Unfair prejudice petitions: what are they, who can bring them and what is the test?

Shareholders of a company can sometimes be subjected to unfair prejudice because of the conduct of the directors or fellow shareholders of the company. Traditionally, unfair prejudice petitions have been a tool used by minority shareholder to protect their interests.

This article will examine what exactly an unfair prejudice petition is, who can bring them, the test for unfair prejudice and what is generally considered to be unfairly prejudicial conduct.

What are unfair prejudice petitions and who can bring the petition?

Unfair prejudice petitions derive from Sections 994 and 995 of the Companies Act 2006. Section 994 permits a member of a company to petition for relief where the affairs of the company are being, or have been, conducted in a manner that is unfairly prejudicial to the interests of members generally, or some of its members in their capacity acting as member of the company. Alternatively, Section 994 permits a member to seek relief if there is an actual or proposed act or omission of the company that is or would be prejudicial to that member.

The petitions can ordinarily be brought by:

1. Members of the company
2. Non-members who have had shares transferred by the execution and delivery of a proper instrument of transfer
3. Non-members who have had shares transferred to them by operation of law, such as a trustee in bankruptcy of a bankrupt member, or a personal representative of a deceased member of the company.

It is important to note that all companies falling within the definition laid out within the Companies Act 2006, including quasi-partnerships are captured by unfair prejudice legislation.

What is the test for unfair prejudice?

Unfair prejudice petitions are subject to an objective test applying equitable principles. Essentially, it is not necessary for the petitioner to show that there was bad faith or an intention to cause prejudice to them. The question of what is considered fair is judged in line with the commercial relationship of the parties, and regarding the terms set out in the company’s Articles of Association and shareholders agreements if in existence.

The first consideration for the court is usually whether the conduct of the offending member(s) contravenes the Articles of Association and/or the shareholders agreement. The conduct must be of a sufficiently serious nature to consider an infringement of the petitioners’ rights. Minor or trivial breaches do not automatically give rise to a right to bring an unfair prejudice petition. 

The court will generally consider several factors in considering the petition:

1. The unfairly prejudicial conduct must be in relation to the company’s affairs such as the managerial decisions, or shareholders exerting greater control which results in detriment to the company.
2. The conduct must relate to members interests.
3. There does not need to be a series of unfairly prejudicial acts or omissions, as a single act or omission can suffice to demonstrate unfairly prejudicial conduct.
4. Prejudice and unfairness must be demonstrated to be granted relief.

What is considered unfairly prejudicial conduct?

1. Inequitable conduct- this can take many forms. In a quasi-partnership, there is generally a sense of the parties coming together in the mutual expectations of good faith, trust and cooperation. If there is breakdown of trust and confidence, this can sometimes lead to inequitable conduct. By way of further example, an exclusion of a member from management where participation in the management of the company was part of what was agreed between the shareholders can sometimes give rise to inequitable conduct.
    
2. Abuse of power. Quite often, this will be tied in with a breach of the articles. For example, an offending member may deprive the petitioning shareholder of their right to know the actual state of the company by delaying accounts.
    
3. Failures to pay a level of expected dividends to the petitioning member or payment of excessive remuneration to directions without reference to value of services rendered by members.
    
4. Mismanagement of the company generally. This is weighed against the level of loss that arises because of the mismanagement and the nature of the acts or omissions amounting to mismanagement.
    
5. Breaches of fiduciary duty- this can also take various forms. Sometimes it is as simple as acts or omissions causing damage to the parties’ general sense of trust and confidence.

The corporate law team at Stephensons have extensive experience acting for businesses on a broad range of legal issues. If you require advice or assistance call us today on 0161 696 6170 to see how we can help.