Unfair Prejudice Claims – A Short Overview
What is unfair prejudice?
Unfair prejudice materialises where one or more minority shareholders have their interests infringed (prejudiced) by a majority shareholder, and often occurs when the majority shareholder has control at board level. As a result of the majority shareholder’s control, the company can be run purely for the advantage for the majority shareholder and can be disadvantageous to the minority shareholder(s).
Section 994 of the Companies Act 2006 (“CA 2006”) allows any shareholder to apply to the court for an order for a remedy where they feel that they have been unfairly prejudiced as a shareholder. The grounds for an application to the court include:
- The company’s affairs have been conducted in a manner that is unfairly prejudicial to the interests of the members generally, or some part of its memes (including the claimant themself); or
- An actual or proposed act or omission of the company is or would be so prejudicial.
The conduct must be prejudicial so that it causes harm to one or more of the shareholders, and it must also be unfair. There are numerous examples as to what could constitute unfair prejudice but some examples are set out below:
- Awarding excessive pay to directors;
- Excluding a particular shareholder or group of shareholders from management of the company where, when the company was incorporated, the shareholders’ negotiations led the shareholders to reasonably believe that they would be included (and could participate) in management of the company;
- Removal of an auditor by the shareholders on the grounds of divergence of opinion on accounting or auditing procedures is deemed to be unfairly prejudicial under s 994(1A) of the CA 2006;
- Diverting opportunities to a competing business in which the majority shareholder holds an interest; or
- Dilution of the minority shareholders’ value by (for example) issuing preference shares.
What happens if a court thinks that unfair prejudice has occurred?
If the court is satisfied that unfair prejudice has occurred, it can make any order it sees fit. The most common order is that the other shareholders must buy the shares of the unfairly prejudiced shareholder, or an order for the company to buy back the shares of the unfairly prejudiced shareholder(s). Such remedies are logical because if the relationships between the shareholders or between the directors and the unfairly prejudiced shareholder has reached the point of legal action, it is likely that the unfairly prejudiced shareholder would like to depart from the company. It is entirely possible that the court may also order something else, including putting a restriction on the company altering its articles of association without the leave of the court and/or an order that the unfairly prejudiced shareholder has permission to bring a derivative claim.
The court will apply an objective test to determine whether a shareholder has been unfairly prejudiced, namely the question of whether a hypothetical bystander would consider the act or omission to be unfair. Notably, it will be more difficult for the disgruntled shareholder to proceed in an unfair prejudice action if the conduct they are complaining about is acceptable according to the Company’s articles of association.
Unfair prejudice actions are both expensive and time-consuming. Evidence will need to be gathered by the client and most of which will be relatively difficult to obtain due to its being held by the company. The court will also require a great deal of evidence to decide whether the claimant has been unfairly prejudiced and an expert report may even need to be relied upon; for example, an accountant may need to place a value on the shares in dispute or to show that a shareholder has been prejudiced and such prejudice is unfair.
How can JLN help?
As with other legal disputes, unfair prejudice claims can be resolved by settlement before the matter goes to court. In fact, court actions are particularly risky when there is no clear evidence of a breach of directors’ fiduciary duty and where the standard articles and any shareholders’ agreement are unclear as to the protections for minority shareholders.
However, it is important to act quickly and decisively in situations where a majority shareholder is manipulating the company, inappropriately using the company’s assets or draining resources.
Look no further if you are seeking a competent, sensible and pragmatic approach to dealing with unfair prejudice disputes. We would be happy to help and discuss a suitable fee mechanism to suit your needs. We will steer you to a suitable and realistic outcome with a commercially focused approach ensuring the greatest possible care and attention to detail.