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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Gibbs-Palmer (Holdings) Ltd v Gibbs-Palmer (Midland) Ltd [1999] ScotCS 217 (8 September 1999) URL: http://www.bailii.org/scot/cases/ScotCS/1999/217.html Cite as: [1999] ScotCS 217

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The petitioner is a shareholder in Lawson Donaldson Limited (hereinafter referred to as "the Company"). The Company has its registered office in Edinburgh. The Directors of the Company are James Mark Harvey, Alan John Marr, Athole MacDonald, David John Onslow, David Leonard Shaw, Robert James Tabberner and John Simon Yealland. The petitioner seeks an order against the respondent pursuant to sections 459 to 461 of the Companies Act 1985. The Directors of the respondent are Gordon Ian Burn, Nicholas Frederick, Robert James Tabberner, John Simon Yealland, William Anthony Johnston and David John Onslow. At a preliminary hearing before me the respondent had argued that the petition is irrelevant.

The Company's principal activity is that of wholesalers of horticultural and pet products. The Company's authorised share capital is £75,000 divided into 7,500 ordinary shares of £10 each, all of which are issued and paid. As at 25 August 1998 the shareholders of the Company were as follows:

1. The Petitioner	3,294
2. The Respondent Company	3,294
3. R. Marr	416
4. B. MacDonald	145
5. A. Harvey	145
6. D. E. Beddie	55
7. P. Fallon	55
8. A. Boyle	48
9. N. Cowie	48
		7,500

It will be noted that R. Marr, B. MacDonald and A. Harvey are not the same persons as the Directors of the Company but apparently are their wives. It will be noted that the shares thus owned by wives of the Company's Directors total 706. Since the petitioner and respondent each were registered holders of 3,294 shares the said block of 706 shares could have a critical influence on the control of the Company.

On 4 April 1988 an Agreement (hereinafter referred to as "the 1988 Agreement") was entered into and this governed the sale and purchase of most of the ordinary share capital of the Company (then known as Lawson Donaldson Seeds Limited). A copy of that Agreement has been produced and its terms are not disputed by either the petitioner or respondent. The parties to the 1998 Agreement were the petitioner, the respondent, and persons set out in column 1 of Part 1 of Schedule 1 of the Agreement (who were therein designed as "the Vendors"). The petitioner and respondent were described in the 1988 Agreement as "the Purchasers". It is also to be noted that Clause 1.1.3 of the 1988 Agreement provided that any reference to the Vendors includes, where appropriate, their personal representatives. However, it should be noted that in terms of Clause 1.1 the word "Associate" is used to define relatives including any spouse. The effect of the Agreement was that the parties specified as Vendors in the first column of Part 1 of Schedule 1 transferred all or part of their respective shareholdings to the party specified as Purchaser in the third column (namely to the petitioner or respondent as was specified). Mr Marr, Mr MacDonald and Mr Harvey were parties to the 1988 Agreement as Vendors but not their respective wives. The petitioner avers that prior to the 1988 Agreement they had acquired 1,342 shares in the Company and that the respondent had acquired 1,343 shares. The 1988 Agreement resulted in the transfer of 1,506 shares to each of them so that after the Agreement was implemented they held approximately equal numbers of shares and it is averred by the petitioner that until the events of August 1998 they maintained this equality of shareholding.

It is clear that one of the objects of the 1988 Agreement was the maintenance of this equality. The petitioner found strongly in Clause 11.5 of the Agreement which was in the following terms:

Since the interpretation of Clause 11.5 was a critical part of the debate before me it may be important to look at the other provisions of Clause 11 which may affect its construction. We find these to be:

By amendment, allowed only on the morning of the hearing, the petitioner introduced reference to another informal agreement which they aver and found upon. They aver:

The respondent does not accept that there was ever such an informal agreement.

The petitioner accepts that while there were Directors of the petitioner and respondent who were also Directors of the Company the Company functioned largely independently and that the Managing Director, Mr Andrew Marr, took most commercial and operating decisions. The respondent makes averments that in recent times the petitioner had been in financial difficulties and unstable but this the petitioner disputes. The petitioner does accept that a large customer moved its custom from the petitioner to the respondent in the summer of 1998. The customer had formerly been serviced jointly by the petitioner and the respondent (both of whom it would appear carry on a business similar to that of the Company). However, the petitioner avers that the respondent represented to the customer that it would be able to supply the customer to the exclusion of the petitioner.

