Unfair Prejudice & s.994 Petitions are ways in which aggrieved shareholders can seek redress for any prejudice they suffer.
Shareholders control over a company
In a limited liability company, shareholders have limited control of the day to day running of the company. The daily decisions are predominantly made by the directors of the company and although shareholders have some ability to effect decisions of the company, this is very limited.
An aggrieved shareholder has the ability to apply to court on the grounds that the company’s affairs are being, or have been, conducted in a manner that is unfairly prejudicial to the interests of the members generally, or to their specific interest as a shareholder. It is a procedure by which a minority shareholder can obtain relief from the court.
Basis of the claim
An application can be brought if the affairs of the company have been conducted in a way that is unfairly prejudicial to its shareholders or some of them. The petition should be brought against the particular shareholder(s) or director(s) that are alleged to have been guilty of unfair conduct, and also the company itself.
This action only be used if the company is solvent and the petitioner retains shares of value at the time of trial.
The claim must be a breach against the minority shareholders, not the majority (who have controlling voting powers that are unavailable to minority shareholders).
There are two types of unfair prejudice that can arise for a claim to be made:-
- there has been a material failure of the company to comply with the company’s constitutional documents (such as the Articles of Association), or directors have acted in breach of a contractual agreement, such as a shareholders agreement. Breaches by directors of fiduciary duties or any duties set out by legislation could also amount to unfair prejudice if it amounts to or involves conduct by the majority of the directors.
- the company has acted in an inequitable fashion in a way prejudicial to the minority shareholders. For example, exercising legal rights when they have promised not to do so, or using the company’s legal powers to which the minority have not agreed.
This second basis is used less frequently than the first, as it is less easy to prove that there was an equitable (or ‘fair’) arrangement with the parties that is not set out in company documentation.
Examples of unfair prejudice might be:-
- If the directors grant themselves excessive remuneration while refusing to consider paying dividends. Note however that the prejudice must be prejudicial to the minority, not to the majority, of the company, so it must be that the minority are not provided with declared dividends for example in this instance;
- directors refuse to consider paying dividends to minority shareholders;
- directors improperly remove the company auditor;
- new shares are allotted in bad faith or without complying with the rights of pre-emption which might benefit minority shareholders;
- if minority shareholders are excluded from or not consulted on specific matters when they were due to be consulted by way of agreement;
- where the company amends the company’s articles which have a prejudicial effect on the minority shareholders.
Misconduct complained of must be both serious and relevant to justify court intervention.
There are two elements of unfair prejudice that must be present in order for a claim to succeed:
- The conduct must have caused prejudicial harm to the relevant interests of the member or some part of the members of the company.
- It must be unfair.
These are inevitably difficult proceedings to take, and can be costly. The chances of success are often difficult to say, and as a result these proceedings are not brought very often. A shareholder may want to consider other remedies as an alternative, such as winding up on just and equitable grounds, or a derivative claim.
What amounts to unfairness?
There is an objective test. It is not necessary to show bad faith or intentional prejudice. If objectively the court believes the conduct to be unfair, then a claim may succeed.
Any breach of rights that are contained in a company’s constitutional documents, including the articles of association and any shareholders agreement will often go some way to proving unfairness. Conversely, if the conduct is allowed for in either of these documents then it is unlikely to succeed.
The rights that are breached do not have to be set out specifically in company documents however, although obviously that makes a claim more clear cut. It can be that a shareholders’ legitimate expectations have been breached. This might arise in a small business ‘quasi partnership’ arrangement, where the shareholders expect to take part in the control and management of the company but one or more directors prevents this.
The court has wide discretion as to what to do if it finds that there has been unfair prejudice. Some examples of relief granted are:-
- giving the petitioner the option to purchase majority shares at a fair price;
- giving permission to the petitioner to commence a derivative claim on behalf of the company;
- a claim for wrongful dismissal against a minority shareholder director or employee;
- require the company not to make any alterations to its articles without leave of the court;
- provide for the purchase of shares of members of the company in order to reduce the company’s capital.
The court can also ask the company to stop doing something, or to do something that has been omitted.
A minority shareholder may wish to sell their shares following a successful unfair prejudice claim because they don’t wish to have any further involvement in the company. The court order therefore might also include an order for the purchase of the minority shares by the company, based on market valuation and not discounted to reflect a minority interest.
Unfair prejudice claims are not particularly easy to win. Courts don’t like to interfere in the general running of a company unless there is very clear prejudice involved.
At Francis Wilks & Jones we frequently advise shareholders on methods of resolving matters of dispute which have arisen for them. Contact one of our expert team today and we can talk you through the options regarding an unfair prejudice petition, and all other remedies available to you. Please call any member of our team for your free consultation now and we can help. Alternatively email us with your enquiry and we will call you back at a time convenient to you.