Unfair Prejudice Claims

In a private company, the minority shareholders’ interests can be unfairly prejudiced by the majority shareholders who use their control of the business to prioritise their own interests. This is particularly the case where those majority shareholders also have a controlling interest on the board. Therefore, there is a mechanism whereby a minority shareholder can be protected.

Successful claims for unfair prejudice provide remedies for those minority shareholders, mainly a buy-out or, in exceptional circumstances, a just and equitable winding up of the company involved.

Although claims involving unfair prejudice can run all the way to trial, it is often the case that they can be resolved without incurring these costs. Many unfair prejudice claims we act on are settled after a mediation, and we have a number of mediators we consistently recommend. However, where a claim proceeds to trial, we bring our deep and extensive experience of contested corporate litigation to bear.

In order to make a successful claim for unfair prejudice, a minority shareholder must be able to demonstrate three individual components. These are outlined below.

1. Standing to bring a claim

First, the claimant must be a minority shareholder in the company where the alleged unfairly prejudicial conduct has occurred.

2. That the conduct involves the management of the affairs of a company

Second, the conduct of which the minority shareholder is complaining of must consist of the management of the affairs of the company. Poor management does not equate to unfair conduct. The affairs of the company must have been managed by the majority in such a way which has caused a detriment to the minority claiming unfair prejudice. It is not enough to simply point out that mistakes have caused a minority shareholder to lose out on potential dividends, for example.

3. That the conduct has caused unfair prejudice

There are arguably two components here. However, given the symbiosis between prejudice and unfairness for bringing an unfair prejudice claim, it is difficult to separate the two. Both must be demonstrated.

In determining whether any prejudicial conduct is unfair, an objective test is employed. This asks whether a hypothetical reasonable bystander would believe the prejudice to be unfair, in the circumstances.

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.

What is unfair in the circumstances will be fact-based. However, as a starting point, examples of conduct that has been found to be both prejudicial and unfair are:

• Where the company continuously dilutes the minority shareholding by issuing preference shares, which puts a detriment on the minority because they rank much further down to receive dividends;
• Where the articles of association or shareholders’ agreement of the company has been breached;
• Where the minority shareholder has been excluded from the management of the company; and
• Where the directors are excessively rewarding themselves through their pay;
• Where the company suddenly departs from an established dividend policy without good reason, leaving the shareholders without income.

If you are a shareholder and suspect that any of the above has been carried out, or some other act which you believe is prejudicial and unfair, it is important to act early, where it is both quicker to resolve and will reduce the overall harm incurred.