Unfair Prejudice Petitions

What is an Unfair Prejudice Petition?

Unfair prejudice petitions usually arise when minority shareholders believe that the company is being run in a way that is contrary to their best interests. They are governed by Sections 994 to 996 of the Companies Act 2006. The minority shareholder is known as ‘the Petitioner’.

A minority shareholder in that position, in a private limited company, will not be able to dispose of their shares to third parties, meaning they could have little to no recourse without the intervention of the court.

The Petitioner is required to prove that their position as shareholder (as opposed to director) has been unfairly prejudiced by the way the company is run.

Who can bring an Unfair Prejudice petition?

Unfair prejudice petitions may be presented by any shareholder of the company, and also legal non-members such as a trustee in bankruptcy or the personal representatives of an estate.

The Petitioner must show that their interest as shareholder has been ‘prejudiced’ by the way the company is run, and that that prejudice is ‘unfair’.

Test for ‘Prejudice’

The ‘prejudice’ that a Petition will commonly suffer will be a devaluation of their shares, caused by the unfairly prejudicial conduct complained of.

However, prejudice can also take the form of the Petitioner showing that the trust and confidence between the Company and the Petitioner has been damaged.

Test for ‘Unfairness’

The test is objective. The Petitioner need not show that anybody has acted in bad faith.

Clear examples of ‘unfairness’ include breaches of directors’ duties, a breach of the Articles of Association or breach of a Shareholders Agreement but are not limited to those situations.

If the conduct is in accordance with the Articles of Association, it will be difficult for a Petitioner to show that the conduct complained of was ‘unfair’ to succeed with a petition for unfair prejudice.

However, where the conduct was in line with the Articles/director’s duties, unfair prejudice can still arise where the company is considered a ‘quasi partnership’ and where the company management has acted inequitably and contrary to the principles of a quasi-partnership. As quasi-partnership usually arises where the company has been run on a familial basis, where the parties considered themselves bound by principles of equity and fairness, rather than only the Articles or shareholders’ agreement.

We have seen an increase of quasi-partnerships being pleaded in unfair prejudice petitions.

Examples of unfairly prejudicial conduct

There are a number of actions that may constitute unfairly prejudicial conduct, including:

• Breach of director’s duties;
• Failure to pay dividends;
• Company mismanagement;
• Allotting shares for improper purpose of diluting minority shareholder’s shareholding;
• Inequitable conduct;
• Payment of excessive remuneration not calculated by reference to the value of the services provided by directors who are in control of the company and is instead disguised payment of dividend or dressed up return of capital;
• Abuses of power and breaches of the Articles of Association.

Potential Remedies

The Court has a broad discretion to decide upon the appropriate remedy, if it finds there is unfairly prejudicial conduct.  

The most common remedy is an order that the Petitioner’s shares be purchased by a majority shareholder.

A common question is how much are the Petitioner’s shares worth? An expert company valuer will be engaged to value the shares.

Generally, the Petitioner’s shares will be valued at the date of the order. But in some scenarios, the court can order that the valuation be backdated to a time before the unfairly prejudicial conduct occurred, where the shares were devalued by that conduct.

This article covers Unfair Prejudice in general terms, it cannot serve as a resource to advise you on whether to petition for unfair prejudice as it will largely depend on the individual facts of your case.

If you are looking to serve an Unfair Prejudice petition or need advice on any of the above issues, please contact Peter Knibbs in the Commercial Litigation team at BPE peter.knibbs@bpe.co.uk

These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.