O’Neill v Phillips is a landmark UK company law case decided by the House of Lords in 1999, which concerns the statutory remedy of unfair prejudice under section 459 of the Companies Act 1985 (now section 994 of the Companies Act 2006). The case is significant because it provides a definitive interpretation of the concept of “unfair prejudice” in the context of shareholder disputes and clarifies the role of “legitimate expectations” within such claims. This brief examines the facts, procedural history, legal issues, judgement, and broader legal principles derived from O’Neill v Phillips.
Facts of O’Neill v Phillips
The facts of O’Neill v Phillips revolve around a private company, Pectel Ltd, which specialised in asbestos removal. Mr Phillips was the sole owner and controller of Pectel Ltd. Mr O’Neill started working for the company in 1983, initially as an employee. Due to his valuable contribution, Mr Phillips made Mr O’Neill a director and gave him 25% of the shares in 1985.
During informal discussions in May 1985, Mr Phillips expressed the hope that Mr O’Neill would eventually take over the entire management of the company and be entitled to 50% of the company’s profits. Over time, Mr O’Neill did assume management responsibilities, and there were further negotiations regarding increasing his shareholding to 50%, but no formal agreement or transfer of shares occurred.
After approximately five years, the construction industry experienced a downturn, which negatively affected Pectel Ltd’s fortunes. Mr Phillips returned to take control of the company, demoted Mr O’Neill to managing the German branch, and withdrew the equal profit-sharing arrangement previously enjoyed by Mr O’Neill.
Feeling aggrieved, Mr O’Neill founded a competing business in Germany and subsequently filed a petition alleging unfairly prejudicial conduct by Mr Phillips. He argued that the termination of equal profit-sharing and the refusal to allot more shares breached his legitimate expectations as a shareholder.
Procedural History
At trial, the judge rejected Mr O’Neill’s petition on both grounds. It was held that there was no binding agreement for the increase in shareholding and that Mr Phillips was entitled to maintain majority control. Furthermore, the judge found that any prejudice suffered by Mr O’Neill was in his capacity as an employee rather than as a shareholder, as his shares and rights remained intact.
Mr O’Neill appealed, and the Court of Appeal overturned the trial decision. Nourse LJ, delivering the leading judgement, recognised that Mr Phillips had created a “legitimate expectation” for Mr O’Neill to receive additional shares and benefit from equal profit-sharing. The Court of Appeal took a holistic view of the relationship between the parties and concluded that Mr O’Neill had suffered prejudice as a member of the company. Consequently, the Court ordered Mr Phillips to buy out Mr O’Neill’s shares at a fair value.
Mr Phillips appealed to the House of Lords, which allowed the appeal, overturning the Court of Appeal’s decision in favour of Mr Phillips.
Legal Issues
O’Neill v Phillips primarily addressed two key legal questions:
- What constitutes “unfairly prejudicial” conduct under section 459 of the Companies Act 1985?
- What is the role and scope of “legitimate expectations” in unfair prejudice claims by shareholders?
The case also considered the capacity in which the alleged prejudice must be suffered to attract relief under section 459 — whether it must be suffered as a member (shareholder) or if prejudice as an employee or in another capacity would suffice.
O’Neill v Phillips Judgement
Lord Hoffmann delivered the leading judgement in O’Neill v Phillips, with which Lords Jauncey, Clyde, Hutton, and Hobhouse concurred. His reasoning remains authoritative on unfair prejudice claims.
Lord Hoffmann emphasised that for conduct to be “unfairly prejudicial” under the statute, it must breach the terms on which a shareholder agreed that the company’s affairs would be conducted or represent an exercise of legal rights in a manner contrary to equitable principles of good faith. The court’s jurisdiction under section 459 is broad, designed to achieve fairness, but this fairness must be grounded in rational and consistent principles rather than being a subjective assessment of what seems fair to the judge.
Regarding “legitimate expectations,” Lord Hoffmann cautioned against allowing the concept to operate independently of traditional equitable principles. He described “legitimate expectations” as a correlative right flowing from equitable restraint on the exercise of legal rights — not a standalone cause for equitable relief. Thus, any expectation must be based on an actual agreement, understanding, or promise, and cannot override the need for formal contracts or company articles.
Applying these principles to the facts of O’Neill v Phillips, the House of Lords held that Mr Phillips had never unconditionally agreed to transfer additional shares or continue equal profit-sharing. The informal expressions of hope or intent during negotiations did not create binding obligations. Mr Phillips’ decision to resume control and terminate profit-sharing was lawful and not unfair.
Additionally, the court rejected the Court of Appeal’s finding that Mr O’Neill was constructively removed from management. He remained a director and employee, and his shareholding was unaffected. Therefore, any prejudice was suffered in his capacity as an employee, which was irrelevant under section 459 that protects shareholders as members.
Lord Hoffmann also acknowledged that had there been a formal agreement or a binding promise supported by Mr O’Neill’s investment of money and effort, the situation might differ. But in the absence of such an agreement, the relief claimed was not justified.
Conclusion
The House of Lords’ decision in O’Neill v Phillips firmly establishes that unfair prejudice claims require a substantive breach of agreed terms or bad faith by majority shareholders. Informal promises or hopes about shareholding and profit-sharing do not, by themselves, create enforceable rights or equitable restraints.
The case also refines the concept of “legitimate expectations,” embedding it within traditional equitable doctrines rather than treating it as a free-standing cause of action. Furthermore, it clarifies that prejudice must be suffered in the shareholder capacity to attract relief.
In summary, O’Neill v Phillips is a foundational case that continues to guide courts, practitioners, and shareholders in understanding the scope and limits of unfair prejudice remedies in UK company law.
