Unfair prejudice claims: A guide for minority shareholders

When disputes arise within a company, minority shareholders can often feel sidelined and powerless, however, the law provides them with clear mechanisms to challenge unfair treatment in the form of an unfair prejudice claim.

Under Section 994 of the Companies Act 2006 (CA 2006), an unfair prejudice claim allows a member of a company to bring a claim if they believe they have been treated unfairly by majority shareholders and/or company directors, or the company’s affairs are being conducted in a manner unfairly prejudicial to their interests.

For minority shareholders, it can be a relief to know there is legal recourse to seek resolution or compensation. For companies and their directors, it is an important reminder of the consequences, and potential costs, of breaching their duties. Hayley Blatch, Litigation Executive in the Commercial Disputes team, explores examples of unfair prejudice and the remedies.

Proof of unfair prejudice

To succeed in an unfair prejudice claim, a shareholder must prove two things. The first is that there has been a breach of the company’s articles of association, shareholders’ agreements or directors’ duties.

Secondly, they must prove the exclusion of minority shareholders from management or dilution of their interests contrary to prior agreements or understandings.

Articles of association are a company’s founding documents which sets out its rules of operation. They are a binding agreement between the company, the directors and shareholders.

Shareholders’ agreements are similar in that these legally binding documents set out the rights and responsibilities of the shareholders.  

A directors’ duties refers to the seven duties set out within Sections 171-177 of the Companies Act 2006:

1. Duty to act within powers
2. Duty to promote the success of the company
3. Duty to exercise independent judgement
4. Duty to exercise reasonable care, skill and diligence
5. Duty to avoid conflicts of interest
6. Duty not to accept benefits from third parties
7. Duty to declare interest in proposed transaction or arrangement

Examples of unfairly prejudicial conduct

The courts have clarified that unfairness is assessed objectively. If a reasonable person would find the conduct damaging towards the shareholder of their interests, whether intentional or not, it is deemed unfair.

Examples of unfairly prejudicial conduct can look different from company to company. It could look like:

• Misuse of company funds (excessive director salaries or personal expenses).
• Share dilution: issuing new shares to reduce a minority shareholder’s stake.
• Withholding dividends: unfairly denying dividends to minority shareholders while majority shareholders benefit.
• Breaching shareholders’ agreements: failing to adhere to agreed upon terms.

Bringing a petition

To bring a petition, the petitioner does not need to be the registered legal owner of shares at the time of the alleged conduct, provided the shares were held on trust for them.

Ultimately, it is at the discretion of the court to decide if the petitioner has adequate standing to bring a claim, which is a critical threshold issue, but my experience is they take a pragmatic case-by-case approach to this, with the overriding objective being one of fairness and proportionality.

In terms of the substance of the petition, breaches of duty (such as directors’ conflicts of interest) can underpin unfair prejudice claims but the petitioner must be able to demonstrate harm.

So, if majority shareholders or director(s) are found to have breached their statutory duties, and that breach is deemed to have been carried out by the majority and to have harmed a minority shareholder, it may give rise to a successful unfair prejudice claim.

In the event a petition is brought forward successfully, the court may order the purchase of the petitioner’s shares at fair value or other remedies under section 996 of the Act:

• A buyout order: majority shareholders purchase the petitioner’s share at a fair value.
• Regulation of company conduct: stopping or requiring certain acts.
• Authorising legal claims: bringing civil proceedings in the company’s name.
• Reversing share dilution: restoring a minority shareholder’s stake.
• Compensating affected shareholders: financial compensation for harm caused.

In summary

Overall, unfair prejudice claims are a flexible but complex remedy for minority shareholders. Remedies are tailored to the circumstances, with share buy-outs being the most common. However, pre-action offers can preclude claims if they address the alleged unfairness. 

Coodes’ Commercial Disputes team are experts in resolving corporate disputes. We recognise the importance of resolving these matters swiftly and effectively to minimise disruption and regularly advise minority shareholders in relation to unfair prejudice petitions.

For more information, please contact Hayley Blatch by calling 01872 246217 or emailing hayley.blatch@coodes.co.uk