When it comes to running a company, corporate decision-making is predominantly down to the company directors and majority shareholders. Still, even those with a minority shareholding are entitled to some limited say. More importantly, if the company's affairs are being conducted in a manner that is unfairly prejudicial, minority shareholders can petition to the court for relief.
However, pursuant to section 994 of the Companies Act (CA) 2006, for an unfair prejudice petition to succeed, two essential ingredients must be present and proven. In a nutshell, to grant the relief sought by a minority shareholder — including an order regulating the future conduct of the company’s affairs or an order requiring the wrongdoing member(s) to purchase the petitioner’s minority shareholding on such terms as the court thinks fit — the court must be satisfied that the conduct complained of is both prejudicial 'and' unfairly so. Both elements must be made out.
The meaning of prejudicial under s.994 CA 2006
Unfair prejudice petitions provide one of the few ways in which aggrieved shareholders can seek redress for any prejudice they suffer. This is where a minority shareholder can apply to the court on the ground that the company’s affairs are being, or have been, conducted in a manner that is unfairly prejudicial to the interests of the members generally or to the petitioner’s specific interest as a member. Still, the petitioner must be able to show that the conduct complained of caused prejudicial harm to the relevant interests of the shareholders, or to some part of them, including at least them.
'Prejudice' is a very broad term, including financial damage, such as a significant depreciation in the value of the petitioner’s shareholding or some other economic detriment, although its’ meaning is considerably wider than this. For example, prejudicial conduct can include failing to permit the petitioner to participate in the control and management of the company where they have a legitimate expectation in the context of a small business 'quasi-partnership' arrangement to be involved in this way or, at the very least, to be consulted about company decisions.
However, despite the relatively broad meaning given to the term 'prejudice', it will nevertheless prove fatal for a petition if the petitioner is no worse off as a result of the conduct complained of.
The meaning of unfairness under s.994 CA 2006
The petitioner must also be able to show that the same conduct was 'unfair', where prejudice alone is not enough. In determining what amounts to unfairness, it is not necessary to show bad faith or intentional prejudice, although the court must objectively believe the conduct to be unfair. The courts are understandably reluctant to introduce subjective notions of fairness into commercial relationships. It is therefore well established that in appraising unfairness, a court must:
Any breach of rights that are contained within a company’s constitutional documents will inevitably go some way to proving unfairness, provided that breach is sufficiently serious. Conversely, if the conduct in question is allowed for in any documentation, then it is unlikely to be construed as unfair. The more tricky cases will again lie in those scenarios where the petitioner’s rights are not expressly provided for, including breach of their legitimate expectations to take part in the control and management of the company where one or more features of a quasi-partnership exist.
Bringing and defending unfair prejudice petitions
While the law affords the minority shareholder some statutory protection where the conduct of the company’s affairs is both unfair and prejudicial, the evidential hurdles can be extremely high. Even where there is clear evidence of unfair conduct, or conduct that is prejudicial, an inability on the part of the minority shareholder to satisfy the court as to both essential ingredients will be fatal.
There may also be various bars to relief by way of defence or in support of an application to strike out, including refusal by the petitioner of a fair offer to purchase their shares where this is found to be equivalent to the relief that they would be entitled to on successful prosecution of their petition.
Other lines of argument that may provide a bar to relief include express provision for an exit route in the company’s constitutional documents, where the petition is essentially seeking to circumvent those contractually prescribed remedies; acquiescence on the part of the petitioner in the alleged unfairly prejudicial conduct or any delay in presenting the petition to the court; or, finally, where any prejudicial conduct cannot be regarded as unfair because of the petitioner’s own misconduct.
Seeking early legal advice is strongly advised, both for any prospective petitioner or respondent. Even though the courts have not succeeded in developing a coherent doctrine so as to confidently predict how future cases will be decided, an informed appraisal of the merits of either bringing of defending an unfair prejudice petition can help each party to decide how best to proceed.
For the minority shareholder, alternative approaches may be available, including seeking an order to bring a derivative action in the company's name or an order for the winding up of the company on the grounds that it is just and equitable to do so. For majority shareholders and/or company directors, especially where any allegations of unfair prejudice potentially have some substance, attention may need to be turned to a properly calculated offer to purchase the minority shareholding.
The matters contained within this article are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law in England and Wales and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, either express or implied, is given as to its' accuracy, and no liability is accepted for any errors or omissions. Before acting on any of the information contained herein, expert legal advice should always be sought.
© Melissa Worth, April 2023