The petitioner avers that a notice of Board Meeting of the Company was given by fax to the Director, David John Onslow, on 18 August 1998. The business of the meeting was therein stated to be:

David Onslow responded on 24 August 1998 to the Company Secretary stating inter alia that he and David Shaw supported the proposals. By fax, on 25 August 1998, David Onslow communicated to the Company in advance of the Board Meeting. On behalf of the petitioner inter alia he stated that the petitioner wished to purchase sufficient of the shares from existing shareholders to maintain the petitioner's "original equal investment" in the Company.

The fax of 25 August 1998 bears to proceed from Gibbs-Palmer (Holdings) Limited and is addressed to Mr A. Marr. The terms of the fax are as follows:

The fax purports to be signed by David Onslow.

There is an obvious discrepancy between the terms of the fax of 24 August and that of 25 August but senior counsel for the petitioner informed me at the debate that it would be disputed that the earlier fax was sent with proper authority.

On 25 August 1998 the Board of Directors of the Company held a meeting attended by Alan Marr, Athole MacDonald, John Simon Yealland and Robert J Tabberner. Steven Walker, the Company Secretary also attended. Despite the fax received on 25 August the share transfers proposed in the notice of the meeting were approved. It is the approval of these transfers which is the gravamen of the alleged grievance which the petitioner seeks now to correct. The share transfers approved at the Board Meeting on 25 August are as follows:

TRANSFEROR	TRANSFEREE	NO OF SHARES
Rosemary Marr	Alan Marr	180
Barbara MacDonald	Athole MacDonald	69
Ann Harvey	James Harvey	55
Douglas Beddie	Lesley Beddie	28
Peter Fallon	Margaret Fallon	28
Norman Currie	Elizabeth Currie	22
Alister Boyle	Christine Boyle	22
Rosemary Marr	Gibbs-Palmer (Midlands) Ltd	236
Alan Marr	Gibbs-Palmer (Midlands) Ltd	180
Douglas Beddie	Gibbs-Palmer (Midlands) Ltd	27
Lesley Beddie	Gibbs-Palmer (Midlands) Ltd	28
Peter J. Fallon	Gibbs-Palmer (Midlands) Ltd	27
Margaret Fallon	Gibbs-Palmer (Midlands) Ltd	28
Norman Currie	Gibbs-Palmer (Midlands) Ltd	26
Elizabeth Currie	Gibbs-Palmer (Midlands) Ltd	22
Alister Boyle	Gibbs-Palmer (Midlands) Ltd	26
Christine Boyle	Gibbs-Palmer (Midlands) Ltd	22
Barbara MacDonald	Gibbs-Palmer (Midlands) Ltd	76
Athole MacDonald	Gibbs-Palmer (Midlands) Ltd	69
Ann Harvey	Gibbs-Palmer (Midlands) Ltd	90
James Harvey	Gibbs-Palmer (Midlands) Ltd	55

The petitioner avers that the transfers between individuals were inter-spouse transfers. The effect of the transfers is that the respondent now holds 56.08 per cent of the issued shares. On the other hand the petitioner's shareholding remains at 43.92 per cent of those shares.

In the light of the transfers approved on 25 August 1998 the petitioner submits that the affairs of the Company have been conducted in a manner unfair to the petitioner. The petitioner now requires to compete commercially against the Company. The respondent's seizure of control of the Company has broken the alliance the petitioner had with the Company in purchasing and marketing. Moreover, the value of the petitioner's shares has been diminished. The petitioner accordingly applies for an order from the court requiring the respondent to sell 456 ordinary shares in the Company to the petitioner at the price paid by the respondent for these shares.

