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Unfair prejudice claims are claims under Section 994 of the Companies Act 2006, providing shareholders with a statutory mechanism to seek remedies, which may include a fair buy-out of your shares, damages, or adjustments to company governance.
Before initiating proceedings, shareholders should document evidence of unfair conduct thoroughly, consider alternative dispute resolution, evaluate litigation costs against potential outcomes, record attempts at internal resolution and obtain early legal advice on claim strength.
In many cases, a negotiated outcome is far better. We combine legal expertise, experience with these claims and strategic insight to help clients balance the risks and potential outcomes.
The two key elements required to establish unfair prejudice are :-
Prejudice - There must be actual or potential harm to the shareholder's interests in their capacity as a shareholder. Harm does not have to be financial harm to establish unfair prejudice.
Unfairness - The conduct must be objectively unfair, not just commercially unwise or disappointing.
Exclusion from management against agreed participation rights.
Improper diversion of business or assets to other companies connected with majority shareholder.
Excessive remuneration paid to majority shareholders.
Failure to provide company information.
Non-payment of dividends without commercial justification.
Serious mismanagement affecting share value.
Improper share dilution.
The prejudice must justify court intervention. Technical breaches without significant impact are insufficient. Compelling evidence will often involve evidence of systematic unfairness rather than isolated incidents. Courts consider the size and nature of the business when assessing materiality.
Some small companies operate like partnerships (generally known as "quasi partnerships), based on mutual trust and personal relationships. In such cases, the courts can be more willing to find unfair prejudice based on excluding a shareholder from management or breaching understandings about participation.
The courts have broad discretionary powers under Section 996 of the Companies Act 2006 to grant remedies they consider appropriate for unfair prejudice claims. While the court's powers are extensive, they typically focus on practical solutions that resolve the underlying issues:
Share purchase order - the most commonly granted remedy, requiring either the company or other shareholders to purchase the petitioner's shares at a fair value. This provides a clean exit for the minority shareholder and is particularly appropriate where relationships have broken down irretrievably.When determining share value, courts have to address several complex issues. The primary consideration is whether a minority discount should be applied to reflect the shares' lack of control, though courts often order valuations on a pro-rata basis where the unfair conduct has led to the forced sale.
Regulation of company affairs - the court can impose specific requirements on how the company must conduct its business going forward, including mandating regular board meetings, requiring specific voting procedures, or establishing clear dividend policies. This remedy is useful where the business relationship can be salvaged.
Injunctive relief - the court can prohibit specific conduct or require particular actions, such as preventing the disposal of company assets, requiring disclosure of information, or mandating consultation before major decisions. These orders can be either temporary during proceedings or permanent.
Authorisation of derivative proceedings - the court may permit the shareholder to bring legal proceedings in the company's name against directors or third parties who have harmed the company's interests. This is particularly relevant where the unfair prejudice involves misappropriation of company assets or opportunities.
Constitutional changes - the court can order amendments to the company's articles of association or shareholders' agreement to prevent future unfair conduct or clarify parties' rights. This might include adding or removing provisions about decision-making processes, share transfers, or management participation.
Unfair prejudice disputes are often as much about strategy as they are about law. Our team guides clients to:
Assess the strength of their position.
Develop tactical approaches aligned with commercial objectives.
Set realistic objectives and plan a clear course of action.
Manage risk and control costs via negotiation or mediation.
Pursue or defend claims effectively if litigation becomes necessary.
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