Unfair prejudice petitions under section 994 of the Companies Act 2006 often turn on the quality of the evidence available. Because these disputes usually involve disagreements about how a company has been managed, the court must reconstruct events by examining documents, financial records and witness evidence.
For shareholders considering a petition, gathering evidence early can make a significant difference. The stronger and more organised the evidence, the easier it becomes to demonstrate that the conduct complained of was both unfair and prejudicial.
Although each case depends on its own facts, several categories of evidence frequently play an important role in unfair prejudice claims.
Why does evidence matter in unfair prejudice petitions?
The court must determine two key issues.
- First, whether the conduct complained of occurred.
- Second, whether that conduct was unfairly prejudicial to the interests of the petitioner as a shareholder.
To answer these questions the court relies heavily on contemporaneous documentation. Written records created at the time of events are often considered more persuasive than recollections formed later.
For this reason, many unfair prejudice cases are decided not only on legal principles but also on the strength of documentary evidence showing how the company’s affairs were actually conducted.
What documents usually form the foundation of an unfair prejudice claim?
The starting point is usually the company’s constitutional and contractual documents. These define the rights and expectations of shareholders and often provide the context for determining whether conduct was unfair.
Commonly relied upon documents include:
- The articles of association. These establish the formal governance framework of the company and determine how decisions should be made.
- Shareholders’ agreements. Where one exists, a shareholders’ agreement may contain provisions about management participation, reserved matters, dividend policies or exit rights.
- Share registers and share allotment records. These documents may reveal whether shares were issued or transferred in a way that affected control of the company.
- Board minutes and shareholder resolutions. These records can show how decisions were taken and whether proper procedures were followed.
Together, these documents help the court understand the legal and commercial relationship between the shareholders.
What financial evidence is typically required in shareholder disputes?
Financial information often plays a central role in unfair prejudice cases, particularly where allegations concern diversion of profits, excessive remuneration or failure to pay dividends.
Examples of financial evidence frequently used in litigation include:
- Company accounts and management accounts. These documents provide insight into the company’s financial position and how profits were generated or distributed.
- Dividend records. These show whether dividends were declared and whether profits were distributed evenly between shareholders.
- Directors’ remuneration records. These may reveal whether the majority extracted value through salaries or benefits rather than dividends.
- Bank statements and transaction records. These documents can help trace the movement of funds and identify related-party transactions.
- Loan account records. Directors’ loan accounts may become relevant where funds have been withdrawn from the company or where loans have not been properly repaid.
Financial evidence is particularly important where the alleged prejudice involves the extraction or diversion of value from the company.
What role do witness statements and expert reports play?
Documentary evidence is often supplemented by witness statements. These statements are usually provided by shareholders, directors or employees who were involved in the relevant events.
Witness evidence may address issues such as:
- how decisions were made within the company
- what agreements or understandings existed between shareholders
- why certain actions were taken.
In many unfair prejudice petitions, expert evidence is also required. This is particularly common where the court must determine the value of shares as part of a buy-out order.
Valuation experts may be asked to assess the fair value of shares by analysing financial performance, assets, liabilities and market conditions.
Their conclusions can have a significant impact on the outcome of the case, especially where the primary remedy sought is a compulsory purchase of shares.
How can shareholders gather evidence before issuing a petition?
Shareholders who suspect unfair prejudice should take care to preserve relevant documents and communications. This may include emails, messages, financial reports and internal correspondence.
- It is also important to review the company’s constitutional documents and any shareholders’ agreement. These documents often contain provisions that are directly relevant to the dispute.
- Where possible, shareholders should avoid taking steps that might escalate the conflict unnecessarily. Instead, early legal advice can help identify the key evidence required and ensure that information is gathered in a way that supports any future proceedings.
In many cases, presenting strong evidence early in the dispute can encourage negotiation and settlement without the need for lengthy litigation.
Key takeaway
Unfair prejudice petitions are rarely decided on legal arguments alone. They depend heavily on documentary evidence, financial records and witness testimony demonstrating how the company’s affairs have been conducted.
Shareholders who carefully assemble this evidence from the outset place themselves in a stronger position to resolve disputes, whether through negotiation or court proceedings.
Francis Wilks & Jones were responsive, available at all times to deal with any of my queries and very reassuring. I would definitely recommend them to deal with proceedings brought on behalf of shareholders – they understood our practical needs.
A shareholder we helped bring unfair prejudice proceedings against a fellow shareholder who had been interfering with the management of the company and damaging its value
