Disputes over the management and direction of companies are very common and the law has long recognised the need to provide redress to shareholders in certain situations if there has been “unfair prejudice”. This is now enshrined in section 994 of the Companies Act 2006.
What is unfair prejudice?
Section 994 provides that a member (ie, a shareholder) of a company may petition the Court for an order on the ground (a) that the company's affairs are being conducted in a manner that is unfairly prejudicial to the interests of members (including at least himself), or (b) that an actual or proposed act is or would be prejudicial.
What is unfairness?
The test of unfairness is an objective one, and is what a hypothetical reasonable bystander would believe to be unfair.
Fairness is judged in the context of the commercial relationship, the contractual terms of which are usually set out in the Articles of Association of the company and in any shareholders agreement. The starting point is therefore to ask whether the conduct complained of is in accordance with the Articles and the powers which the shareholders have entrusted to the board. If the conduct is in accordance with the Articles it will be more difficult to succeed with an unfair prejudice petition.
Even if the conduct is not in accordance with the Articles, it does not necessarily render the conduct unfair, as trivial or technical infringements of the Articles may not give rise to a remedy under section 994.
Examples of unfairly Prejudicial Conduct
Unfair prejudice is a flexible concept. Common examples of what may constitute unfairly prejudicial conduct are:
Remedies
In practice, the most common remedy awarded to a successful Petitioner is an order that their shares be purchased by those who caused the unfair prejudice.
However, the Court also has other specific powers, such as to require the company to refrain from doing an act complained of, to require the company not to make any specified alterations in its Articles or to authorise civil proceedings to be brought in the name of the company.
In relation to a purchase of shares, the valuation of shares can cause considerable problems, as there are many conflicting methods of valuation. The normal approach is that the shares should be valued at such date as is fair to the Petitioner, which is usually the date when the prejudice to the Petitioner began. The Court can also order that the valuation should be on the basis that the unfairly prejudicial conduct (which may have devalued the Company's shares) had not taken place.
In some circumstances it may be appropriate for the Court to order that the majority shareholder sells his shares to the Petitioner, although this is less common.
A final word
Shareholder disputes are notoriously complicated and costly. The Court is limited in what it can do to remedy such a dispute: always try to resolve it without the need for proceedings and the most effective way to do so is likely to be with the assistance of a skilled mediator.
If you wish to discuss any of the points raised in this article please contact Christopher Longden who is a member of our Dispute Resolution team and an accredited mediator.
