Unfair prejudice claims

We advise a significant number of clients on potential unfair prejudice claims every year.  We are skilled and experienced in  finding the best way to exert pressure on the majority shareholder to create the right conditions to settle with the best available outcome.

What is unfair prejudice?

Unfair prejudice typically arises where 1 or more minority shareholders find their interests prejudiced by a majority shareholder, commonly where the majority shareholders also have control at board level.

This level of control (and often failure to enhance basic company law minority shareholder rights with a shareholder agreement and/or suitable amendments to the company’s articles of association) can result in the company being run purely for the advantage of the majority shareholder and to the disadvantage of minority shareholders.

Unfair prejudice claims can often become highly personal. A negotiated outcome, as with other types of disputes, is often better than going all the way to a trial.

Section 994 legal test for Unfair Prejudice

To successfully take legal action for activities which are unfairly prejudicial to you as a shareholder, you will need to satisfy the requirements in section 994 of the Companies Act. There are 4 aspects to be satisfied but the most important are the requirements of unfairness and prejudice. These are 2 separate concepts and both will need to be proven.

Looking first at unfairness, the courts will look at the overall background and context and apply an objective test to decide unfairness. Factors can include :-

• whether the business is a family business or not;
• it’s size and type;
• how the shareholders have operated the company historically;
• whether there is a shareholders agreement or modified articles.

Prejudicial impact on shareholders will require the claimant to show tangible detriment such as reduction in the value of his/her/their shares. The courts generally take a wide view of what constitutes prejudice and it is not limited to financial loss only.

Examples of unfair prejudice

There are many warning signs that a company is unfairly prejudicing its shareholders, but claims often fall within 2 categories, which sometimes overlap :-

• Manipulation of company finances or assets – this can range from directors paying themselves bonuses whilst refusing shareholder dividends to inappropriate use of company assets for the director’s own benefit, diversion of business to other businesses and/or dilution of the minority shareholders value by for example issuing preference shares.
• Withholding information – what often makes minority shareholders suspicious in the first instance is where they are refused access to company records or accounts. If there is no shareholder agreement giving shareholders rights to information, or the articles of association have not been amended to include such rights, the directors have a virtual monopoly on information. The inability to find out exactly what is going on makes the prospect of claiming unfair prejudice more difficult and risky.

Legal remedies for unfair prejudice

Section 996 of the Companies Act deals with the powers of the court to grant remedies if it decides there has been unfair prejudice. The remedies are wide ranging with the starting point being that the court can “make such order as it thinks fit”.

This gives the courts options including :-

• forcing the shareholder found to have unfairly prejudiced others to buy the others shares;
• ordering that the company must be sold;
• the court can make an order that the company stops the conduct which is prejudicial or takes steps to correct the wrong.

The most common legal remedy, whether a claim goes to court or settles is for the minority shareholder to have his/her/their shares bought out. The courts has wide discretionary powers when it comes to remedies.

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