Senior counsel for the respondent in addressing me maintained that the petition was irrelevant. As far as the 1988 Agreement is concerned he submitted that 912 shares had been transferred to the respondent but only 206 of these shares were covered by the 1988 Agreement. The shares transferred by wives numbered 706 and the wives were not "Vendors" under the Agreement. Clause 11.5 of the Agreement only applied to Vendors. If, on the other hand, the petitioner bases the petition on the alleged 1987 informal agreement that does not affect the Directors who were not party to it. The Agreement is only said to be between the petitioner and the respondent. It was said that the Company had formerly been in family ownership and had been subject to a management buy-out. The Vendors in the 1988 Agreement were the management shareholders. After the petitioner and respondent entered into the 1988 Agreement with the management shareholders the latter retained some shares and remained in the service of the Company as Directors. In fact the Company continued to operate entirely independently of the petitioner and respondent. Mr Onslow and Mr Shaw were Directors of the petitioner whereas Mr Yealland and Mr Tabberner were associated with the respondent. It should be noted that neither Mr Onslow nor Mr Shaw were Directors of the petitioner on 25 August 1999, although they were Directors of the Company. The petitioner has not specified precisely what was unfair about what happened. Simply because something is unlawful it does not necessarily mean that it is unfair. Given that the parties by the petitioner's own concession have fallen out there will be no equity in dividing the additional shares and imposing a continuing stalemate on the parties. Moreover, as matters stand, any remaining independent shareholders seem more likely to line up with the respondent so that the petitioner has little control anyway.

It was further contended on behalf of the petitioner that for section 459 of the Companies Act to apply the following four conditions must be met (1)  the complaint must relate to the manner in which the Company's affairs were conducted; (2)  the conduct complained of must be unfair; (3)  the conduct complained of must be prejudicial and (4)  the complaining party must be prejudiced as a member of the Company.

It was submitted that the conduct complained of did not relate to the affairs of the Company. Thus, the alleged informal agreement was a commercial arrangement between the petitioner and respondent. It is not even averred by the petitioner that the Company itself knew about it. Regarding unfairness the petitioner has not indicated why registration of share purchases already arranged between the parties would be unfair. The share transfers would have been approved by the independent Directors of the Company, even if those who were connected with the respondent had abstained. The wife shareholders were not governed by the 1988 Agreement and the Directors had no occasion for refusing transfers granted by them. The balance of 206 shares would not affect the respondent's control of the Company once they were entitled to acquire the 706 other shares. Any prejudice suffered by the complaining shareholder must be prejudice as a member to be relevant. Any commercial prejudice, independent of membership, is not relevant. The petitioner's averments of prejudice are based on the false hypothesis of joint control. In fact the petitioner could not rely upon joint control since, if the management shareholders aligned themselves with the respondent, the petitioner would be outvoted. As shareholders the petitioner and respondent shared profit taking equally but not management. The petitioner allowed the business management of the Company to be effected independently of the petitioner and respondent by leaving management in the hands of the Directors who were management shareholders.

It would be inequitable if the section 459 remedy were used to perpetuate disharmony in the Company. If the petitioner's general complaint is valid it would not be precluded from the remedy of breach of contract.

The respondent's counsel referred me to a number of authorities. In Saul D. Harrison & Sons plc [1995] 1 B.C.L.C. 14, there was a general consideration of the features of a section 459 application. It was held that the Articles of Association of a Company was the starting point for any assessment of the conduct of the Company which is complained of as being unfair. However, looking at matters in a commercial context there may be factors additional to the Articles which determine what conduct of the Company is fair to members affected by the Directors' transactions. At page 31 Neill L.J. suggests that in judging on fairness:

It was submitted that the concept of "legitimate expectations" which was considered as an important factor in a number of later authorities has now been discounted by the House of Lords in In re a Company (O'Neill v Phillips) [1999] 1 W.L.R. 1092. However, in Saul D. Harrison Neill L.J. refers with approval to Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd [1973] A.C. 360 at 374 where his Lordship said that considerations of a personal character arising between one individual and another may make it unjust and inequitable, to insist on legal rights, or to exercise them in a particular way. There are many Companies where it can be said that the basis of association between the members is adequately and exhaustively laid down in the Articles. However, the superimposition of equitable considerations requires "something more". It was suggested by senior counsel for the respondent that the question in this case was whether it is sufficient that the "something more" is an agreement between only a limited number of members and not all the members, or members holding a controlling interest in the Company. The views expressed by Neill L.J. are essentially the same as had been earlier expressed in the case by Hoffmann L.J. (as he then was). At page 19 Hoffmann L.J. says:

Senior counsel for the respondent contended that his Lordship was referring to an arrangement between some members and members exercising a controlling interest and not to just the relationship between two minority interests.

