A guide to unfair prejudice petitions

In this guide, our shareholder dispute solicitors will take a look at one of the main shareholder remedies – unfair prejudice petitions (a claim for unfair prejudice) – and cover what unfair prejudice is, some common examples of unfair prejudice, who can bring an unfair prejudice petition, how to bring an unfair prejudice petition, remedies for unfair prejudice and bars to relief in unfair prejudice actions.

What is unfair prejudice?

Typically, the Courts of England & Wales have approached what constitutes ‘unfair prejudice’ as something which has put a member of a company at an unfair disadvantage, specifically in relation to the way in which the company’s business and affairs are handled. This could be because of the conduct of another member of the company, or be because a certain act or task has not been done (i.e. an omission), but in any event the shareholder’s interest(s) must have been prejudiced in such a way as to be deemed unfair.

It's ultimately up to the court to decide what can be considered as both ‘unfair’ and ‘prejudicial’ (giving rise to unfair prejudice) on a case-by-case basis and a broad approach is generally taken. Both elements have to be assessed on their own merits, and if you’re the shareholder who wishes to bring an unfair prejudice petition, you must be able to demonstrate that you’ve lost out in some way as a result of the unfair prejudice.

Common examples of unfair prejudice

To help you understand what types of behaviour might be deemed as unfairly prejudicial by the courts, the below examples showcase some common situations that our shareholder dispute solicitors deal with on a regular basis:

• Share dilution: A majority shareholder may issue new shares at a price, or in a quantity, that a minority shareholder is unable to afford – or is simply unwilling to pay. Past decisions made by the courts indicate that this kind of behaviour could potentially be classed as unfairly prejudicial. Much will depend on the justification for the new share issue.

• Exclusion from management: Whilst there is no automatic right in law for a shareholder to be involved in the management of a company, if it can be established that there is a quasi-partnership in existence there is a presumption that the exclusion of a minority shareholder will constitute unfair prejudice, unless it’s accompanied by an offer to buy their shares at a fair value. (A company may be a quasi-partnership where the relationship between the shareholders is formed/continued on the basis of a personal relationship – very common in small businesses, or there’s an legitimate expectation that all of the shareholders will have a part in the management of the company, or there are restrictions on the ability to transfer shares freely.

There are other examples in case law of different types of conduct which can be classed as exclusion from management, but the above is the most common scenario.

• Payment of excessive remuneration to directors: This type of complaint arises regularly as the basis for an unfair prejudice claim. Sometimes it might be immediately apparent, i.e. where the figures speak for themselves, but occasionally it may necessitate further investigation. In any event, expert evidence will be required by the court to bring a successful claim.

Other common examples of unfair prejudice may be:

• The sale or purchase of assets without the approval of shareholders.

• The transfer of assets to another business owned by a shareholder.

• The inappropriate use of the company’s assets by a director for their own benefit.

• Withholding dividend payments if, for example, if a company’s dividend policy has not been adhered to without a viable reason (although a lack of dividend policy does not automatically provide a bar to relief). Alternatively, the directors may be artificially depressing profits so that there are no funds available to pay dividends.

• The withholding of information by majority shareholders, for example, the company’s accounts or other management information.

• A breach of the company’s Shareholder’s Agreement or Articles of Association.

Who can bring an unfair prejudice petition?

Any shareholder or non-member who has been transferred shares (but who has not been entered on the register of shareholders), or who has acquired shares by law (for example, as a personal representative of the estate of a deceased individual), is entitled to bring an unfair prejudice petition to the court. If you are the person doing this, you are technically referred to as ‘the petitioner’.

Whilst the law as set out in the Companies Act 2006 technically includes majority shareholders having the right bringing a claim for unfair prejudice, in reality it’s the case that such a petition would only succeed in exceptional circumstances, such as where the majority shareholder does not have voting control. Generally speaking though, a majority shareholder will usually be in a position where they can exercise control over the affairs and decisions of the company; this is not a position that’s afforded to a minority shareholder and is therefore the reason why most petitions are brought by minority shareholders.

How to bring an unfair prejudice petition

If you wish to bring a claim on the basis of unfair prejudice, it must be brought to the court in the form of a petition. Our shareholder dispute lawyers can prepare the claim on your behalf in conjunction with specialist barristers, submit the claim to the court and can manage the case on your behalf for a relatively low fee.

The petition must set out the grounds upon which it’s presented – in other words, your reason for alleging unfair prejudice – and the nature of the relief (what remedy) you are seeking.

Once in receipt of the petition paperwork, the court will then fix a hearing date when you and the respondent (the person or people you’ve brought the petition against – usually the shareholders or directors you say are responsible for the unfairly prejudicial conduct) are obliged to attend court. Prior to this, relevant documents concerning the company’s affairs and written statements from witnesses will have been provided by the parties.

Remedies for unfair prejudice

The court has a wide discretion to make any order it considers fair and equitable to remedy the unfair prejudice suffered – just as it does in determining what’s ‘unfair’ and ‘prejudicial’ in the first place, as touched upon above. This exercise will take into account the interests of other shareholders and creditors. The court will not police the management of the company going forward. However, there are particular remedies that tend to be utilised by the court more often than not. These include:

• An order that the majority shareholder(s) buy(s) the petitioner’s shares at fair value

and on terms to be determined by the court.

• An order for directors to transfer property to the company which was acquired in breach of their fiduciary duties.

• An order requiring the company to refrain from or compelling them to do a particular act – this can include amendments to the Articles of Association.

• An order for the minority shareholder to purchase the majority shareholder’s shares.

• An order winding up (liquidating) the company.

Bars to relief in unfair prejudice actions

There are some considerations to highlight that could prove as bars to relief (i.e. factors that prevent or dissuade the court from granting a remedy). Examples of these considerations are:

• If the petitioner refuses a fair offer to purchase their shares.

• If there’s an express provision for an exit route in the company’s Articles of Association or in a Shareholder Agreement (meaning there’s another way provided for by the company’s own legal documentation that provides a solution to the problem).

• If there’s misconduct on the part of the petitioner – essentially, the court will not use its discretion to make ‘two wrongs right’ where both parties have acted improperly.

• If there is a delay in presenting the petition, and/or if there’s been a perceived acceptance of the alleged unfairly prejudicial conduct by the petitioner.

Summary

As is clear from this article, the court’s perception and discretion plays a large role in assessing what constitutes unfair prejudice and equally in deciding upon the appropriate remedy for it, which will vary on a case-by-case basis. If you believe that you’ve suffered unfair prejudice as a shareholder of your company, it’s strongly recommended that advice from an experienced shareholder disputes lawyer is sought so that you can safeguard your position and get the right advice quickly.

The large majority of unfair prejudice disputes are settled by negotiation but you first need to understand the strength of your position and your options. Our legal team are very experienced in guiding you through the negotiating process to settlement with a view to allowing the parties then to move on with their own business plans and aspirations.