If you have found your way here, then you may be one of an increasing number of individuals getting in touch with us to find out what their options are when relationships with co-shareholders/directors break down. If you are an aggrieved shareholder, then we may have the answer for you – an unfair prejudice claim.
What is unfair prejudice?
Unfair prejudice claims typically arise when majority shareholders, who in many cases are also directors, use or abuse their powers to promote their own interests to the detriment of the minority.
To be able to establish that there has been unfair prejudice, you first need to be able to show that the conduct in question relates to the running of the business and affects you in your capacity as a shareholder. If that box can be ticked, then the next hurdle for you to overcome is to demonstrate that the conduct of which you are complaining is both unfair and prejudicial – establishing just one element alone is not sufficient.
Usually, you would point to acts which have resulted in a reduction in your share value in order to establish prejudice. The other main qualifying criterion relied upon is removal from the running of a business when you have a ‘legitimate expectation’ of being involved in management.
When it comes to identifying conduct which is unfair, there is no exhaustive list, but do any of the examples below look familiar to you?
- Directors awarding themselves excessive bonuses;
- directors failing to award dividends;
- failing to consult or provide information to a shareholder;
- mismanagement of the company;
- breaches of Articles of Association or a Shareholders’ Agreement or, in some cases, an unwritten understanding between the shareholders about how a business is to be run;
- exclusion from management;
- allotments of shares and rights issues; and
- breaches of directors’ fiduciary duties.
Who can bring an Unfair Prejudice petition?
A claim for unfair prejudice is brought under s.994 of the Companies Act 2006.
You can bring a claim if you are a:
- member of the company; or
- non-member who has been transferred shares (but not entered on the register); or
- non-member who has acquired the shares by law (e.g. the personal representative of a deceased person).
Remedies for Unfair Prejudice
If you can establish unfair prejudice, the court can make any order it thinks fit to remedy the position. The court may, for example:
- Regulate the future conduct of the company;
- require the company to perform an act;
- prevent the company performing an act; and/or
- require the company to purchase your shares on a fair valuation.
However, the typical remedy awarded by the courts is an order that the shareholder(s) found to be responsible for causing the unfair prejudice is/are ordered to buy-out your shares at fair value at a date the court deems is appropriate.
Prevention is cheaper than the cure
Unfair prejudice claims can be costly, but you can take relatively inexpensive pre-emptive steps to minimise your exposure and/or ensure that if a claim needs to be brought then you are fighting from a position of strength rather than being on the back foot.
Take, for instance, a situation where you and your co-shareholders decide that you should all be entitled to have a say in the running of a company and/or your shareholdings should not be diluted. In those circumstances, if steps are subsequently taken by the majority to exclude you from management and dilute your shareholding, it is going to be much easier for you to claim relief if provisions have been incorporated into the Articles of Association and/or in a shareholders’ agreement which clearly provide protection that you can rely upon.
How we can help
Whether you are concerned about your potential liability to unfair and prejudicial conduct at the outset of, or during, a commercial venture with other stakeholders, or whether relationships which you have formed are breaking down or have been irreparably damaged, we have extensive experience in both minimising risk and bringing and defending claims for unfair prejudice.
Disclaimer: Anything posted on this blog is for general information only and is not intended to provide legal advice on any general or specific matter. Please refer to our terms and conditions for further information. Please contact the author of the blog if you would like to discuss the issues raised.