in future cases. 

Further, both the High Court and Court of Appeal decisions validate an application for summary judgment as a fast-track process for bringing about the buy-out, provided the various steps beforehand are taken and the offer is fair. 

Ultimately, this decision makes commercial sense and needs to be borne in mind by both majority and minority shareholders when considering making and accepting buy-out offers. 

Tom Pasley is a Special Counsel at Fee Langstone