SHAREHOLDER DISPUTES

A shareholder may make an unfair prejudice claim if the business has been, or is being, run in a manner that is unfairly prejudicial to the interests of some of the shareholders. Unfair prejudice claims typically arise when one or more minority shareholder believes that their interests are being prejudiced by a majority shareholder.

Section 994 of the Companies Act 2006 provides that “A member of a company may apply to the Court by petition for an order…on the ground (a) that 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 (b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial”.

There are two elements to a successful unfair prejudice claim:

• The conduct must be prejudicial in the sense of causing prejudice or harm to the relevant interest of the members or some part of the members of a company (i.e. shareholders); and
• It must be unfair.

The test as to what amounts to unfair prejudice is objective. It is not necessary for the petitioning shareholder to show that anybody acted in bad faith or with the intention of causing prejudice. The courts will regard the prejudice as unfair if a hypothetical reasonable bystander would believe it to be unfair. Fairness is judged in the context of a commercial relationship, the contractual terms of which are in the main set out in the company’s articles of association and any shareholders agreement. The starting point is therefore to ask whether the shareholder has acted in contravention of the company’s articles or shareholders agreement.

The conduct in question must be unfairly prejudicial to the petitioner’s interests in their capacity as a member of the company (i.e. as a shareholder). The court takes a broad view as to what might be regarded as an ‘interest’ and the word ‘unfairly’ enables the court to consider wider equitable considerations which are not necessarily included in the company’s articles of association. For example, a shareholder’s interest may arise out of an agreement that some or all members should participate in the management of the company.

A shareholder’s interest is not therefore limited to his strict legal rights but can extend to legitimate expectations arising from the nature of the company and agreements and understandings between the parties. A common example of this is the corporate ‘quasi-partnership’, in which shareholders may have expectations of participating in the management of the company. If other shareholders deprive a shareholder of their rights under a ‘quasi-partnership’ then this may allow that shareholder to bring a claim for unfair prejudice.

Unfair prejudice is a flexible concept and can arise in several scenarios. Common examples of what may constitute unfair prejudice however include:

• A shareholder being excluded from the management of the business in circumstances where there is a legitimate expectation that they may do so.
• A shareholder diverts business to another company in which that shareholder holds an interest.
• A shareholder awards himself/ herself an excessive financial benefit.
• Breach of a company’s articles of association or shareholders agreement.
• Majority shareholders passing a special resolution to alter the company’s articles of association which unfairly impacts upon the rights of the other shareholders.

A petitioning shareholder has several statutory remedies available to them. Whilst the court retains a general discretion to make any order it thinks fit, Section 996(2) of the Companies Act 2006 allows the court to:

• regulate the conduct of the company’s affairs in the future.
• require the company to refrain from doing or continuing an act complained of, or to do an act which the Petitioner has complained that it has omitted to do.
• authorize civil proceedings to be brought in the name and on behalf of the company by such person/s and on such terms as the court may direct.
• require the company not to make any, or any specified, alterations in its articles without the leave of the court.
• provide for the purchase of the shares of any shareholder by other shareholders or by the company itself and, in the case of the purchase by the company, the reduction of the company’s capital accordingly.

The power to authorize civil proceedings can be a particularly useful remedy, as it enables an action to be pursued by the company, meaning that the costs of that action would then be borne by the company rather than by the petitioner.

In practice, the most common remedy awarded to a successful petitioner is to order that their shares be purchased by those who caused the unfair prejudice. The process of valuing the shares can however be problematic and contentious. The courts have generally held that the shares should be valued at such date as is fair to the petitioner, which is usually the date when the prejudice to the petitioner began. The court can also order that the valuation should be on the basis that the unfairly prejudicial conduct (which may have devalued the company’s shares) had not taken place. In some circumstances it may be appropriate for the court to order that the majority shareholder sells their shares to the petitioner, although this is considerably less common.

In order to bring an unfair prejudice claim you need to issue a petition with the court. The petition must name the parties who are accused of causing the unfair prejudice. The petition must specify the grounds on which it is presented and the nature of the relief sought by the petitioner (i.e. the shareholder who is bringing the claim). The Court will fix a hearing date on which the petitioner and any respondent must attend at Court or directions to be given as to the procedure in respect of the petition. Interlocutory relief may be available to protect the company’s and the petitioner’s position pending the hearing of the petition.

At Birch Law we act for shareholders (both majority and minority) as well as businesses in connection with a wide variety of shareholder disputes. We provide bespoke pragmatic and commercial legal advice to ensure that you get the best possible legal assistance. We will always explore whether alternative forms of resolution would be suitable, such as a negotiated settlement. If not possible we will advise you of your options and deal with formal court proceedings on your behalf. Whilst we always look to avoid court proceedings we are litigation solicitors through and through and will fight your corner to the very end. For a free no obligation discussion please feel free to contact us on 0161 669 4621 or by email at sbirchall@birchlaw.co.uk.

Our team of solicitors represent clients locally and nationally at every stage of the construction adjudication process. We have the legal expertise to present your case clearly and cost effectively.  We can assist with adjudication proceedings, negotiated settlements, litigation or arbitration.  For a free no obligation chat please feel free to contact us on 0161 669 4621 or by email at sbirchall@birchlaw.co.uk.