In previous articles I have looked at remedies available to shareholders who believe they have been prejudiced. Key to these solutions is the petition for unfair prejudice pursuant to S.944 of the Companies Act 2006. This article explores what is actually meant by unfair prejudice.

What is unfair prejudice?

It is important to understand that unfair and prejudice actually consist of two separate parts of any petition although there is definitely a link between the two.

In Re Saul D Harrison & Sons plc [1995] Lord Justice Neill outlined that it is possible for behaviour to be unfair but not prejudicial or prejudicial but not unfair.

For example if a shareholder was dismissed as a director and excluded from the management of a company this may well be prejudicial. It would not be unfair, unless the shareholder had a legitimate expectation of involvement in management.

Prejudice

A petitioner will need to show that prejudice has actually been caused to their shareholding. What this usually means is a reduction in the value of their shareholding. There is no need to show direct damage to the shareholding; where a petitioner can show financial loss to the company as a whole this will be sufficient to show prejudice to their shareholding.

Unfairness

Whether an action (even if prejudicial) is unfair will undoubtedly turn on the facts of the individual case. In O’Neill v Phillips [1999] The House of Lords set out a two stage test for unfairness.

Two Stage Test for Unfairness

The two stages are:

  • There must be a breach of the terms of  how the affairs of the company should be conducted.  For instance, a breach of the articles of association or a collateral agreement such as a shareholders agreement; and
  • It is unfair for those conducting the affairs of the company to rely on their strict legal powers under the constitution of the company.

The Court of Appeal provided further guidance on this in the case of Grace v Biagioli [2006]

Examples of Unfair Prejudice

A classic example would be a shareholder excluded from the management of a quasi partnership company.  In this instance as there is an expectation that each shareholder would be involved in the management of the company the action is unfair. In addition it is also prejudicial as excluding the shareholder from the management of the company severely impacts the value of their shareholding.

However, if there is no collateral agreement that each shareholder would be involved in management, then removal as a director may not amount to unfair prejudice.

Re Cumana Ltd [1986]

In this case there was an agreement that a particular shareholder would be consulted on all matters concerning the company.  Failure to consult was considered unfair prejudice. Even where there is no collateral agreement, a failure to consult may be unfair prejudice. This would be the case if the decision being made was sufficiently important to justify consultation (Re Elgindata Ltd [1991]).

Re Tobian Properties Ltd [2013]

Lady Justice Arden suggested in this case that a general failure to provide a shareholder with copies of the annual company accounts could potentially amount to unfair prejudice.

Simple mismanagement of a company would not amount to unfair prejudice if the actions complained  about are of normal commercial activity or judgment and the actions have been taken in good faith. After all, a shareholder invests in a company knowing that there is always a risk that the venture may fail and that their investment could be lost.

Consequently, a petitioner would need to show that the actions complained about were either continued serious mismanagement –  or deliberate and cynical and therefore amounted to an actual breach of a director’s statutory and fiduciary duties (See Re Macro (Ipswich) Ltd [1994] 2 BCLC 354).

Croly v Good [2009]

Drawing excessive remuneration from the company in breach of the articles of association or an agreement between the shareholders will probably amount to unfair prejudice  This is particularly the case  if profits have been allocated deliberately to exclude a particular shareholder or group of shareholders to the profit of others (Re McCarthy Surfacing Ltd).

Directors who award themselves grossly inflated salaries that cannot be justified by the services they provide to the company, or which swallow up all potential profit to be distributed to the shareholders, could also be guilty of unfair prejudice (Re a Company (No 002612 of 1984) (1986). 

Do you believe that your shareholding has been prejudiced?  Our Commercial Dispute Resolution solicitors can help. Call us today on 0800 988 7756 for a FREE initial consultation.