Family law practitioners may recall the reported Inner House appeal case of Foster v Foster [2023] CSIH 35, where Mrs Foster successfully appealed the Outer House decision to refuse to ordain her husband to acquire for value her 50% shareholding in a company operated and controlled by her husband. Mr Foster had unilaterally removed her as a director and excluded her from the business. The decision, at first instance, was predicated on concluding that there were no resources from which to meet the value of Mrs Foster's shares. Mr Foster had not sought transfer of the shares. Lady Carmichael had accepted that he had little prospect of raising the funds personally and that, as the company was not party to the divorce, there was no remedy available to the court to force the "buy back" of Mrs Foster's shares. There was reference to the possibility that, at some point, Mrs Foster might invoke the remedies available to her, as a minority shareholder, under the Companies Acts.
There were very few examples of this being utilised as the method of extracting value from shares until Miller v Miller & 2 others SAC Dec 2024.
Measures under s944 of the Companies Acts 2006
It's not clear why the parties did not address the matter of payment for Mr Miller's shares in the context of a divorce action, but Mr and Mrs Miller were still married. Mr Miller had suffered a stroke in 2016 and his ability to work or communicate was severely impaired. Mrs Miller appointed a new director after that without going through the formal process of seeking his consent. The parties separated in 2018. Mrs Miller "dismissed" Mr Miller as an employee in 2019. They operated a successful estate agency and factors company and were each 50% shareholders. Mrs Miller removed Mr Miller as a director, after she claimed he was spending excessively, and she stopped his salary. She made no effort to acquire his shares in the business. Mr Miller sought an order that Mrs Miller or the company be ordained to purchase Mr Miller’s share in terms of section 994 of the Companies Act 2006. The court possesses broad discretion to issue any order it deems fair and equitable to address the unfair prejudice experienced – just as it does when it determines what constitutes “unfair” and “prejudicial” behaviour. Remedies commonly employed by the court are:
- An order for the majority shareholder(s) to purchase the petitioner’s shares at a fair value and according to terms set by the court
- An order for directors to transfer property to the company that was obtained in breach of their fiduciary duties
- An order compelling or prohibiting the company from taking a specific action – this could involve changes to the Articles of Association
- An order for the minority shareholder to acquire the majority shareholder’s shares
- An order for the company to be wound up (liquidated)
Unfair prejudice
The Sheriff had found that Mr Miller had been unfairly prejudiced by Mrs Miller's actions.
On appeal Mrs Miller argued the Sheriff erred in finding that it was unfair for Mrs Miller to insist on the continuance of their association as members of the company. There had not been any breach of Mr Miller’s legitimate expectations as a member. Unfair prejudice required both prejudicial conduct and unfairness, and both elements were not present. Mr Miller was no longer fit to conduct the business and the Sheriff had ignored the reality that Mr Miller could no longer work and had no equal claim to remuneration.
The Appeal Court upheld the findings that the affairs of the company had been carried out in an unfairly prejudicial manner in a number of respects. Mr Miller was unlawfully removed as a director. He was unlawfully excluded by Mrs Miller, as well as precluded by ill-health, from participation in significant affairs, from the daily running and management of the company, and from significant decisions such as dividends, fixing remuneration, changing employment status and dismissal of directors. The attempted distinction, between actings and illness, did not recognise that these findings were cumulative, or that illness was not capable of excusing conduct, which removes personal and patrimonial interests such as dividends or remuneration. Mr Miller’s inability to work did not justify being stripped of his rights in the company.
It was observed that non-participation did not equate to consent to decisions against his own interests. Mrs Miller and Mr Stewart conducted the company business in breach of the articles, in disregard of Mr Miller’s interests, and to the benefit of their own. The appeal was refused.
Which pathway to choose?
Foster highlights the restrictions which bind the court in an action for divorce. The company is not party to the action and the court has no power to make any orders against the company. Where the resources sit in the company and not with the individuals, parties often rely on the party acquiring the shares, recognising it can be more tax efficient to conduct a company buy back of the other party's shares and agree this extra judicially.
In Foster, there were a number of conduct factors which were taken in to account in the Appeal Court decision which led to Mr Foster being ordained to make payment for Mrs Foster's shares, including the fact that she had had to seek protective orders which meant they would never work together and recognising the stark reality that post-divorce he could continue to dilute and undermine the value of her shares if she was not paid value for them in the divorce.
It's a tricky choice between a section 944 remedy and that under the 1985 Act but awareness of the Companies Act remedy is critical for any family law practitioner. The family courts hold a broad discretion in the orders it can make against a party including that they acquire and pay value for shares in circumstances where relations between married shareholders have soured. The Companies Act allows such an order to be made against the company, the other shareholder or to wind up the company but the test of unfair prejudice requires to be met.
