Unfair prejudice claims

Mon 25 September 2023

Unfair prejudice

An unfair prejudice claim is the most common type of claim minority shareholders have against majority shareholders. The typical scenario also includes where the majority shareholders also have control at director level, either themselves or through directors they have appointed, and the minority shareholders are not adequately protected by a shareholder agreement or amended articles of association.

In many situations, especially in small businesses, the dilemma facing a shareholder who may clearly be being unfairly prejudiced is that starting a court claim is expensive, risky and can often cause damage or even the downfall of the company.

A better strategy is often to instruct experienced and skilled solicitors to exert sufficient pressure on the shareholders creating the prejudice and to negotiate the best available outcome, which is, however unfair it may be, that the majority shareholder buys out the shares of the minority on best available terms.

If you need experienced, practical and cost effective specialist lawyers for unfair prejudice, please do get in contact. We are 1 of the UK’s fastest growing and larger law firms and this generally means that your opponents are likely to take on board that you mean business.

Making a court claim for unfair prejudice

The basis for starting a court claim is breach of section 994 of the Companies Act, which sets out the legal tests for unfairly prejudicial conduct. Any shareholder can bring a claim.

There are 2 elements you would need to prove to succeed at court, that actions or inactions of majority shareholders are unfair and that you have consequently suffered prejudice, in terms of reduced value of your shares.

The requirement to prove prejudice often creates difficulties in the common situation where minority shareholders are deliberately kept in the dark about how the company is being run and its finances. It is easier to prove prejudice where, for example, business is being diverted to other businesses owned or controlled by shareholders or where a dividend policy favours the majority shareholders only, often combined with overly generous bonuses for directors.

Where a claim goes to trial (which is quite rare) and the claim succeeds on the legal test, the court has wide powers in terms of remedies, which include :-

Damages and an order that steps be taken by the company to prevent unfair minority prejudice in the future.
Ordering the liable shareholder top buy you out at a price decided by the court.
An order that the company must be sold.
An order that the company should be wound up.