Understanding shareholder protection: unfair prejudice explained
What is an Unfair Prejudice Petition?
An Unfair Prejudice Petition, contained within Sections 994 to 996 of the Companies Act 2006, is a legal mechanism available to a minority shareholder (the ‘Petitioner’) to challenge unfair treatment. It provides an opportunity for the Petitioner to seek a fair resolution through a statutory remedy which offers relief for ‘unfairly prejudicial’ conduct.
Examples of Unfairly Prejudicial Conduct
Unfair Prejudice claims are often highly nuanced because they are based on the specific circumstances of the Petitioner but we list below some common examples of conduct that the courts have found to be ‘unfairly prejudicial’ are:
- Mismanagement and Diversion of Assets;
- Breach of Director’s Duties;
- Failure to pay Dividends;
- Exclusion from Management Information (e.g. Accounts);
- Excessive Remuneration;
- Dilution of Shareholding;
- Inequitable Conduct; and
- Breaches of Articles of Association.
Who is entitled to bring a Petition?
A Petition may be brought by:
- Members (i.e. shareholders) of the company.
- Non-members such as the personal representatives of an estate or a trustee in bankruptcy.
The Petitioner must evidence that their interest as a shareholder has been ‘prejudiced’ by the way in which the company is being run, and that the prejudice complained of is ‘unfair’.
The Tests for ‘Unfairly Prejudicial’
The court must assess whether the conduct complained of satisfies a two-staged test:
1. Unfairness
This is an objective test in which the Petitioner need not show that anyone has acted in bad faith.
If the conduct the Petitioner has experienced is in accordance with the Articles of Association, it will prove difficult for the Petitioner to show the conduct was ‘unfair’ in order to succeed with their Petition for Unfair Prejudice. The caveat to this is where the company is considered a ‘Quasi Partnership’ and the company has acted contrary to the principles of a Quasi Partnership. This form of Partnership arises whereby the company has been run on a familial basis, the parties consider themselves bound by principles of equity and fairness as opposed to solely by the Articles of any Shareholders Agreement. In these situations, it is often the breakdown in trust and understanding that leads to unfairly prejudicial conduct.
2. Prejudice
The conduct must have caused, or be likely to cause, prejudice to the Petitioner’s interests as a member. This often involves diminution in the value of their shares or a loss of other rights.
Remedies
If the court agrees that ‘unfairly prejudicial’ conduct has occurred, it has wide discretion to grant a remedy that would be fair, just and reasonable in all of the circumstances.
The Companies Act 2006 specifically enables the court to make an order that:
- requires the company to refrain from doing or continuing an act complained of, or to do an act that the petitioner has complained it has omitted to do;
- regulates the conduct of the company’s affairs in the future;
- authorizes civil proceedings to be brought in the name and on behalf of the company by such person(s) and on such terms as the court may direct;
- requires the company not to make any alterations in its articles without the leave of the court; and / or
- provides for the purchase of the shares of any members of the company by other members or by the company itself and, in the case of a purchase by the company itself, the reduction of the company’s capital (this often requires the input of an expert company valuer to value the shares).
Unfair Prejudice Petitions can be a powerful tool for minority shareholders facing detrimental treatment but seeking legal advice early in the process is crucial to assess the merits of a claim and navigate the legal process
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