Further I was referred to Re Astec (B.S.R.) plc [1999] B.C.C. 59 where, in his lengthy judgment, Jonathan Parker J. referred with apparent approval to Harman J. in Re Unisoft Group Ltd (No 2) [1994] B.C.C. 766 at 777 where he said:

In Re Postgate & Denby (Agencies) Ltd [1987] B.C.L.C. 8 Hoffmann L.J. (as he then was) stated:

In Re Blue Arrow plc [1987] B.C.L.C. 585 it was held that outside investors, where there is a large spread of shares as in a public company, cannot be affected by private arrangements which may not be known to them. The informal agreement which the petitioner had, on the morning of the debate, introduced a reference to by way of amendment was not known to all the interested parties until the amendment was made, and nothing contrary to that view is averred by the petitioner. In Re a Company (No 002015 of 1996) [1997] 2 B.C.L.C. 1 the court had acknowledged the possibility that certain alleged arrangements might constitute the "something more" beyond the Articles needed to justify a section 459 petition. But the alleged arrangement had included the controlling shareholder. Leeds United Holdings plc [1996] 2 B.C.L.C. 545 was a case where considerable doubt was expressed as to whether an agreement among a limited number of shareholders could be an element additional to the Company's constitution such as is required to justify a section 459 application. As Ratee J. said at page 559:

In Tottenhan Hotspur plc [1994] 1 B.C.L.C. 655 and in Re a Company ex p. Schwarcz (No 2) [1989] B.C.L.C. 427 we find illustrations of the reluctance of the court to allow a section 459 remedy when such a remedy would not secure an appropriate result.

It was further contended on behalf of the respondent that in Re a Company (O'Neill v Phillips) [1999] 1 W.L.R. 1092 was an important case because in it the House of Lords had finally removed from this area of law the concept of "legitimate expectation". In giving the leading judgment Lord Hoffmann indicates that the terms of the association of the members of a Company are contained in the Articles of Association and sometimes in collateral agreements between the shareholders. Ordinarily, before a member can complain of unfairness, there must be some breach of the terms on which he agreed that the affairs of the company should be conducted (page 1099A). Lord Hoffmann conceded that it was probably a mistake to use the term "legitimate expectation" in his judgment in Saul D. Harrison & Sons (page 1102E).

I was informed that in this case the Articles only gave the Directors a right to refuse to register share transfers if the shares are not fully paid up. If any agreement, such as is referred to by Lord Hoffmann, does not include as a party the controlling shareholder of the Company then it is not an effective commitment as to how the Company should operate and is merely a commercial arrangement between the members rather than agreement relating to the Company's affairs. In the absence of their involvement in any agreement concerning shares the other shareholders should be able to assume that they could exercise their voting rights to confer control on one or other of the major shareholders. It was submitted that it also has to be noted that the petitioner makes no averments as to how the shares, transferred by some of the management shareholders to their wives, came to be so transferred. In 1988 41 shares of the Company had been registered in the names of shareholders who are either untraceable or have died. Barring these shareholders all others were party to the 1988 Agreement. The respondent seemed to concede that the 1988 Agreement may be apt to represent "something more" in respect of the 206 shares transferred by Vendors but nothing beyond that.

The alleged 1987 informal agreement would have to be tested by reference to the shareholdings at the time it was entered into and at that time the petitioner and respondent together had no shares. In any event so far as its terms can be understood the 1987 Agreement does not indicate how the petitioner and respondent's affairs were to be conducted but only the Company's own affairs. The case of Jesner v Jarrad Properties Ltd 1993 S.C. 34 was cited to me to illustrate that it is not sufficient justification of a section 459 application that there should have been a breach of the Articles of a relevant shareholders' agreement. It was submitted to me that there had been no prejudice occasioned to the petitioner. An equal holding of shares in the changed circumstances between the parties would merely result in a damaging stalemate. Under the 1988 Agreement the petitioner would merely acquire 103 shares which would leave them a minority shareholder. If the petitioner were likely to lose the benefit of trading discounts this could not be said to be prejudicial in terms of section 459. The petitioner would not have incurred any prejudice as a member. For the reasons advanced it was submitted that the petition should be refused but if this course were not followed a proof before answer should be allowed.

