Can Broken Promises Between Shareholders Lead to an Unfair Prejudice Claim? Lessons from O’Neill v Phillips

Many shareholder disputes begin not with a breach of a shareholders’ agreement, but with a promise. A third party may have been promised a shareholding, a future leadership role or ongoing involvement in the management of a business. But what happens when those promises are not met?

The landmark House of Lords’ decision in O’Neill v Phillips remains one of the most important cases in unfair prejudice petitions because it examines when a broken promise may amount to unfair prejudice and when it is simply an unmet expectation.

For a more in-depth look at unfair prejudice claims, explore our separate guide to unfair prejudice claims.

A background to the O’Neill v Phillips case

The dispute arose from a business relationship between Mr O’Neill and Mr Phillips.

Mr Phillips owned a successful asbestos-removal business and brought Mr O’Neill into the company, initially as a manual worker. As the business grew, Mr O’Neill was given management responsibilities. Mr O’Neill excelled in that position and he was eventually appointed director and gifted 25 shares by Mr Phillips. Mr Phillips had informally discussed his wish that Mr O’Neill eventually take over the company’s day-to-day running and could draw 50% of the company’s profits. Mr O’Neill did eventually take over running of the business as sole director when Mr Phillips retired from the board.

The company prospered during the late 1980s construction boom, and discussions took place about Mr O’Neill obtaining a 50% shareholding in the company. Solicitors, accountants and counsel became involved and draft documents were prepared. However, no final agreement was ever concluded.

When economic conditions deteriorated and the company’s performance suffered, the relationship deteriorated. Mr Phillips withdrew from the arrangement that would have seen Mr O’Neill acquire a total shareholding of 50% in the company, and resumed control of the business.

Mr O’Neill subsequently argued that Mr Phillip’s conduct was unfairly prejudicial and sought relief from the court, under what was then a petition under section 459 of the Companies Act 1985 (now section 994 of the Companies Act 2006).

The court’s decision

Following appeals, the House of Lords finally rejected Mr O’Neill’s claim, with Lord Hoffman providing the leading judgment.

The court held that disappointment alone is not enough to establish unfair prejudice. Instead, there must be conduct that is unfair when judged against the legal rights and obligations that govern the relationship between the shareholders.

In practical terms, the courts will not usually intervene simply because a shareholder expected something to happen and it did not. Shareholders cannot simply point to an expectation that did not materialise and assume they have a claim.

Mr O’Neill ultimately failed because the House of Lords concluded that there was no binding agreement giving him a right to acquire additional shares and no enforceable entitlement to continue receiving half of the company’s profits. While negotiations and proposals had taken place, the court found that they never crystallised into a concluded agreement.

There must usually be a breach of legal rights, binding commitments or established understandings forming part of the basis upon which the parties agreed the company would be run.

Key point: A disappointed hope or aspiration alone is unlikely to be enough.

What counts as unfairness in an unfair prejudice claim?

One of the reasons O’Neill v Phillips remains so influential is that it provides guidance on the meaning of unfairness in shareholder disputes.

The House of Lords confirmed that unfairness will often arise where there has been:

• A breach of the company’s articles of association.
• A breach of a shareholders’ agreement.
• A breach of directors’ duties.
• A departure from the basis on which the parties agreed the company would be managed. 

However, the court also recognised that private companies are not always governed entirely by formal documents. In some situations, equitable considerations may arise because of the nature of the relationship between the shareholders. Lord Hoffmann acknowledged that behind every company are individuals with rights, expectations and obligations that are not always fully reflected in company paperwork.

That is where the concept of legitimate expectations becomes important.

What are legitimate expectations in unfair prejudice?

Legitimate expectations are one of the most significant concepts in modern unfair prejudice law.

In the context of shareholder disputes, a legitimate expectation may arise where shareholders have operated the company on the basis of shared understandings about how the business will be run.

Examples might include:

• An expectation that all shareholders will participate in management.
• An expectation that founders will remain directors.
• An expectation that shareholders will share in profits in a particular way.
• An expectation that important business decisions will be made collectively.

