Unfair prejudice claims

What is unfair prejudice?

An unfair prejudice claim is the most common type of claim minority shareholders have against majority shareholders. Unfair prejudice claims are statutory claims brought under Section 994 of the Companies Act 2006.

The typical scenario where a claim arises is where the majority shareholders also have control at director level, either themselves or through directors they have appointed, and the minority shareholders are not adequately protected by a shareholder agreement or amended articles of association.

Examples of unfair prejudice include :-

• Exclusion from decision making and information

• Misappropriation of company assets - where the majority shareholders utilise company assets for personal gain.

• Breach of fiduciary duties - where directors may breach their fiduciary duties to the company and its shareholders.

Claims are risky

In many situations, especially in small businesses, the dilemma facing a minority shareholder being unfairly prejudiced is that starting a court claim is expensive, risky and can often cause damage or even the downfall of the company.

A better strategy is often to instruct experienced and skilled solicitors to exert sufficient pressure on the shareholders creating the prejudice and to negotiate the best available outcome, which is, however unfair it may be, that the majority shareholder buys out the shares of the minority on best available terms.

Court claim for unfair prejudice

The basis for starting a court claim is breach of section 994 of the Companies Act, which sets out the legal tests for unfairly prejudicial conduct. Any shareholder can bring a claim.

There are 2 elements you need to prove to succeed at court, that

• actions or inactions of majority shareholders are unfair; and

• the prejudice created consequences, in terms of reduced value of your shares.

The requirement to prove actual prejudice often creates difficulties in the common situation where minority shareholders are deliberately kept in the dark about how the company is being run and its finances. It is easier to prove prejudice where, for example, business is being diverted to other businesses owned or controlled by shareholders or where a dividend policy favours the majority shareholders only, often combined with overly generous bonuses for directors.

Relevance of quasi partnerships

A quasi-partnership arises when a company, despite being formally incorporated, operates more like a traditional partnership based on the relationship between its members. Key characteristics include where shareholders contribute capital, skills, or effort based on mutual understandings, often started as or evolved from informal business relationships and often involving family members.

Where a quasi partnership exists this is relevant to unfair prejudice because :-

• breach of legitimate expectations can constitute unfair prejudice.

• courts are more willing to intervene in quasi-partnership scenarios.

• standard of conduct expected from majority shareholders is higher.

• exclusion from management in a quasi-partnership is often sufficient grounds for relief.

Potential remedies

Where a claim goes to trial (which is quite rare) and the claim succeeds on the legal test, the court has wide powers in terms of remedies, which include :-

• Damages and an order that steps be taken by the company to prevent unfair minority prejudice in the future.

• Ordering the liable shareholder to buy you out at a price decided by the court.

• An order that the company must be sold or wound up.

• An order that the company should be wound up.

Alternative claims

• Derivative claims (under sections 260-264 Companies Act 2006) - useful when the wrong is done to the company rather than individual shareholders and can address breaches of directors' duties. Requires court permission to proceed.

• Contractual claims - based on shareholders' agreement or articles breaches.