Claims of Unfair Prejudice Against Shareholders

Posted 29th July 2021

Written by Chris Newton

Individual stressed working over laptop due to unfair prejudice claims.

Are you considering making an unfair prejudice claim? Or are you concerned an unfair prejudice claim will be brought against you? If the answer is yes, you should be clear in your understanding of unfair prejudice and familiarise yourself with unfair prejudice examples below. This will help you to protect both yourself and your business’ interests.

What is unfair prejudice?

Unfair prejudice claims are brought under section 994 of the Companies Act 2006.

Typically, an unfair prejudice claim is brought against a majority shareholder by a minority shareholder. There is no black and white list of what type of behaviour is classified as unfair or prejudicial, but the Act states that a member of a company may apply to the court for an order on the grounds that:

(a) the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself)

or

(b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial

When considering if you have a legitimate unfair prejudice claim, you should always ask yourself “would a reasonable bystander think that the actions in question were unfair?”.

In what circumstance can a shareholder make a claim for unfair prejudice?

A shareholder can make a claim for unfair prejudice if they believe that majority shareholders have acted unfairly in regards to how the business is run. This alleged unfair activity must have resulted in prejudice to the claimant’s position as a shareholder.

The minority shareholder making the unfair prejudice claim must be one of the individuals affected, however the alleged unfair activity may impact more than one shareholder.

Unfair prejudice examples

Common unfair prejudice examples may include:

  • deliberately devaluing the value of the minority’s shareholding
  • excluding minority shareholders from the management of the business despite this being a prerequisite of the minority shareholders investment
  • majority shareholders withholding information, such as company accounts or records, from minority shareholders
  • directors using company assets inappropriately and for their own benefit
  • excessive financial awards to the director
  • diverting business to another company in which the majority shareholder holds an interest
  • repeatedly failing to hold AGMs
  • mismanaging the business
  • breaching the Articles of Association or a Shareholder’s Agreement

Unfair prejudice remedy

If the court agrees with the unfair prejudice claim, they can grant a remedy to address the misconduct. The court will decide on the type of unfair prejudice remedy to order on a case-by-case basis.

Remedies that the court may grant are listed under section 996 of the Companies Act 2006. The court’s order may:

(a) regulate the conduct of the company’s affairs in the future;

(b) require the company-

(i) to refrain from doing or continuing an act of, or
(ii) to do an act that the petitioner has complained it has omitted to do;

(c) authorise civil proceedings to be brought in the name and on behalf of the company by such person or persons and on such terms as the court may direct;

(d) require the company not to make any, or any specified, alterations in its articles without the leave of the court;

(e) provide for the purchase of the shares of any members of the company by other members of by the company itself and, in the case of a purchase by the company itself, the reduction of the company’s capital accordingly.

The most common unfair prejudice remedy is where the court orders the defendant (the shareholder who has had the claim brought against them) to purchase the claimant’s shares at a fair value and by a particular date.

But what is considered a fair value? An unfair prejudice claim can devalue the shares of a business, which can hurt the claimant. Typically, the court will order that the shares be valued at the date when the unfair prejudice began.

Unfair prejudice claim procedure

Firstly, a minority shareholder should seek legal advice to make sure they have enough evidence and grounds to file an unfair prejudice claim.

Secondly, if the minority shareholder decides that they want to make the claim, they must present a petition to the court. The petition must make two things clear:

  1. the nature of the unfair prejudice against the Petitioner
  2. the relief sought by the Petitioner

Thirdly, Respondents to the petition should be named. This is first and foremost the company’s majority shareholder/s or director/s who are accused of unfair prejudice. Third parties may be included as Respondents, too, if they were directly involved in the alleged unfair misconduct or if they could be impacted by the relief sought by the Petitioner. The business is also usually listed as a Respondent.

Fourthly, the court will set a date for the hearing – the Petitioner and Respondents must attend.

Lastly, the court will decide on the verdict and, if they agree with the claim, they will grant an unfair prejudice remedy.

Avoiding unfair prejudice claims

Whether you’re a minority or majority shareholder, everybody wants to avoid shareholder disputes. Nevertheless, shareholders need to take the necessary legal steps to protect themselves when taking out shares in a company.

When becoming a shareholder of a business, we strongly recommend having a Shareholder’s Agreement drawn up. As a minority shareholder, having provisions clearly laid out in a Shareholder’s Agreement will make it easier for you to make a claim if majority shareholders breach the Agreement. Likewise, majority shareholders can protect themselves from a costly unfair prejudice claim being brought against them if everything is clearly laid out in an Agreement.

How can Newtons Solicitors help?

Our team has extensive experience in negotiating, drafting, interpreting and implementing Shareholder Agreements for a variety of businesses in many different industries. We have years of experience in bringing unfair prejudice claims to court and defending against them. No matter if you’re a minority or majority shareholder, our team are well-versed in all aspects of unfair prejudice claims and will guide you through every stage of the process. Please get in touch with us to discuss your options.