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Unfair prejudice claims allow minority shareholders to seek legal remedy when company affairs are being or have been conducted in a manner unfairly prejudicial to their interests. Unfair prejudice is a statutory claim brought under Section 994 of the Companies Act 2006.
Before initiating proceedings, shareholders should document evidence of unfair conduct thoroughly, consider alternative dispute resolution, evaluate litigation costs against potential outcomes, record attempts at internal resolution and obtain early legal advice on claim strength
The two key elements required to establish unfair prejudice are :-
Prejudice - There must be actual or potential harm to the shareholder's interests in their capacity as a shareholder. Harm does not have to be financial harm to establish unfair prejudice.
Unfairness - The conduct must be objectively unfair, not just commercially unwise or disappointing..#
The most frequently successful grounds include :-
Exclusion from management against agreed participation rights.
Improper diversion of business or assets to other companies connected with majority shareholder.
Excessive remuneration paid to majority shareholders.
Failure to provide company information.
Non-payment of dividends without commercial justification.
Serious mismanagement affecting share value.
Improper share dilution.
The prejudice must justify court intervention. Technical breaches without significant impact are insufficient. Compelling evidence will often involve evidence of systematic unfairness rather than isolated incidents. Courts consider the size and nature of the business when assessing materiality.
The courts have broad discretionary powers under Section 996 of the Companies Act 2006 to grant remedies they consider appropriate for unfair prejudice claims. While the court's powers are extensive, they typically focus on practical solutions that resolve the underlying issues:
Share purchase order - the most commonly granted remedy, requiring either the company or other shareholders to purchase the petitioner's shares at a fair value. This provides a clean exit for the minority shareholder and is particularly appropriate where relationships have broken down irretrievably.
Regulation of company affairs - the court can impose specific requirements on how the company must conduct its business going forward, including mandating regular board meetings, requiring specific voting procedures, or establishing clear dividend policies. This remedy is useful where the business relationship can be salvaged.
Injunctive relief - the court can prohibit specific conduct or require particular actions, such as preventing the disposal of company assets, requiring disclosure of information, or mandating consultation before major decisions. These orders can be either temporary during proceedings or permanent.
Authorisation of derivative proceedings - the court may permit the shareholder to bring legal proceedings in the company's name against directors or third parties who have harmed the company's interests. This is particularly relevant where the unfair prejudice involves misappropriation of company assets or opportunities.
Constitutional changes - the court can order amendments to the company's articles of association or shareholders' agreement to prevent future unfair conduct or clarify parties' rights. This might include adding or removing provisions about decision-making processes, share transfers, or management participation.
The valuation of shares is a crucial element in unfair prejudice proceedings, particularly as the most common remedy is a court-ordered purchase of the minority shareholder's shares. When determining share value, courts must address several complex issues. The primary consideration is whether a minority discount should be applied to reflect the shares' lack of control, though courts often order valuations on a pro-rata basis where the unfair conduct has led to the forced sale.
The selection of the valuation date is also significant - this might be the date of the petition, the date of the unfair conduct, or another date the court deems just. The impact of the prejudicial conduct itself on share value must be considered, as courts may adjust valuations to compensate for value reduction caused by the unfair behavior.
These valuations typically require expert evidence, with courts often needing to reconcile competing expert opinions on methodologies and assumptions. The ultimate valuation approach chosen by the court will depend on the specific circumstances of the case, the nature of the business, and the type of unfair prejudice established.
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.
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Solicitor - Commercial disputes & Insolvency
Thomas advises clients on various commercial and civil litigation matters and is a member of the firms London Litigation team.
Thomas provides advice on contractual disputes including disputes between shareholders and unfair prejudice claims. He...
