Until now, the general approach has been that a company cannot claim privilege against its own...
In private companies, majority shareholders might also have a controlling interest on the board. The company might be controlled by one or two key individuals, which can sometimes lead to the unfair treatment of minority shareholders.
To combat this, there are legal mechanisms in place to protect minority shareholders' interests – if you know what they are and how to deploy them.
Understanding unfair prejudice
‘Unfair prejudice’ occurs when the majority shareholders use their control to prioritise their own interests at the expense of minority shareholders. Thankfully, minority shareholders protect themselves by advancing an unfair prejudice petition under Section 994 of the Companies Act 2006. This can lead to remedies such as a share buy-out order or, in exceptional cases, the winding up of the company.
While some unfair prejudice disputes proceed to trial, we have resolved many through mediation, saving on costs and time. Our firm has a successful track record in settling these disputes through recommended mediators, but we're also equipped to handle cases that proceed to trial with our extensive experience in contested corporate litigation.
Key components for a successful claim
- Standing to bring a claim
To present an unfair prejudice petition, you must be a minority shareholder in the company where the alleged unfair conduct occurred.
- The conduct must involve the management of the company’s affairs
The conduct in question must relate to the management of the company's affairs and must have caused detriment to the minority shareholder. Simply pointing out poor management isn't enough; the conduct must be unfair and prejudicial.
- Proof of unfair prejudice:
There must be evidence of both prejudice and unfairness. An objective test is used to determine if a hypothetical reasonable person would consider the conduct unfair.
The default position is that shareholders are not obliged to cooperate. They are only obliged to act in accordance with the articles of association, any shareholders’ agreement and the Companies Act 2006. However, in deciding what is unfairly prejudicial, these strict legal rights should not limit any interest of a minority shareholder. The court will also take into account a concept of fairness when deciding whether majority shareholders may rely on their strict legal rights. These are legitimate expectations that arise from express or, if evidenced, implied agreements, understandings or promises between the shareholders. If the company is being managed contrary to those legitimate expectations, it could be classed as unfairly prejudicial conduct.
Examples of unfair prejudice
What is unfair in each given case depends on the individual and specific circumstances. However, some key examples might include:
- Continuous dilution of minority shareholding through the issuance of preference shares.
- Breach of the company’s articles of association or shareholders’ agreement.
- Exclusion of a minority shareholder from company management.
- Excessive director compensation.
- Abrupt changes to established dividend policies without justification.
If you're a shareholder who suspects unfair treatment, it's crucial to act promptly. Early intervention can lead to quicker resolutions and minimise overall harm. Our team is here to help you navigate these legal waters and resolve matters.