The importance of being precise in unfair prejudice petitions

In any legal dispute, particularly in one where the parties have a close personal connection to each other it is tempting to take a “everything and the kitchen sink” approach to the claim, by making wide ranging allegations about the conduct of the parties. Primeking Holding Ltd and others v King and others [2021] (“Primeking”) seeks to remind us why that approach is not appropriate in the context of unfair prejudice petitions.

What is an unfair prejudice petition?

An unfair prejudice petition is brought under s.994 of the Companies Act 2006. This entitles any shareholder of a company (often, but not always, the minority shareholders) to bring a claim on one of two grounds:-

1. That the company’s affairs are or have been conducted in a manner that is unfairly prejudicial to the interests of the members (shareholders) generally, or to some part of the members (including the petitioner); or
2. That an actual or proposed act or omission of the company is or would be so prejudicial.

Common examples of unfair prejudice are the withholding of dividends without good reason, diluting the voting power of particular shareholders or the exclusion from management of someone who is both a director and shareholder of the company where that person has a legitimate expectation to be involved in its management. One thing is clear – the unfair prejudice has to be linked to the conduct of the company’s affairs. The conduct of the shareholders’ affairs in their personal capacity would not be sufficient to support an unfair prejudice petition.

What is a quasi-partnership?

Where a company is formed and trades on the basis of a mutual understanding of trust and confidence between the members it may be a “quasi partnership”. This distinction is important because unfair prejudice can be found to exist in such circumstances even though the majority is acting within its strict legal rights. Further, the court has a wide discretion in terms of the remedies it can grant the petitioner, but the usual remedy is that the petitioner has their shares brought out by the majority shareholders. When there is a quasi-partnership, when valuing the petitioner’s shares, the court will generally not apply the usual discount to reflect the minority status of the shareholding.

Why is it important to be precise?

Much will therefore turn on whether a company is or is not a quasi partnership. It is therefore common to see petitions that make very broad allegations as to the conduct of the affairs of the shareholders and the company, both to try and found a case that the company is a quasi partnership, and to attach the credibility of the respondents to the petition. Recent case law suggests that presenting the case on such a wide basis would not be acceptable.

In Primeking there has been a very broadly pleaded petition which raised a range of allegations, and as a result the respondent company applied to strike out elements of that petition on the basis that some of the allegations went to the conduct of the shareholders in their personal capacity and so could not form the basis for an unfair prejudice petition.

This argument was successful and these allegations were struck out. The court held that:-

1. Precision was important in the preparation of an unfair prejudice petition, principally to ensure that the issues were as narrow as possible and so as to avoid extensive (and potentially unnecessary disclosure);
2. It was desirable for the court to strictly apply the statutory test on unfair prejudice and that involved it only testing those allegations that went to the conduct of the affairs of the company. The conduct of shareholders in their personal capacity was not relevant to that test.

Accordingly, only allegations that have a direct causal link to either the acts or omissions of the company, or the conduct of the company, should be raised to support an unfair prejudice petition. This is important to ensure that these petitions (which can be extremely expensive to run to trial) remain manageable. It is therefore important for the lawyers dealing with such allegations to draft petitions in a sensible and proportionate way, and to discard allegations that do not go directly to the statutory test.

To learn more about how our commercial litigation team can help you please request a consultation. Partner Peter Brewer specialises in corporate litigation, including unfair prejudice petitions.