O'Neill v Phillips (1999) UKHL 24 is a significant UK company law case that deals with the concept of members of a business having their legitimate expectations disappointed and the action for unfair prejudice under section 459 of the Companies Act 1985 (now section 994 of the Companies Act 2006). The case revolves around the facts of the relationship between O'Neill and Phillips in the context of their ownership and management of a company called Pectel Ltd, which specialised in asbestos removal.
Phillips, the owner of Pectel Ltd, gave O'Neill 25% of the company's shares in 1985 and expressed his hope that O'Neill would eventually take over the management of the company and receive 50% of its profits. However, after several years, the construction industry declined, and Phillips took back control of the business, demoting O'Neill and withdrawing his share of the profits. O'Neill, feeling unfairly treated, started his own competing company in Germany and filed a petition for unfairly prejudicial conduct against Phillips.
At first, the High Court rejected O'Neill's petition on both grounds. It was held that there was no firm agreement for an increase in shareholding, and it was not unfair for Phillips to maintain a majority of the company's shares. The judge also argued that O'Neill had been well rewarded, and the dispute was primarily about his status as an employee rather than a member.
O'Neill appealed. The Court of Appeal ruled in his favour, finding that Phillips had created a legitimate expectation in O'Neill's mind about acquiring additional shares in the future. The Court of Appeal took a global view of the relationship, asserting that O'Neill had suffered as a member of the company.
Phillips appealed. The House of Lords subsequently overturned the Court of Appeal's decision. The leading judgment was given by Lord Hoffmann, with concurrence from several other Lords. Lord Hoffmann made several key points:
- Unfairly prejudicial: Section 459 of the Companies Act focuses on fairness as the criterion for deciding whether a court has jurisdiction to grant relief. It was established that this concept of fairness must be applied judicially and based on rational principles. The concept of fairness may vary depending on the context. For instance, what is fair in a family business may differ from what is fair in a business involving unrelated shareholders.
- Equitable principles: The House of Lords held that company law had evolved from partnership law, which was based on principles of good faith. These principles were carried over into company law, and a member could not ordinarily complain of unfairness unless there was a breach of the terms on which they had agreed to conduct the company's affairs.
- Legitimate expectation: The use of the term 'legitimate expectation' was criticised, as it introduced a new label for a concept already defined by established principles of equity. It was clarified that this concept should not lead to new, undefined notions of fairness.
- Was Phillips Unfair?: Lord Hoffmann stated that it would have been unfair for Phillips to use his voting powers to remove O'Neill from the management without allowing him to sell his shares at a fair price. However, since Phillips had not made an unconditional promise to allocate more shares to O'Neill, there was no basis for the court to hold that he acted unfairly in withdrawing from the negotiation.
- Capacity in which prejudice is suffered: The House of Lords addressed the question of whether the prejudice was suffered in the capacity of an employee or shareholder. It was noted that the capacity in which prejudice was suffered could vary based on the circumstances. In the case of O'Neill, it was suggested that his capacity might have evolved from an employee to a shareholder due to his investments in the company. However, no promise had been made to allocate more shares.
In summary, the House of Lords held that Phillips had not acted unfairly, as he had not made any promises regarding the allocation of additional shares, and there was no basis in law or equity to impose such an obligation on him. The case underscores the importance of clear agreements and the context in which relationships and expectations are formed within a company.
You can learn more about this topic with our Company Law notes.