However, O’Neill v Phillips is just as noteworthy for what it did not say.

The decision does not mean every expectation becomes legally enforceable.

The expectation must have a proper foundation. It cannot simply be a personal hope, an assumption about the future, or a proposal that never became binding.

This remains one of the most important hurdles in unfair prejudice litigation.

How can a shareholder agreement help protect shareholder interests?

The case highlights the dangers of relying on informal understandings.

Many shareholder disputes arise because important arrangements were discussed but never properly documented.

For example:

• Future ownership percentages were agreed in principle, but never formalised.
• Succession plans were discussed, but not recorded.
• Management arrangements were assumed rather than documented.
• Exit provisions were never included in a shareholders’ agreement.

Had the parties in O’Neill v Phillips reached and documented a binding agreement regarding share ownership, the outcome may have been very different.

For business owners, one of the clearest lessons from the case is the importance of having a well-drafted shareholders’ agreement that records key commercial arrangements before relationships begin to deteriorate.

Explore our shareholder agreement service page to discover how Napthens can help draft documents to protect you.

How a “fair exit offer” can help shareholders avoid the courts

Commentary around O’Neill v Phillips focuses almost exclusively on the unfairness in unfair prejudice claims and legitimate expectations. One aspect overlooked is a principle key to modern shareholder disputes – fair exit offers.

The House of Lords recognised that where a shareholder makes a genuinely fair offer to buy another shareholder’s shares, it may remove the need for a court to intervene.

This principle later developed into what practitioners commonly refer to as an O’Neill v Phillips offer. A respondent to an unfair prejudice petition may seek to make such an offer to purchase the petitioner’s shares. This may satisfy the courts to the extent they see no further need to continue litigation and strike out the petition.

Lord Hoffman considered a reasonable offer will usually involve:

• An offer to purchase the shares at a fair value. In some cases, that offer may provide for a minority discount to be applied. In others, no discount should be applied.
• If the value cannot be agreed, the valuation should be determined by a competent expert.
• The value should be determined by the expert as an expert, without requiring the expert to provide reasons (“The objective should be economy and expedition, even if this carries the possibility of a rough edge for one side (or the other)… compared with a more elaborate procedure”).
• The offer should provide equality of arms between the parties, with both afforded the same right of access to information about the company which bears on valuation, and both should have the right to make submissions to the expert in such manner as the expert determines.   
• The offer should also consider the question of costs, and whether to make any offer and, if so, on what terms.

In many modern shareholder disputes, the availability of a fair exit mechanism remains a key factor when parties are considering commercial litigation.

Practical lessons for shareholders

The principles established in O’Neill v Phillips remain highly relevant for modern businesses.

If you are a shareholder, consider the following:

1.      Put important arrangements in writing

Informal understandings can be difficult to prove and even harder to enforce.

2.      Review shareholder agreements regularly

Businesses evolve over time and documentation should evolve with them.

3.      Do not rely solely on verbal promises

The stronger the evidence of a binding commitment, the stronger the potential claim if that commitment is not met.

4.      Seek advice early

Many shareholder disputes begin as management disagreements before escalating into significant legal and commercial conflicts.

Final thoughts

Disputes between shareholders are rarely just about company law. They are often rooted in personal relationships, trust and expectations that have developed over many years.

As O’Neill v Phillips demonstrates, not every broken promise will give rise to an unfair prejudice claim. The key question is whether the conduct complained of represents a departure from the legal or equitable basis on which the company relationship was founded or since been established.

If you have been excluded from management, denied a promised role in the business, frozen out of decision-making, or are involved in a dispute concerning shareholder rights, early legal advice can be critical.

Our specialist shareholder dispute solicitors advise business owners, directors and shareholders on unfair prejudice petitions, shareholder exits, deadlock disputes, derivative claims and negotiated buyouts.

To discuss your situation, contact us today via our form to get in touch with our shareholder disputes team for clear, practical advice tailored to your circumstances.

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