Typically, this may be the case where a minority shareholder’s interests are being prejudiced by the way the company is being managed by majority shareholders, especially when the majority shareholders have control at the board level.
Pursuing an unfair prejudice petition requires careful thought as to the risks and costs involved; however, it can be a useful tool for a shareholder seeking to protect their rights. The most common form of remedy in such applications is for the minority shareholder to have their shares bought out at a fair price by the majority shareholder(s).
Grounds for making an unfair prejudice claim
The applicant will need to show that the company’s affairs are being run in a manner which unfairly affects the members or a group of them.
In assessing unfairness, courts consider various factors, such as the nature of the business, it’s size, history of dealings between the shareholders, as well as reference to relevant documents including any shareholder agreement and the company’s articles of association. Proving prejudice requires evidence and the Court will adopting a broad approach, not just limited to proving financial loss.
Examples of unfair prejudice can include:
- Breach of director and/or fiduciary duties, including breach of the articles of association
- Excessive remuneration of directors
- Mismanagement and exclusion from management of the company’s affairs
- Manipulation of company finances
- Failure to pay dividends due
- Withholding information from shareholders.
- Where the majority shareholder effectively treats the company as their own, diverting assets or business or operating in a way which is a clear conflict of interest.
Proving unfair prejudice and who can claim
Any shareholder can bring a claim for unfair prejudice, but successful claims require proof that the alleged unfair activity impacts the business’s operation and affects the shareholders. Demonstrating actual prejudice is essential, and the court’s remedies, outlined in section 996 of the Companies Act, provide wide-ranging options, including share buyouts or even ordering the company’s sale.
What is a Quasi-Partnership and why it may matter for unfair prejudice?
Companies founded on mutual trust and confidence, like family businesses or enterprises set up by long-term friends, may be deemed quasi-partnerships. The relevance to this for unfair prejudice claims is that where the court finds that the company is a quasi-partnership, this is generally helpful for the claimant and makes it more difficult for the majority shareholder to explain away actions or conduct using strict interpretation of the legal rights associated with being a majority shareholder.
How we can help
Unfair prejudice disputes can be time consuming and costly. In addition, they almost certainly result in financial or other damage to the company. It is therefore essential to take early advice to avoid the risk of a dispute escalating and to explore options for resolution without the need for Court proceedings.
We are highly experienced in representing both claimants and defendants in unfair prejudice petitions and seeking to obtain the best solution, whether by court action, mediation, negotiation or a combination of these.
To talk to a solicitor about your situation please call 020 8464 4242 for our Bromley office, 020 7481 2422 for London, 01732 457575 for Sevenoaks or 01372 750100 for Surrey. Alternatively, you can email enquiries@wellerslawgroup.com and we will get back to you as soon as possible.
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