University of Law: Corporate Law Casenote on O'Neill v Phillips [2020]

This case note provides a comprehensive analysis of the landmark case of O'Neill v Phillips [1999] 1 WLR 1092 (HL), focusing on its significance within corporate law and governance. The case involved a dispute between a minority shareholder and the majority shareholder, highlighting issues of unfair prejudice. The analysis delves into the facts of the case, the House of Lords' decision and reasoning, and the impact the ruling has had on the unfair prejudice remedy under Section 994 of the Companies Act 2006. The case note examines the implications for minority shareholder rights, derivative actions, and corporate governance, demonstrating the case's lasting influence on the balance between majority rule and the protection of minority interests. The document includes a discussion of the facts, the court's rationale, and the case's wider implications, alongside a conclusion summarizing the key findings and the case's enduring relevance.

Corporate law and governance

ASSESSMENT I: CASENOTE 1
Introduction
The case law namely “O’Neill v Phillips [1999] 1 WLR 1092 (HL)” is one of the most
renowned case laws concerning the Section 994 of the Companies Act 2006. It is important to
note that a company is comprised of various stakeholders, some of which are members who
hold the shares in various proportions for the contribution of capital for the functioning of an
enterprise. One of the major issues that ascends in company law is related to the degree of
indifference between the dealings of majority shareholders of a company to the minorities.
The section provides for the remedy to the minority shareholders of a company against the
unfair conduct purported by the majority shareholders of the company. Thus, the case is one
of the most significant cases regarding the provision of remedy against unlawfully prejudicial
conduct of the major shareholders of an entity. The work would highlight the facts of the
case, decision and reasoning behind the case, and the overall impact on the corporate
cultures. Lastly, the work would involve a conclusion to provide an overall summary of the
discussion.
Facts of the case
The segment would elaborate the material facts that formed the part of the case in the lights
of the issues in the majority and the minority shareholders. The company Pectel Limited had
an only shareholder Phillips and was chiefly engaged in the business of the stripping out the
asbestos from the buildings. With an aim to secure the professional management the company
had appointed O’Neill as a manual worker of the company in the year 19831. Impressed with
the performance of O’Neill, he was then further promoted to foreman, supervisor of the site,
followed by the contract manager. Later he was entrusted with the responsibility of the day to
day management of the company and was allotted 25 percent of the shares of the company.
The company further introduced the provision of profit sharing in the business to O’Neill to
the tune of 50 percent in the year 1985. In addition, O’Neill was appointed as the de facto
managing director of the company post the retirement of Phillips from the management of the
company. In the year 1991, the company witnessed hard times in the form of the recession in
the construction industry and the business conditions turned adverse for the company Pectel
Ltd. The result of which was that Phillips resumed the control of the company and terminated
the profit sharing agreement with O’Neill. Thus, it was proposed that O’Neill would only be
1 'House Of Lords - O'neill And Another V. Phillips And Others' (Publications.parliament.uk, 2020)
<https://publications.parliament.uk/pa/ld199899/ldjudgmt/jd990520/neill01.htm> accessed 15 January 2020.

ASSESSMENT I: CASENOTE 2
entitled of the salary and the dividend payments. In response to the said repudiation of the
contract, an appeal was filed with the courts by O’Neill stated to the unfair prejudicial
conduct of Phillips. In addition, a notice was given to terminate the contract of guarantee of
the bank account in the name of O’Neill, which stood at credit at that time. Further, the
arrangements were made by O’Neill regarding the setting up of a competing business to that
of the company. The further response of Phillips was the reduction of the position of O’Neill
together with the termination of the profit sharing contract. The petition was filed under the
section 459 and a claim for damages was made in response to the violation of the oral
agreement of profit sharing and allotment of further shares.
Decision and Reasoning
The following segment is descriptive of the decisions taken by the House of the Lords and the
explanation of the rationale behind the same. The hearings of the court was concentrated on
two complaints stated as follows. The first complaint was that the agreement to allot further
shares was terminated. The second complaint was that the equal profit sharing agreement was
later on terminated by one of the parties. In the first rounds of hearings, it was held by the
courts that an unconditional commitment was not initiated by Mr Phillips regarding the profit
sharing, and in the event of change of business circumstances to the adverse, Mr Phillips
being the controlling shareholder of the entity possessed the rights to modify the
responsibilities and the remuneration of O’Neill2. There was no conclusive evidences were
present regarding the promises made by Phillips and therefore the powers exercised by Mr
Phillips were not unfair on being the holder of the majority shares of the company. The
additional grounds for dismissing the said petition initially was that the profit sharing
arrangement made by the company was in the capacity of O’Neill as the member of the
enterprise, in exchange of the valuable services and not the shareholder.
However, an absolute contrasting decision was passed by the House of the Lords in the Court
of Appeal. It was held by the House of the Lords in the form of the differentiating decisions
that the prejudice conduct was initiated against O’Neill and that the conduct of Phillips was
unfair in the situation3. It was held by the court of appeal that though there was an absence of
a conclusive agreement between Phillips and O’Neill regarding the issue of more shares, yet
2 'O'neill And Another V Phillips And Others; In Re A Company (No 00709 Of 1992): HL 20 May 1999 -
Swarb.Co.Uk' (swarb.co.uk, 2020) <https://swarb.co.uk/oneill-and-another-v-phillips-and-others-in-re-a-
company-no-00709-of-1992-hl-20-may-1999/> accessed 15 January 2020.
3 'A QUICK LOOK AT… O’NEILL V PHILLIPS [1999] 1 W.L.R 1092 | Association Of International
Accountants' (Aiaworldwide.com, 2020) <https://www.aiaworldwide.com/international-accountant/editors-
blog/quick-look-%E2%80%A6-o%E2%80%99neill-v-phillips-1999-1-wlr-1092> accessed 15 January 2020.

