Unfair prejudice? Minority shareholder rights

Posted on: May 24th, 2019

If you are a shareholder who is unhappy about how a company’s affairs have been, or are being run, there are things that can be done.

Shareholders Agreement

First of all, it is sensible to have a shareholders agreement in place. This can include provisions to protect you as a minority shareholder. A shareholders agreement is really useful when relationships between shareholders have broken down and one or more of the shareholders wishes to exit the company.

A shareholders agreement will normally have a mechanism in place and structure to follow in the event of a dispute. This will often include provisions to allow a shareholder’s shares to be purchased at fair value by the remaining shareholders on exit.

If you are a disgruntled minority shareholder, but you do not have a shareholders agreement, you need not panic; the Companies Act 2006 affords you some protection.

Unfair Prejudice

Any shareholder can petition the Court (even if you do have a shareholders agreement) if they consider they have suffered what is known as “Unfair Prejudice”, pursuant to Section 994 of the Companies Act 2006 :-

“A member of a company may apply to the Court by petition for an order on the ground (a) that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of member generally or of some part of its members (including at least himself), or (b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.”

The conduct complained of must be causing prejudice or harm and it must be unfair. What amounts to “Unfair Prejudice” is objective, but examples have included:

  • Failure to pay dividends, or recognise the rights of the minority shareholder;
  • Failure to disclose accounting information;
  • Exclusion from management where this would legitimately be expected;
  • Serious mismanagement;
  • Diverting business to another company in which the minority have no shareholding.

To win, there has to be an unfair adverse effect on the minority shareholders. Fairness will be judged by a Court in the context of a commercial relationship and this will normally involve analysis of all available evidence including corporate documents, such as the Articles of Association and any shareholders agreement.

It is sensible to check whether the conduct of the infringing party is in accordance with the Articles and the powers that the shareholders have given to the Board. It will be hard to win an unfair prejudice petition if the issues and behaviour complained of falls within the Articles of Association.

Wide powers are given to the Court to provide redress to a minority shareholder who has been unfairly prejudiced under Section 996 of the Companies Act 2006. The Court has been known to make orders:

  • Authorising civil proceedings on behalf of a company, as appropriate;
  • Regulating the conduct of a company’s affairs in the future;
  • Requiring a company not to do or continue to do an act complained of;
  • Requiring a company to do an act which it has omitted to do;
  • Provide for the purchase of the shares of any shareholder by other shareholders, or by the company itself.

The last of these above is probably the most common order you see made by a Court if there has been Unfair Prejudice, where the Court orders that a minority shareholder is bought out by the majority, or the company, at a fair price/value which may need to be determined by the Court, subject to expert evidence.

The mere threat of an Unfair Prejudice petition being issued can sometimes lead to a successful negotiation. Before any petition is issued with the Court, it is always advisable to take legal advice and there should usually be an exchange of correspondence setting out your case as to why you consider you are suffering Unfair Prejudice.

If you are a shareholder who is affected by any of the above, please do not hesitate to contact Mark James on 01273 069993.