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A Guide to Unfair Prejudice Claims for Minority Shareholders

Author: Nicola Sharp  30 April 2024
5 min read

Minority shareholders have invested in a company, but have a smaller shareholding than other members. With that comes less control over voting rights, and often minority shareholders have little insight into the financial and operational sides of the business. 

Over time, this leads to uncertainty about how their investment is performing, and whether they are being treated fairly in the decision-making process. 

Once rifts start to occur between the shareholders in privately owned companies, the minority shareholder(s) may start looking for ways to either;

  1. Break free of the arrangement and sell their shares, or,
  2. Assert greater control over the way in which the company is run.

One of the ways that minority shareholders exercise their rights is through an unfair prejudice petition.

What is unfair prejudice?

A minority shareholder can make a petition to the court for unfair prejudice on the grounds that:

  1. The company’s affairs are being conducted in a manner that is unfairly prejudicial to the interests of the members, or to some part of its members; or
  2. An actual, or proposed act or omission of the company would be prejudicial

(See Section 994 of the Companies Act 2006)

In other words, the actions of the company’s majority shareholders or directors are deemed to be oppressive, unfairly discriminatory or prejudicial to the interests of the minority shareholders.

Examples of Unfair Prejudice

Practical examples of unfair prejudice could include:

  • Dividends not being paid.
  • Creating more shares in the company (share dilution) without a shareholder resolution.
  • Concern over how the member’s shares are valued.
  • Prioritising a director’s personal interests over the company’s success.
  • Failing to comply with the company’s articles of association.

Reviewing the Constitutional Documents

When a minority shareholder thinks that they have been treated unfairly, the quickest way to get out of the situation is to sell their shares and have a clean break. However, there may be little appetite from the other shareholders to buy a minority shareholding, because with fewer voting rights, the shares are deemed to be less valuable. 

In those circumstances, the first port of call is to check the articles of association and the shareholder agreement. Those documents may contain provisions for compelling another shareholder to purchase the minority shareholder’s shares. 

If no such provisions exist, the minority shareholder can turn to section 994 of the Companies Act 2006 and bring an unfair prejudice petition before the court.

Unfair Prejudice Petitions

The minority shareholder sets out the conduct that has been unfairly prejudicial to them in their petition to the court.

The court listens to the petition and uses their discretion to decide;

  1. Whether the conduct was unfairly prejudicial?
  2. What to do about it.  

The court will decide if the conduct complained about is “unfair” and, separately, whether the conduct has also prejudiced the shareholder. Previous cases have shown that the prejudice must be substantial to the petitioner if they are going to be successful.

That might include a severe financial prejudice such that the petitioner’s shares no longer have any value. Or their rights have been impacted so that they no longer have any involvement in the management of the company.

The process differs from other civil claims in that there is no claim form. Instead, the petition is the court document that begins the process, and it is served on the respondent with a detailed letter of claim. The petition must set out the grounds on which the minority shareholder alleges unfair prejudice, and the remedy they seek.

Remedies in Unfair Prejudice Claims

When it comes to the remedies that the court will order, it has a wide discretion. In fact, the court can make any order it deems fit in the circumstances.

Examples of the orders the court can make include:

  • The petitioner’s shares must be purchased by the majority shareholder(s) or the company.
  • Fixing the price of the shares that it orders to be purchased, including any minority discount.
  • Requiring the company to refrain from carrying out an action that it has planned.
  • Ordering the company to perform an act.
  • Requiring  the company not to make alterations in its articles without leave of the court.

(See section 996 Companies Act 2006)

In practice, the minority shareholder is usually seeking the first remedy. By the time the minority shareholder decides to make the petition, it is likely that there is an irreconcilable breakdown in relationships between shareholders, and the minority shareholder wants a clean break. In most cases, the shareholder is looking for a way to sell their shares (a purchase order). 

However, if the court deems that the purchase order is disproportionate to the prejudice suffered, then it will refuse to make such an order.  For example, in Macom GmBH v Bozeat & Ors [2021] EWHC 1661 (Ch), HHJ Hodge KC (sitting as High Court judge) refused to make the order for the director to buy out the petitioner’s shares because no financial loss was suffered by the petitioner. Instead he made orders regulating the future conduct of the company’s affairs.

Quasi-Partnerships

Often in an unfair prejudice petition, a minority shareholder will seek to establish that the structure of the company is a quasi-partnership. 

In a quasi-partnership relationship, there is a presumption that the exclusion from management of a minority shareholder will be unfairly prejudicial. Usually, there is no automatic right for a shareholder to be involved in the management of a company. But in a quasi-partnership there’s the presumption that the exclusion from management is inherently unfair. 

This usually only applies to small private companies, where the relationship between the shareholders is formed on the basis of a personal relationship (such as a family business for example). There is some agreement, understanding , or expectation that all shareholders will participate in the management of the business. 

If a quasi-partnership is established then no minority discount will be applied to the value of the shares owned by the petitioner in any buy-out that the court orders.

Does the minority shareholder have to go to court?

If initial discussions with the directors or majority shareholders have failed, it is usually necessary to at least begin the court process. This gives the minority shareholder leverage to show that they are serious about litigation, and the company has ‘skin in the game’ as it will have to spend time and money to defend the petition.

However, it is not always necessary to have the petition heard in court. It’s often worthwhile getting an early valuation of the shares and making an offer to the other side. It may be in all parties’ interests to settle the dispute early and avoid incurring further costs, and  the possible negative publicity. 

Settlement offers are common in these types of disputes, and the court encourages parties to settle where possible. So much so, that if the petitioner refuses a ‘fair’ offer to purchase their shares, the court is likely to be dissuaded from granting them any remedy.

Alternative Options to an Unfair Prejudice Petition

There are a couple of other claims that a minority shareholder can bring alongside, or in the alternative to an unfair prejudice petition.

The first is particularly draconian: a winding up order. Under section 124 Insolvency Act 1986 the minority shareholder can request that the court puts the company into liquidation and that it ceases to do business. 

This remedy is used sparingly and it is generally discouraged by the court. But the court will grant it if it considers that it is just and equitable to do so. Example scenarios include:

  • There is a deadlock in the decision-making of the company.
  • The company is being mismanaged.
  • It has become impossible for the company to carry on the business it was established for.

The second option is to bring a derivative claim. That’s when the members of a company, the trustees, or the personal representatives that hold shares in the company bring a claim against a director on behalf of the company. The claim is grounded in the allegation that the director did, or proposed to do, something which was negligent, and in breach of their duties.

A shareholder can (in certain circumstances) take over a derivative claim that was started by the company.

Getting Legal Advice

Unfair prejudice claims are complex and are always determined on a case-by-case basis. With a specialist legal team on board, you stand the best chance of getting the outcome you are looking for, at the earliest possible opportunity. Many of these claims are settled before they go to court, but it’s important to have the right strategy, and a robust understanding of the merits of your position before you begin settlement discussions.

If you would like any help with an unfair prejudice claim, please get in touch. Our specialist team of lawyers can advise you in consultation.  

Nicola Sharp C 09983

Nicola Sharp

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Nicola is known for her fraud, civil recovery, arbitration and business crime expertise, her experience of leading the largest financial disputes and multinational investigations and her skills in devising preventative measures and conducting internal investigations for corporates.

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