07 November 2022

What is unfair prejudice? Section 994 of the Companies Act 2006 allows a minority shareholder to bring an unfair prejudice petition if:

• “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
• an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.”

It is not enough for the court to find that the conduct complained of is either prejudicial or unfair – it must be both.

What constitutes unfairly prejudicial conduct?

The courts have a wide discretion when deciding whether a party has acted in a prejudicial and unfair manner. As such, there is no single definition of what will constitute such conduct. Examples of conduct that the courts have previously held to be unfairly prejudice include:

• excessively remunerating directors (with the result of reduced dividends being made available to shareholders);
• excluding shareholders from management where there was an expectation that they would be included;
• deliberately devaluing dividends;
• concealing information from the Petitioner regarding the state of the company’s affairs;
• serious company mismanagement; and
• diverting business opportunities to another business (in which the majority shareholder in question holds an interest).

When considering an action for unfair prejudice, the company’s Shareholders’ Agreement and related Articles of Association will be taken into account. In particular, the courts will consider what powers have been afforded to the company’s board under these documents, and as such, whether the party complained of has acted within or outwith these powers.

What are the remedies?

Section 996 of the Companies Act lists the remedies available to a shareholder, should it be deemed that they were unfairly prejudiced. Most commonly, the courts will order the company or majority shareholder to purchase the minority shareholder’s shares, valued at a price considered fair to the Petitioner. Other remedies available under s.996 include orders to:

• regulate the conduct of the company's affairs in the future;
• require the company to either do or refrain from doing a specific act;
• authorise civil proceedings to be brought in the name and on behalf of the company by such person or persons and on such terms as the court may direct; and
• require the company not to make any, or any specified, alterations in its Articles without the leave of the court.

It is important for Petitioners to raise claims timeously to avoid facing a potential bar to receiving relief.

Derivative proceedings

Unfair prejudice petitions are generally raised at an individual level to provide personal relief. If, instead, relief for a company is sought (i.e. an action by a number of shareholders is to be raised on the company’s behalf against the company’s directors), a derivative action claim under s.265 of the Companies Act could be raised as an alternative. The section provides relief for shareholders against “any actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company.”

In Scotland, those wishing to raise derivative proceedings must first apply to the court for leave.

Avoiding shareholder disputes

Preferably, such disputes would be avoided by ensuring the Shareholders’ Agreement and related Articles of Association are properly drafted to offer protection in the first instance.

For more information on negotiating and preparing Shareholders’ Agreements, shareholder disputes or unfair prejudice claims, please contact:

Alastair Dunn, Partner: akd@bto.co.uk / 0141 221 8012

Angus Wood, Partner: arw@bto.co.uk / 0141 221 8012