The senior counsel for the respondent contended that in 1987 the parties had agreed to invest in the Company on the basis that they would have an equal shareholding. The inescapable fact is that the respondent has now arranged matters so that it controls 56 percent of the shares. Until the recent transactions the parties had scrupulously maintained an equality of shareholding and that had been the position since 1988. In the fax of 25 August 1998 it was made quite clear that the petitioner would object to the proposed unilateral acquisition of shares by the respondent. However, the respondent proceeded to acquire shares in flagrant disregard of the fax and of their pre-existing agreements. The petitioner therefore was at risk of being left in a position of permanent minority. It is accurate for the petitioner to refer to "joint control" of the Company since it and the respondent had previously together held about 80 percent of the shares of the Company. No one else could take over the Company without their joint consent. The transfer of some shares by the Vendors to wives had not been a breach of the 1988 Agreement. It is accepted that the 1987 informal agreement, if it were critical, would need to be established by the petitioner by way of proof before answer. Clause 11.5 of the 1988 Agreement is clear in its terms and covers all acquisitions of shares by the parties. In the interpretation clause of that Agreement "sale shares" are defined as "shares to be sold by a Vendor pursuant to Clause 2". However, Clause 11.5 refers not merely to "sale shares" but to "shares". Events which have happened are clearly an example of unfair prejudice. Equality suggests balance, not domination by one shareholder. If the voting balance between shareholders is held by free-floating shares the petitioner had at least the opportunity of securing the support of the shareholders in any difference between it and the respondent. Now the respondent has complete control. A test of unfair prejudice might be what would have happened if the petitioner had had time to apply for interdict. The shareholders Marr, Harvey and MacDonald approved the registration of transferees under share transfers in respect of shares which had been sold by their wives. They also knew that a substantial shareholder had objected to the registration of these shares. The respondent should not have allowed the relevant shares to go forward for registration. It is an important component of fair dealing that parties should honour their agreements. Re B.S.B. Holdings Ltd (No 2) [1996] 1 B.C.L.C. 155 was cited to support the proposition that categories of unfair prejudice should not be regarded as closed and they may extend beyond those vouched by existing authority. Lord Hoffmann in O'Neill v Phillips made the point (at page 1103) that the requirement in section 459 that prejudice must be suffered as a member should not be too narrowly or technically construed. In the same case at page 1098 Lord Hoffmann observed that one of the traditional rules of equity, the separate jurisdiction, was to restrain the exercise of strict legal rights in certain relationships in which it is considered that this would be contrary to good faith. At page 1101 his Lordship observes that "one useful cross-check in a case like this is to ask whether the exercise of the power in question would be contrary to what the parties by words or conduct have actually agreed". The petitioner's counsel used O'Neill v Phillips to support this contention that section 459 should be applied broadly. The fair remedy for the situation which has arisen is to split the shares transferred to the respondent so that the parties are restored to the position they should have been if the original Agreement had been honoured. If

In reply it was argued for the respondent that if the petitioner had been asking for interdict a question would have arisen as to the precise legal wrong that the parties, not subject to the Agreement, had been on the point of committing. There were no pleadings relating to any alleged breach of fiduciary duty by the Directors. Clause 11 of the 1988 Agreement governs only the acquisition of Vendors' shares.

