Shareholders – are you being unfairly prejudiced?

When business ventures first begin, it is rare for the parties to consider what would happen in the event of a relationship breakdown in the future. Unfortunately, disputes between shareholders are not uncommon in companies of all sizes. Whether a small family business or a global enterprise, relationships between shareholders can deteriorate where one or both parties consider that their interests are not being met.

In the Commercial Disputes team at HCR, we have seen a rise in disputes between shareholders and directors. We consider below what are the signs to look out for, what may amount to a claim, and what to do if you are facing what can be a very difficult, stressful and, at times, emotional situation.

An unfair prejudice claim usually arises when, more often than not, minority shareholders believe that the company is being run contrary to their best interests. An unfair prejudice petition provides for a statutory remedy available to shareholders of a company, governed by sections 994 to 999 of the Companies Act 2006. An unfair prejudice petition allows shareholders to seek relief from the court on the basis of ‘unfairly prejudicial’ conducted by other shareholders and/or the directors.

What are the signs of Unfair Prejudice?

Typical examples that we routinely come across include:

• Exclusion of the shareholder (known as a petitioner) from the management of the company, in breach of an agreement/understanding between the shareholders that they would have been involved, and the majority’s conduct did not justify taking that step;
• directors (with the sanction of the majority) grant themselves or others, sometimes family members, excessive remuneration whilst refusing to consider paying dividends to the petitioner;
• shares being transferred or allotted in bad faith or without complying with rights of pre-emption in a company’s articles, that benefit the majority members. This could be the case even if the rights issue was open to all shareholders, but the majority knew that the petitioner could not afford to take up the offer and this was the reason for making it;
• where the company amends the company’s articles of association and such amendments have a prejudicial effect on the petitioner, such as diluting their interest;
• wrongful suspension and/or dismissal of the petitioner from their employment in the company, often seeking to rely on bad leaver provisions, which can hugely discount the value of any shareholding;
• change of auditors or members of the board without the petitioner’s consent and are overly sympathetic to one or more of the other directors/shareholders;
• being suspended as a director, access to IT systems removed, and/or banned from attending the premises.

What would amount to prejudice that is unfair?

The shareholder must demonstrate that their interest as a shareholder has been ‘prejudiced’ by the way the company is run, and that the prejudice is ‘unfair’. The elements are therefore twofold:

1. The ‘prejudice’ commonly suffered is a devaluation of the petitioner’s shares often combined with other forms of a loss; failure to repay the director loan account, failure to pay dividends that have been agreed, caused by the conduct complained of. However, it can also be due to the trust and confidence between the company and the petitioner being damaged; and
2. The test for prejudice being ‘unfair’ is objective.

Timing of the unfair prejudice

The conduct can be past, present or even anticipated events and can impact one, some or most of the shareholders. Often it can start small and is repeated or builds.

In May 2024, we successfully opposed an interim application to strike out our client’s petition on grounds it was time-barred under the lead decision known as Zedra Trust.  We believe that our case was the first judgment to be handed down following the lead case.

The Judge in our client’s case dismissed the respondents’ argument and drew attention to the key factor that the relief sought that it was non-monetary and subject to a 12-year limitation period. Do read the High Court’s decision in Tom V Candey [2024] EWHC 1398 (Ch).

However, we do not recommend you waiting 12 years before bringing a claim!

What can you claim? 

The court has a wide discretion in relation to the relief it may give and can make such order as it sees fit. However, we usually apply for and obtain an order to purchase our client’s shares at fair value after taking into consideration the unfair prejudicial conduct.

Tips if you consider that you may be unfairly prejudiced

• Check to see if you have a shareholders agreement, articles and other company documents to see what rights you have;
• if you are a director, is there a director service agreement in place?;
• if you are an employee and have been suspended or sacked, check your employment contract;
• keep an audit trail of the activities, document the position, follow up on email; and
• take action promptly – seek independent legal advice at an early stage to understand your rights and obligations