ASSESSMENT I: CASENOTE 3
there existed a legitimate expectations on the part of O’Neill regarding the receipt of the said
profits and the shares, on the achievement of the certain targets. Hence, it was held that it was
unfairly prejudicial to deny the expectations of O’Neill in the absence of the notice to the
same, an offer to buy the shares at the fair value and an opportunity to defend the situation.
The phrase that was significantly used in the decision of the House of the Lords was that
O’Neill was “forced out of the entity Pectel Ltd.” The fact that he was denied of the profits
and the thus the legitimate expectations, he was forced to engage himself in some other things
or businesses. Thus, the first reason of the initial judges was rejected by the court of appeal in
the form that there were sufficient reasons to believe the existence of an agreement.
Further, the second grounds of initial rejection of the appeal of O’Neill were also turned
down by the courts of appeal. It was stated by Nourse L. J. that there needed a broad view of
the interests of the members of a corporate. A very significant pronouncement that was held
by the court was that a member of the company, who is the subscriber of the shares of the
company in the light of the understanding of the participation in the management of the
enterprise, can also be interested in the form of the benefits attached to the membership rights
of the company even when there is no specific attachment of the benefits to the rights as per
the articles of association of the company. Thus, a more global view of the situation and the
rights was undertaken by the judges of the Courts of Appeal in the light of the prejudice
arising from the share allocation arrangements and the termination of the profit-sharing
agreement.
Impact
The case law of O’Neill v Phillips is considered as one of the most significant decisions in the
corporate environment globally. The said case law has been formed a vital base and has been
cited in a number of other case laws as elaborated as follows. It is a significant thing to be
noted that the rights of the members of the company vary as per the types of the shares
acquired by the individuals. Often the minority shareholders of the company are dissatisfied
by the controlling decisions of the majority shareholders. The case law and the decision is
aimed at paving the way to the creation of an optimum balance between the safeguarding of
the rights of the minority shareholders and the principle of the majority rule as was
established in the Foss v Harbottle4. It is a general understanding that the minority
shareholders in the company are particularly in a weaker position because of the lack of the
4 Foss v Harbottle (1843) 67 ER 189

ASSESSMENT I: CASENOTE 4
control in the management. The significance of the derivative action has been well
highlighted in the judgement of the stated case. Earlier the decisions were majorly relied on
the Foss v Harbottle, and the derivative actions could only be filed when the case
circumstances had fallen within the ambit of exceptions of the Foss v Harbottle. The case law
of O’Neill v Phillips has significantly improvised the ambit of the scope of the derivative
actions. It was specifically stressed in the case in question that it would be insufficient to
narrowly construe or technically construe the qua member requirements. The concept of the
rights of the members need to be studied not only in light of the legal definitions but also the
circumstances of the case which may vary from one situation to other. It has been understood
with the aid of the case law that the interests and rights are not limited to the statutory rights
only and would include the legitimate expectations of the shareholders or the stakeholders.
The final impact can be stated in the form that the case has paved the way for the improved
corporate governance requirements and have widened the scope and efficiency and the
management of the enterprise. Thus, it would be right to state that the rights and interests of
the members of the company must not be strictly studied in the legal context itself and must
be understood with reference to nature of the company and the understandings of the
company along with the members and the nature of the agreements therein
Conclusion
The discussions conducted in the previous parts have enabled to reach the conclusion that the
issues of the interests of the minority and the majority shareholding and the differences in the
interests are one of the significant issues in the corporate environment. The work introduced
the facts of the case to develop an understanding of the judgement and the reasoning behind
the same. It has been understood that while rights and the benefits of the de facto director
O’Neill had wider ambit initially, the same were reduced and terminated in the event of the
adverse times of the company to which the former objected and filed the petition. The
decisions of the courts have been explained in detail in which it is learned that Courts of
Appeal ruled out the initial decision and laid down a significant decision which formed the
base for the later cases. It has been later elaborated in the work that the pronouncement in the
said case has formed a significant base for the later judgements and has played a phenomenal
role in the preservation of the rights of the minority shareholders. Hence, it can be concluded
that the case law is a major case in the corporate environment globally.

ASSESSMENT I: CASENOTE 5
Bibliography
Case Law
Foss v Harbottle (1843) 67 ER 189
Others
'A QUICK LOOK AT… O’NEILL V PHILLIPS [1999] 1 W.L.R 1092 | Association Of
International Accountants' (Aiaworldwide.com, 2020)
<https://www.aiaworldwide.com/international-accountant/editors-blog/quick-look-
%E2%80%A6-o%E2%80%99neill-v-phillips-1999-1-wlr-1092> accessed 15 January 2020
'House Of Lords - O'neill And Another V. Phillips And Others' (Publications.parliament.uk,
2020) <https://publications.parliament.uk/pa/ld199899/ldjudgmt/jd990520/neill01.htm>
accessed 15 January 2020
'O'neill And Another V Phillips And Others; In Re A Company (No 00709 Of 1992): HL 20
May 1999 - Swarb.Co.Uk' (swarb.co.uk, 2020) <https://swarb.co.uk/oneill-and-another-v-
phillips-and-others-in-re-a-company-no-00709-of-1992-hl-20-may-1999/> accessed 15
January 2020