Unfair Prejudice Petitions – Resolution for Minority Shareholders and 50/50 Shareholders?

If you are in a dispute with fellow shareholders, either as a minority shareholder or in a 50/50 deadlock and want to protect your rights or get full value for your shares in the company, the courts offer a remedy through a petition under Section 994 of the Companies Act 2006. Such a claim is often called a Minority Shareholders Petition or a Section 994 Petition. In this article we will refer to it as an Unfair Prejudice Petition.

Set out below is information on who can bring a petition, what you need to prove to be successful and the potential remedies available.

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Who Can Bring an Unfair Prejudice Petition?

An Unfair Prejudice Petition can be brought by any shareholder or Member of a company. Petitions are likely to be brought by shareholders holding a minority of shares or who own 50% of shares and stuck in a deadlock because of their lack of power to control the company.

Owners of the majority of shares in a company are likely to have powers available to them through the company’s Articles of Association, which will make an Unfair Prejudice Petition unnecessary. This may not always be the case though, it may be that a shareholder agreement so restricts a majority shareholders powers that an Unfair Prejudice Petition will be required.

What is unfairly prejudicial conduct?

Below we set out the most commonly encountered unfairly prejudicial conduct.

An Unfair Prejudice Petition is brough by shareholders in a company if the company’s affairs are being run in a way that is unfair and harmful (prejudicial) to their rights and interests as a shareholder.

To be precise, Section 994 of the Companies Act 2006 says:

(1) A member of a company may apply to the court by petition for an order under this Part on the ground—

(a) that 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.

This requires the Court to consider the conduct being complained of in two stages; is it “Unfair” and has it been prejudicial to the petitioner’s interests as a member/shareholder of the company?

Unfair Conduct

A company is governed according to its constitution, which is set out in its Articles of Association and any shareholder agreement or company resolutions that may exist.

Any conduct that is in breach of a company’s constitution, with some exceptions, is likely to be considered as unfair by the Court.

Similarly, any breach by the company’s directors of their duties as directors, will usually be considered to be unfair conduct. Please read our article on Directors’ duties and Fiduciary duties.

Also, conduct that breaches more informal but binding agreements between shareholders, which are often found in companies where the same people are both directors and shareholders (sometimes referred to as quasi-partnerships), will be considered as unfair by the Courts.

The Courts recognise that such agreements, which rely on trust and mutual understanding, create obligations between the parties entering into them, referred to as equitable obligations. For example, excluding a minority shareholder from the management of a company could amount to unfair prejudice, if it breaks a promise that they would be included. However, clear evidence of such agreements is needed.

Claims of unfair conduct must be grounded in breaches of legal or equitable obligations, not merely in disagreements or the breakdown of relationships.

Is the Unfair Conduct Prejudicial To the Interests of the Shareholder

The effect of any unfair conduct will be determined by the facts of each case. Showing a financial loss will be clear evidence of prejudice being caused. However, the disadvantage does not always have to be financial. Being excluded from the decision making within a company by being dismissed as a director will also be considered as being prejudicial.

Examples of conduct that might be considered as unfair and prejudicial include:

Issuing new shares. This means your percentage ownership of the company is diluted, meaning they lose value and you lose your rights as a shareholder to control the company.
Exclusion from management. This is particularly significant in quasi-partnerships, where the same people are directors and shareholders and you have previously been involved in management.
Excessive remuneration for Directors means all profits go to the directors and there is no money left to pay dividends to you as a shareholder.
Misuse of company funds or assets. Diverting company resources for personal gain or transferring assets without approval.
Withholding dividends or information: Failing to pay dividends without justification or denying access to company accounts.
For 50/50 shareholders, disputes caused by decision-making deadlock or the other shareholder acting without authority.

What Remedies Are Available?

The Court is granted a wide ranging discretion in deciding upon the remedy to resolve unfair prejudice claims. However, the most common outcome is a share purchase order. This means the Court will require the majority shareholders to buy the petitioners shares at a fair value. The Court may consider the value at the time of the petition or an earlier date if the company’s value diminished due to unfair conduct. Delays in filing the petition can also affect valuation.

The price is usually based on the value of the company at the time of judgment and may either:

– Reflect the full value of the company divided equally among all shareholders (pro rata).

– Include a discount if your shares don’t give you control over the company (a minority discount).

While this is the usual remedy, other remedies are possible depending on your situation. In some cases, the Court may also:

– Require directors to return property to the company

– Compel changes to the Articles of Association

– Order the minority shareholder to buy out the majority

– Wind up the company as a last resort

How Can We Help?

Unfair prejudice claims can be a powerful tool to protect your shareholder interests, but they can also be challenging to navigate. If you think you’ve been treated unfairly, our team of experts can help you understand your options, guide you through the process and fight for the best possible outcome.