I have no difficulty in accepting that the test set out in section 459 should be applied broadly and with an eye to the underlying equities rather than to technicality. The purpose of the section is to give the court power to ensure that minority shareholding interests are protected against unfair practices in the conduct of the Company's affairs. Moreover, I accept the view expressed in Re B.S.B. Holdings Ltd (No 2) that the categories of situations regarded as suitable for section 459 intervention should not be thought of as closed nor conclusively defined by existing case law. Nevertheless, section 459 creates its own parameters which have to be respected. The rules governing an association of members in relation to companies' affairs are found in the Memorandum and the Articles of Association. As the authorities make clear it is only in a rare and exceptional case that the court will pay regard in assessing fairness, by looking beyond the Memorandum and the Articles of the Company, and before other rules can be superimposed on the Company's formal constitution on equitable grounds there must be what Lord Wilberforce described as "something more" in the Ebrahimi case. Since O'Neill it is established that the "something more" to be adequate must extend beyond a mere aspiration or expectation. There must be a definite agreement affecting the relevant parties which entitles them to regard the Articles as only being part of the story. The requirement for agreement is intelligible because the Memorandum in the Articles themselves constitute an implied contract and if it is to be contended that Company conduct which is strictly in conformity with them is unfair then parties must positively have expressly or impliedly agreed to modify the behaviour which would otherwise be expected thereunder. If they claim that the conduct of the Company has violated some understanding underlying the basis upon which they hold their shares there must be a firm justification for that understanding.

The petitioner does not seek to side-step the fact that its case depends upon being able to show that the overall Agreement regulating the relationship between the Company and the petitioner, as a member, depends on something more that the Articles which regulate the Directors' powers. In this regard the petitioner depends on the terms of two alleged contracts. The first (which until the morning when the present hearing began was the only one relied on) is the 1988 Agreement and certainly there is no issue as to its existence or terms. The second alleged agreement is the informal agreement between the petitioner and respondent dated in 1987 and the existence of such an agreement is not recognised by the respondent. With regard to that agreement the respondent argues that the agreement would only be relevant to the conduct of the Company of its affairs if it was entered into between the complaining member and a controlling shareholder. In my view the reference by Lord Hoffmann at page 19F of Saul D. Harrison to "the personal relationship between a shareholder and those who control the Company" should not be regarded as definitive of the only situation where personal contracts may have to be taken into account. Of course, unless such a contract implicates a controlling interest then the parties cannot have intended that the Company would be bound by the personal agreement in the conduct of its affairs. Clearly if a party with a controlling shareholding interest is involved in such an agreement the parties could have understood that the Company's compliance with the agreement could be secured. However, that in my view does not mean that a single shareholder needs to hold a majority of the shares. The parties to the 1988 Agreement together held, for practical purposes, most of the shares of the Company. Together they controlled the Company. Thus the 1988 Agreement was "something more" which created a situation where the members affected were entitled to expect that the Company, in the conduct of its affairs, would take the terms of the Agreement into account. Both the parties to this petition and the management Directors and shareholders were parties to the 1988 Agreement and thus knew about it. In these circumstances it would seem unfair if they had conducted the Company's affairs in violation of the Agreement and in a situation where they had total control of the Company. What then are the terms of the 1988 Agreement which the petitioner claims justify his petition? The keystone of the petitioner's case on this point is Clause 11.5 of the Agreement. The petitioner contends that the scope of Clause 11.5 extends to governing every acquisition of shares in the Company, whether or not the selling party is a Vendor or somebody who was a third party to the 1988 Agreement. I find myself unable to construe Clause 11 in the manner which the petitioner desires. The headnote to the clause is "Disposal of Shares by Vendors". However this adds little because Clause 1.2 prescribes that clause headings are for ease of reference only and not to affect construction of any provision. However, looking to the content of Clause 11 I am left in no doubt that the clause is only intended to regulate the acquisition of shares from Vendors. First I find no help in the petitioner's contention that the reference in Clause 11.5 is a general reference to shares and that there is no reference to "sale shares". The only shares covered by the definition of "sale shares" are those sold pursuant to Clause 2 and that clause relates to shares which are the subject of direct purchase under that clause. Secondly, it would be on the face of it odd if parties to the Agreement were to make provision which could affect third party members over whom they had no control. Indeed equitable considerations would arise if a third party who was

As I have already indicated, by 25 August 1999 706 shares of the Company were registered, not in the names of Vendors, but in the names of persons who were wives of Vendors. That is what the petitioner avers. According to the petitioner's averments on 25 August 1998 the transfer of 902 shares in favour of the respondent was approved by the Company. However, at the beginning of the series of transfers approved to achieve this result 706 of these shares were registered in the names of wives of parties who had originally been Vendors.

