28 November 2022

Unfair Prejudice In Shareholder Disputes

In many companies the commercial disruption and anxieties experienced over the past two or three years have, in some cases, amplified the tensions between minority and majority shareholders...
UK Corporate/Commercial Law
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In many companies the commercial disruption and anxieties experienced over the past two or three years have, in some cases, amplified the tensions between minority and majority shareholders, leading to boardroom disputes based on unfair prejudice.

Unfair prejudice claims generally arise if the minority shareholders believe that the majority shareholders with control at board level are acting against their best interests. If shareholders of a company believe they are unfairly prejudiced by other shareholders, they may bring a claim under section 994 of The Companies Act 2006. For an unfair prejudice claim to stand, the person bringing the claim, the petitioner, is required to prove that first, the conduct complained of relates to the running of the business and that the conduct affected the petitioner's interest as a shareholder. Secondly, the conduct complained of must be both unfair and prejudicial.

However, what is or is not considered to be unfairly prejudicial is determined objectively using the test of whether a reasonable person, based on the circumstances and the facts of the case, would consider the conduct to be unfair. For example, if a director pays himself unreasonable remuneration from the company accounts, or if he unreasonably withholds important information from the other shareholders, there would usually be a case for unfair prejudice. Parties would rely on case law to support their case on whether the conduct was unfairly prejudicial or not. Section 996 of the above mentioned Act provides for the reliefs for unfair prejudice. The court has discretion to award successful petitioners a wide range of reliefs such as future regulation of the company's conduct, with the most common remedy being for the court to order one of the parties to purchase from the other party their shares in the company at a fair value.

In the case of Wann v Birkinshaw [2017] EWCA Civ 84, the petitioner, one of four equal shareholders in a company that provided self-catered holiday accommodation, brought an unfair prejudice claim against the other three shareholders for allegedly excluding him from the management of the company. The petitioner was successful, and obtained an order for the sale of his share in the company to the other shareholders. On appeal, however, the appellants were able to get the valuation of the company reduced by £1.4 million to reflect net borrowings the company had at the time.

In most cases, unfair prejudice claims are brought by a minority shareholder against a majority shareholder. However, this is not always the case. The case of Goodchild v Taylor & Taylor Goodchild Limited [2018] EWHC 2946, involved a dispute between two equal shareholders in a company, also known as a quasi-partnership. The petitioner alleged that the respondent had affected business arrangements in ways that were unfairly prejudicial to him, and sought relief in the form of a court order with provisions for the petitioner to buy the respondent's share at the fair market value. The court found that the respondent's actions did amount to unfair prejudice and ruled in the petitioner's favour.

Claims of unfair prejudice can even be brought by majority shareholders against minority shareholders. In the case of Macom GmbH v Bozeat and others [2021] EWHC 1661 (Ch), the court decided that a minority shareholder's restriction of the majority shareholder's access to information and his refusal to correspond with the other director, who was appointed by the majority shareholder, constituted unfair prejudice and ruled against the minority shareholder.

Khizar Arif, a partner, pointed out "often minority shareholders feel dominated by the other shareholders and do not always recognise that they can take legal action if the actions of the other shareholders over the direction and development of the company unfairly impacts on them." Khizar further comments " all shareholders have statutory rights consisting of the right to inspect company registers and the entitlement to call a general meeting. Conflicts of interest can sometimes be resolved by frank negotiations, if this proves impossible legal action is the alternative."

Procedure for making an unfair prejudice claim

Unlike most civil claims, a claim for unfair prejudice involves a petition instead of a claim form. It should include the allegations of unfair prejudice and the relief sought. A draft should be served on the respondent alongside a detailed letter of claim. Although discouraged by the court, an alternative claim can be made for the just and equitable winding up of the company. If this is sought, a validation order under section 127 of the IA 1986 is required and the petition should include the petitioner's consent to such an order.

The next step, the final petition is nominally presented to the court instead of being issued like other claims. Most unfair prejudice claims are heard in the High Court. Care should be taken to ensure extraneous details unrelated to business dealings are not included in the petition, or risk of getting your claim struck out. (Primekings Holding Limited and Ors v King and Ors)

Once the petition has been presented to the High Court, an Insolvency and Companies Court ("ICC") judge will give standard directions concerning the service of the petition, the statements of case, costs budgeting, and the listing of a Costs Case Management Conference ("CCMC"). In the interim and at any point during the proceedings, you can apply for interim injunctions if you can show that damages are not an adequate remedy. Additionally, as a cost-saving exercise, you can apply for a split trial, where the question of valuation would be deferred until after the issue of unfair prejudice is decided. However, this may be disadvantage to the petitioner not in the least because of the time delay it would cause.

The CMCC comes next. In this, the court will decide on matters concerning disclosure, costs, and set a trial date. The trial will be heard by a High Court judge instead of an ICC judge, and will be confined strictly to relevant matters of the case.

The application of the law of unfair prejudice is complex and such an action should always be undertaken with advice from a legal professional if you need to bring or respond to a claim for unfair prejudice.

Khizar Arif, a partner, having initially been called to the Bar of England in 2001, Khizar was then admitted to the Roll of Solicitors, attaining Higher Rights of Audience shortly thereafter. He holds a Master of Laws degree (LL.M.) focused on international business and maritime law from the University of Hamburg, Germany.

He has a distinguished reputation for complex cross-border commercial work, commodities trade and shipping disputes, property, construction, contract, intellectual property, technology, media and employment law.

Khizar has a defamation practice that includes online publication claims, along with privacy, harassment, human rights and data protection cases. He acts for claimants and defendants, and he has represented a range of clients including high-ranking public and 'politically exposed' individuals,

Khizar, who regularly appears in the County Courts and the High Court, advises on all aspects of dispute resolution and litigation, from pre-action stage to settlement or trial through to enforcement. He helps clients in informal negotiations and, if appropriate, on alternative dispute resolution methods such as mediation and arbitration.

He has extensive expertise in the marine and shipping sector. Khizar is a member of the Solicitors' Association of Higher Court Advocates, the London Shipping Law Centre and the Deutscher Verein für Internationales Seerecht.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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