Introduction

Disputes between directors and shareholders disrupt the running of otherwise successful businesses. New businesses and start-ups naturally involve the directors and shareholders shared enthusiasm for the project and willingness to take a risk. It is later, when disagreements occur about the direction that a company should follow, that problems arise.

A powerful remedy for shareholders is a section 994 petition. This allows a minority shareholder to petition the court if the affairs of the company are being run in a way which is ‘unfairly prejudicial’ to their interests. The court has a wide range of remedies, but the normal order is for a sale or purchase of shares at a fixed price.

Five recent cases have provided important lessons and guidance for shareholders and directors about what to do when a company is being run against your interests. In this series, Alex Pritchard-Jones and Harrison Burroughs explain the key points of each case.

Minority Discount / don’t build your own house with company money: Mantir Singh Sahota vs Albinder Singh Sahota and others [2024] EWHC 2165 (Case)

This recent case demonstrates the importance of understanding the difference between personal and business relationships between shareholders and directors, as well as the issue of minority discount and fairness being dependant on the intricacies of each case.

Mantir Singh Sahota (‘Mantir’) was part-owner and director a business as a quasi-partnership alongside his four brothers, Albinder Singh Sahota (‘Jitha’), Jurloden Singh Sahota (‘George’), Jagdishan Singh Sahota (‘Harvey’) and Jan Singh Sahota (‘Jan’). Amongst the numerous complaints mentioned in his s.994 petition were the withholding of financial information, the exclusion of Mantir from the running of the company and the misappropriation of company assets by Jitha in using them to build his own house.

The High Court ordered that that Jitha should purchase Mantir’s shares from him as he was considered responsible for both treating Mantir unfairly and in a prejudiced manner in terms of his position as company director, despite proof of much of the brothers’ reply that Mantir repeatedly exhibited bullying and violent behaviour. However, Jitha, and not Mantir, was ultimately judged to have destroyed the mutual trust and confidence in the quasi-relationship through his behaviour.

A minority discount was not applied, partly because Jitha was considered responsible for the breakdown in trust and confidence between Mantir and the brothers. It would not have been fair to punish Mantir economically when his brother was considered guilty of causing the breakdown in the relationship. After Jitha’s forced purchase of Mantir’s shares, he would not be majority shareholder, bringing into question whether the shares were as valuable to him as their market value. However, the remaining brothers, between whom it was adjudged a functioning relationship of trust and confidence still existed, would control the company free of any involvement from Mantir. Therefore, a minority discount was considered inappropriate by both the judge and the responding brothers’ own accountant as Jitha, and by extension the other brothers, would fully benefit from the control of those shares.

The following points should be drawn from this judgement:

  1. The issue of the minority discount demonstrates the subtleties when dealing with the intricacies of relationships between all the directors and shareholders. Despite Jitha appearing to have potentially been treated unfairly by the court, in that his purchase at full value of Mantir’s shares did not grant him a real increase in power within the company, the working relationships between him and the other three brothers meant that it in fact allowed the four remaining brothers complete control and the removal of a problematic shareholder (Mantir), offsetting the issue of Jitha’s minority shareholding and allowing the court to rule against a minority discount without the risk of being unfair to Jitha.
  2. Despite much of the petitioner’s evidence being considered dishonest and unreliable, the synthesization of evidence from other parties demonstrates that his treatment should be considered unfair and prejudiced notwithstanding the issues with his own witness account.
  3. Despite Mantir’s problematic behaviour and strained personal relationships with his brother’s being evidenced more than twenty years prior to the petition, careful examination shows that the fundamental relationship of trust and confidence was functioning up until far more recently and was begun by Jitha’s behaviour, namely the construction of his house with company materials and the subsequent attempts to cover this up. This demonstrates that although personal relationships are important in matters such as an s.994 petition, a parallel between them and professional relationships should not be assumed.