The question arises as to whether any transfers from a Vendor's wife to the respondent is a breach of the 1988 Agreement. I have difficulty in seeing how such a transfer can be said to be prohibited by that Agreement. As I have said the Agreement itself only imposes restrictions on the acquisition of a Vendor's shares. Senior counsel for the petitioner seemed to suggest that share transfers by wives of Vendors can, in an equitable context, scarcely have been distinguished from sales by the Vendors themselves. I cannot accept this. The petitioner does not aver that the wives' interests were purely as nominees. Indeed nothing at all is averred as to the circumstances of the transfers which must have occurred from the Vendors to their wives. There were vague suggestions that these transfers may have been connected with tax considerations. If so, it cannot be supposed that transfers of beneficial interests might not have been required. Moreover, transfers of 706 shares are not at first sight the number of shares one might expect to have been transferred just to secure a qualifying interest in some respect or another. All in all I have no occasion to suppose that the shares registered in the names of wives were not beneficially and freely owned by them. Once a transfer from a Vendor to his wife is allowed, without exercise by the Purchasers of any power they had under Clause 11, the shares in question for all practical purposes escape the protective net sought to be created by Clause 11. That clause does not provide for equal acquisition of shares which are not Vendors' shares. Nor are the wives restricted as to whom they offer the shares to should it be their wish to sell them.

It must be noted that section 459 only extends to conduct of the Company's affairs. Thus the execution by the wife sellers of share transfers in favour of the respondent is not "conduct of the Company's affairs". It is a private transaction quite independent of the Company.

Of course once the share transfers are presented by the transferees to the Directors for registration the approval of such registration would be part of the conduct of the Company's affairs (although the detail of the conduct of the Company forming the basis of the petitioner's petition is nowhere spelt out in the pleadings). Assuming, however, that the registration by the Company of the transfers is the conduct complained about, when the Directors considered these transfers they would be entitled to conclude that they were not covered by the 1988 Agreement. Looking to that Agreement they would have no occasion to refuse to register the shares. It may be the Company's function to take account of agreements between the members as to how the Company's affairs should be conducted. However, this must be limited to observance of the terms of such agreement. The Directors have no power to adjust or extend the contracts entered into by private parties. Thus looking solely to the 1988 Agreement the Directors cannot be said to have acted unfairly in registering the 706 shares which they were entitled to concluded were freely at the wives' disposal. With regard to the suggestion that Messrs Marr, MacDonald and Harvey in some ways violated their fiduciary responsibility, although this is hinted at in argument, it is not raised and specified in the pleadings. Indeed it would appear that Mr Harvey was not even present at the meeting on 25 August.

With regard to the remaining 206 shares different questions arise. Most significantly the petitioner can only succeed if the conduct by the company was "unfairly prejudicial". However, the gravamen of their case in this regard is that the respondent has acquired control of the Company. However, even if the 206 shares are ignored the acquisition of 706 shares from the wives was sufficient to give the respondent a majority shareholding. If the petitioner has lost control of the Company without recourse it is unclear what prejudice it could have suffered by not securing a half share of the 206 remaining shares. Certain the adverse trading conditions which the petitioner complains of (if relevant at all which is doubtful) would arise irrespective of the 103 shares it may have lost. The petitioner claims that the acquisition of 902 shares by the respondent will diminish the value of its remaining shareholding. However, the same consideration may not apply in relation to the 103 shares. Indeed to obtain the 706 shares (which would give a controlling interest) the respondent may have had to pay a high price. It is not at all obvious that the petitioner would want to pay the same price for 103 shares when the acquisition of these shares would leave the petitioner still with a minority holding. Thus the petitioner has no averments to support prejudice if any entitlement to acquire shares is limited to 103 shares. In any event, in the whole circumstances, the exercise of any remedy in breach of contract which might be available to the petitioner might be a more sensible remedy than any limited remedy that might be available under section 459 (which remedy is not going to resolve the petitioner's real problem in any event).

