312 Chapter 11Companies (2): Management, control and winding up
In O’NeillvPhillips (1999)Lord Hoffmann gave the only judgment of the House of Lords
and considered unfair prejudice in considerable detail. He made the following points:
(1) Although fairness was the criterion on which relief under s. 994 might be granted, and
although the court has a wide power to do whatever it considers just and equitable, the
concept must be applied rationally and upon judicial principles.
(2) In deciding what is fair, the context and background will be extremely important.
(3) Generally, members will be bound by the articles, as these were the terms on which
they agreed that the company’s affairs should be conducted. However, equitable prin-
ciples might make it unfair to rely strictly on the articles in a way which equity would
regard as contrary to good faith.
(4) The way in which equitable principles are applied is reasonably well settled. These
should not be abandoned in favour of some uncertain notion of fairness.
(5) Conduct can be unfair under s. 994 even if it would not be sufficient to wind the
company up.
(6) In deciding whether conduct is unfair, it should be asked whether the exercise of the
power complained of is contrary to what the parties agreed, either by words or conduct.
(7) In quasi-partnership companies what was agreed will usually be found in the under-
standings between the members when they entered into association. Promises
exchanged in quasi-partnership companies should be binding as a matter of equity
even if they are not binding as a matter of law.
(8) Breaching a promise or undertaking is not the only ground on which unfair prejudice
may be founded. An analogy could be made with frustration of a contract (see p. 141).
The majority might use their powers in a way which the minority can reasonably say
that they did not agree to. This might allow winding up of the company or it might
afford a remedy for unfair prejudice.
(9) The majority must not use their powers, in breach of equitable considerations, when
the articles do not contain the fundamental expectations of the shareholders. For
example, if members have entered the company on the understanding that they have
all put in capital and will all manage the company, equitable considerations would
require that this agreement would be honoured or that a member would be able toRe HR Harmer Ltd (1958) (Court of Appeal)Harmer had a successful business dealing in postage stamps. He formed a company to
take the business over. His two sons were, like him, life directors. Harmer retained voting
control of the company although his sons held most of the shares. When Harmer was 88
his sons asked the court for relief on the grounds that he completely ignored their wishes,
running the company as if he still owned all of it. He had made bad business decisions,
employed private detectives to watch the staff and countermanded resolutions passed by
the board.
HeldThe court ordered that Harmer should be made president of the company for life
(without any special powers) and be paid a salary. They also ordered him not to interfere in
the company’s business otherwise than in accordance with the valid decisions of the board
of directors.