Unfair prejudice – answers to some questions with reference to recent case law
What is unfair prejudice?
Unfair prejudice arises where the affairs of the company have been, are being or will be conducted in a way that unfairly prejudices the members generally or some part of the membership including at least the petitioner.
They often involve the majority shareholders acting in a way that unfairly prejudices the interests of the minority shareholders.
Relief is available to the petitioning minority shareholder under s.994 of the Companies Act 2006 (“s.994”). Section 994 essentially provides that the court has very wide ranging powers to regulate the affairs of the company, but most commonly the court will order that the majority shareholders buy the minority shareholders out.
What constitutes unfair prejudice and how the minority shareholders shares are valued will depend on the facts of each case. However there have been some useful cases recently that give some guidance on some of the issues that a wronged minority shareholder might face.
What if I tolerate the unfairly prejudicial conduct?
As a general principal, prompt action is better than inaction when it comes to any form of litigation. However, it is possible that within a company a certain state of affairs might be tolerated for all sorts of reasons.
On the face of it inaction might be a bar to relief under s.994. However in Routledge v Skerritt [2019] the court granted relief to a shareholder where they had not been paid a dividend in respect of their shares. They had allowed that to happen for a period of 8 years before making a complaint and then had waited for a further period of 3 years before taking action. However, the court found that the unfairly prejudicial conduct was continuing (i.e. the continuing failure to declare an unfair dividend) and had not been addressed when the petitioner first raised his complaint. The petitioner had remained actively involved in the business during the whole of the period. Therefore, despite the delay, the petitioner was entitled to relief.
Contrast this though with Waldron v Waldron [2019] where the petitioner had apparently made a tactical decision around tolerating the allegedly unfairly prejudicial conduct. . In that case the petitioner had taken a back seat in the running of the company and had allowed the respondent to run it. The respondent had drawn sums commensurate with their role as a business leader. After a period of time the petitioner tried to challenge that but they were denied relief as a result of their delay.
The issue of acquiescence is therefore very fact sensitive and, on balance, it is probably better to litigate than wait if you suspect that your interests have been prejudiced.
Remedies
As mentioned, the court has a wide range of remedies it can grant to address unfairly prejudicial conduct. Given the width of its discretion the court must try and tailor the best remedy to fit the facts before it. The breadth of the remedies available was recently illustrated in Yusuf v Yusuf [2019] where the court ordered that a property held within the company be sold, despite the petitioner not expressly seeking that as relief. The court felt that allowing the property (which was a substantial company asset) to be sold would assist in the eventual sale of the shares.
However,the most common remedy is that the petitioner’s shares are bought out by the respondent.
Even this rule is not hard and fast, as demonstrated in Goodchild v Taylor [2018]. In that case (between 50/50 partners in a law firm), the respondent had engaged in serious misconduct in that he had set up in competition with the company, he had taken some of the companies clients with him, he had withdrawn company money without proper authority and he had left the company in chaos when he departed. During this period he remained as both a shareholder and a director (and so owed the company fiduciary duties).
In such circumstances where the respondent had engaged in serious breaches of duty, the court was happy to order that the usual rule be departed from and that the petitioner be allowed to buy out the respondent.
It is therefore possible to “reverse the polarity” of an unfair prejudice petition and buy out the respondent in a 50/50 company, but the conduct of the parties will be an important consideration here.
Conduct generally
As a general proposition, a minority shareholders shares in a quasi partnership type company will be brought out without a discount for them being a minority interest in a private company. This is because minority shares in a private company are worthless on the open market, and it is unfair that minority shareholders be punished as a result.
However, a discount can be applied by the court where the petitioner has not conducted themselves properly. Therefore, in Davies v Lynch-Smith and others [2018] a discount was applied where the petitioners’ exclusion from management was entirely justified on the basis of his own conduct, and that the situation he faced was brought upon himself. As a result his shares were acquired by the respondent with a 60% discount applied.
What if the parties do eventually resolve their differences? In Weatherley v Weatherley [2018] the respondent had engaged in unfairly prejudicial conduct (by withholding the petitioners’ dividend and by effectively excluding her from the management of the company). In the run up to trial the respondents offered to buy the petitioners shares on a sensible basis, and the situation with regards to the management of the company was resolved.
Accordingly, the petition was dismissed; there cannot be unfair prejudice where the matters complained off have been resolved between the parties.
Conclusion
Much like the companies and the people within them every unfair prejudice petition is different. However, the above cases give some useful and up to date guidance on how the courts will approach some of the issues within disputes of this nature.
If you are facing this kind of dispute or want to bring a petition as a shareholder then please get in touch.
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