It should be noted that the 1988 Agreement confers on the Purchasers a pre-emptive option to purchase their quota of shares. It does not bind them to exercise this option, even if this is required to maintain equality of shareholding.

There of course remains the question of the alleged informal agreement in 1987. The petitioner's averments purportedly defining that agreement are decidedly ambiguous and scanty. Whatever the precise terms of what was allegedly agreed in 1987 the pleadings seem to suggest that this was related to the acquisition of 1,342 and 1,343 shares which "proceeded on the basis" of that informal agreement. Then there is reference to the allegation that "this" equality of holding was to be the basis on which the petitioner and respondent were to conduct their relationship with the Company and inter se. That averment seems to refer to the equality of holdings which had been completed as a result of the 1987 understanding. Whatever was agreed in 1987 it would be difficult to maintain that this agreement was more than a personal commercial agreement between the parties. At that time it could not have been intended to regulate any actings of the Company because the parties were not even shareholders and the shares which were acquired on the basis of that agreement did not constitute a majority of the Company's shares, even when added together. At what point of time the 1987 Agreement is said to have changed character so that it could be said it had altered the rules governing the conduct of the Company's members is not made plain. Then, of course, the 1988 Agreement was entered into. If share acquisitions followed the 1988 Agreement then at least to the extent that they were sales by Vendors that would mean that they would be attributable not to any informal agreement in 1987 but to the terms of the 1988 Agreement. There was clearly a relatively small parcel of shares acquired by the Purchasers other than shares sold by the Vendors, but the petitioner tells us nothing as to the circumstances surrounding the acquisition of these shares. Furthermore, the petitioner does not specify the dates of the acquisitions relied upon to boost the proposition that the parties had an informal agreement. If these acquisitions pre-dated the sale of shares by Vendors to non-Vendors the fact that the petitioner chose not to exercise rights under the 1988 Agreement in respect of these shares may well have been taken as a signal that the petitioner was no longer insisting or maintaining equal division (that is if I am right in holding that the acquisition of shares by wives of Vendors liberated the shares from the scope of the pre-emptive agreement). The management shareholders transferring shares to their wives are not said to have known about an informal 1987 Agreement so that they may well have assumed that the only pre-emption rights attaching to these shares arose under the 1988 Agreement. It is difficult to accept that any informal agreement which could emerge from the framework pleaded by the petitioner would have been understood by the parties to be aimed at regulating the conduct of the Company's affairs. On the other hand the Agreement may well have been intended to create a contract between the petitioner and respondent which could be enforced under the normal contractual remedies. The informal agreement is not said in any way to have involved the management shareholders who were allowed to remain in effective control of the Company. The informal agreement apparently contained no reference to the registration of shares by the Company but only to the acquisition of these shares. There is no machinery stipulated for the supposed equal acquisition of shares such as is found in Clause 11. On 25 August 1988 the Directors attending the Board Meeting decided to register the share transfers tendered to them at the meeting. Can it be said that by exercising their duty under the Articles to register the transfer of fully paid shares they violated some agreement superimposed on the Articles? The holders of the 706 shares in the name of wives were entitled to sell these shares as they pleased. In that regard they

With regard to the matter of prejudice flowing from the alleged breach of the 1987 Agreement if I am right that at best only 206 shares would be covered by that Agreement, my observations as to prejudice in relation to the 1988 Agreement would be equally applicable to the 1987 Agreement. Indeed once it is clear that the respondent has acquired 706 shares any equality of acquisition expected under the 1987 Agreement is in fact lost to it.

All in all I consider that, whether under the 1988 Agreement or under the alleged 1987 Agreement, could not establish a case giving rise to an entitlement to an order under section 459.

I should perhaps add that I was not impressed by the respondent's argument that to order a sale by the respondent to the petitioner of any shares they should have acquired would be inappropriate since it would lock the parties into a stalemate position. If there were an agreement aimed at achieving just that result, and if the Company could be said to have acted unfairly, then the respondent could scarcely complain if the situation is restored to what should in the first place have happened. However, the need for considering the terms of an appropriate section 459 order does not arise. In the circumstances I shall refuse the petition.