Unfair prejudice claims are legal actions pursued by minority shareholders who believe their interests have been unjustly compromised by the actions of majority shareholders, often in situations where the latter hold significant control at the board level.
This legal recourse is commonly employed when the majority’s decisions negatively impact the company’s operations and value, leading to an imbalance of benefits in favor of the controlling shareholders.
Such claims arise when minority shareholders feel that the company’s affairs are being managed to their detriment, often resulting in financial losses or diminished shareholder rights.
Unfair prejudice claims typically involve intricate legal considerations, as they require demonstrating both the unfairness of the actions and the prejudice suffered by the claimant shareholders.
Resolutions to these claims can range from negotiated settlements to court-ordered remedies, including the purchase of affected shareholders’ shares at fair value or even company-wide changes to rectify the unfair treatment
What is unfair prejudice?
Unfair prejudice scenarios frequently emerge when one or more minority shareholders discover their interests hindered by a majority shareholder, particularly when the majority’s control extends to the board level.
This heightened control (often coupled with a neglect to reinforce fundamental company law rights for minority shareholders through agreements or appropriate article amendments) can lead to the company being operated solely for the benefit of the majority shareholder, to the detriment of the minority.
When a court determines that a company’s actions have disadvantaged shareholders, a common resolution involves directing the other shareholders to acquire the claimant’s shares at an equitable valuation.
Unfair prejudice claims often take on deeply personal dimensions. Opting for negotiated resolutions, akin to other dispute scenarios, frequently proves more advantageous than resorting to a trial.
Section 994 legal test for Unfair Prejudice
To initiate legal proceedings against actions that are unjustly detrimental to you as a shareholder, it is essential to fulfill the criteria outlined in section 994 of the Companies Act. This involves addressing four key facets, with the primary emphasis placed on establishing both the presence of unfairness and prejudice. These two concepts are distinct, each necessitating separate substantiation.
Beginning with the aspect of unfairness, the judicial assessment considers the comprehensive backdrop and context, employing an impartial evaluation to determine inequity. Variables taken into account encompass factors such as the company’s familial nature, its scale and classification, historical shareholder practices, the existence of shareholder agreements or modified articles, followed by the application of these details to ascertain the fairness of the alleged actions or inactions.
In terms of prejudicial repercussions on shareholders, the claimant must present concrete evidence of harm, often manifesting as a decrease in the valuation of their shares. The courts generally adopt a broad interpretation of what constitutes prejudice, extending beyond mere financial loss.
Examples of unfair prejudice
There exist numerous indicators that a company is treating its shareholders unfairly, though claims typically fall into two interrelated categories:
- Financial and Asset Manipulation – This spectrum spans from directors awarding themselves bonuses while denying shareholder dividends, to the improper utilization of company assets for personal gain, diversion of business to external entities, or even diminishing the value of minority shareholders through methods like the issuance of preference shares.
- Information Withholding – A notable scenario that triggers suspicion among minority shareholders is their exclusion from accessing company records or accounts. Absence of a shareholder agreement that grants information rights, or the lack of amendments in the articles of association to accommodate such rights, effectively grants directors a near-monopoly over information. The inability to ascertain the true state of affairs complicates the prospects of pursuing unfair prejudice claims, introducing greater complexity and risk into the equation.
Who can make a claim for unfair prejudice?
Section 994 of the Companies Act 2006 succinctly outlines the eligibility to file a claim and defines the components of unfairness and prejudice as previously delineated. Put simply, any shareholder holds the capacity to initiate a claim for unfair prejudice.
How to prove unfair prejudice
To substantiate their case, the claimant must establish a direct link between the alleged unjust conduct and the company’s operational affairs, showcasing its impact on shareholders as a whole or on a smaller subgroup. Notably, the claimant themselves must invariably be among the affected shareholders.
A comprehensive catalogue of actions or inactions that amount to unfair prejudice remains elusive, rendering the determination of what qualifies as prejudicial an inherently factual exercise.
To secure success in an unfair prejudice claim, the claimant must provide evidence that the impugned activity has directly disadvantaged their standing as a shareholder. The demonstration of actual prejudice is paramount, transcending instances where the company’s directors might have wounded the claimant’s sentiments or treated them inequitably in matters unrelated to shareholding.
While it bolsters the claim’s strength if a single shareholder faces a detriment relative to others, such a discrepancy isn’t a prerequisite for instigating an unfair prejudice petition. It suffices that the prejudicial activity adversely affects shareholders collectively.
For instance, if directors consistently breach their obligations or bestow bonuses upon themselves while withholding dividends, this conduct might impact all shareholders uniformly, yet still empower a shareholder to pursue an unfair prejudice petition.
Legal remedies for unfair prejudice
Addressed within Section 996 of the Companies Act, the court’s authority to provide redress in instances of determined unfair prejudice is extensive. The judicial starting point revolves around the court’s discretion to “issue such directives as it deems appropriate.”
This confers upon the courts a spectrum of choices, encompassing measures like compelling the implicated shareholder to procure the shares of those adversely affected, or even mandating the potential sale of the company itself. Notably, Section 996 explicitly empowers the court to issue an order that counteracts the prejudicial actions or initiates corrective measures.
The most prevalent legal recourse, whether the claim advances to a court hearing or culminates in a settlement, typically revolves around the acquisition of the minority shareholder’s shares. In this regard, the courts exercise a substantial degree of discretion in the realm of remedies.
Need help with unfair prejudice
Much like the fabric of most legal disputes, it’s the path of settlement that often unravels the complexities. Mastering this trajectory involves orchestrating precise pressures at opportune junctures, bolstered by astute legal advisors who provide pragmatic, well-grounded counsel.
When facing scenarios where the contours of a director’s fiduciary obligations remain nebulous and where standard articles and a shareholder’s agreement offer limited safeguards for minority shareholders, the notion of resorting to court actions bears its share of risk.
Yet, amidst these dynamics, when a majority shareholder maneuvers the corporate landscape, perhaps inappropriately exploiting company assets or siphoning resources, time becomes a paramount essence. Delaying response could potentially diminish the business’s value, even if a court decree mandates a business sale or the acquisition of minority shareholder shares.
The intricacies of these situations are manifold, and your decisions could wield considerable impact. Thus, consider swift action in situations demanding it. If you’re seeking strategic guidance tailored to your unique circumstances, seize the opportunity to reach out through our online enquiry form. Your proactive approach can shape the course ahead.
David is a Solicitor and Chartered Tax Advisor. David has many years experience of advising clients on Regulatory Fraud matters, involving the smallest to the very biggest cases.
He regularly lectures to the City of London Police on these and related issues. He regularly advises on Confiscation and other consequences that flow from money laundering offences