Developments in Unfair Prejudice Litigation

Published date07 July 2022
Subject MatterCorporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Directors and Officers, Insolvency/Bankruptcy, Shareholders
Law FirmMayer Brown
AuthorMr James Whitaker


Companies-both public and private, and in multiple sectors-continue to grapple with the challenges of today's economic climate. Nuanced, complex and consequential (perhaps even existential) decisions must often be made under significant time pressures. As a result, the interests and views of shareholders-particularly minority shareholders-may not always receive the attention they deserve, or require. Increasingly, those shareholders are looking for means of redress.

In this post, we look at unfair prejudice actions, which have long formed an important weapon in shareholders' arsenals. These allow minority shareholders to seek redress for perceived injury or prejudice they have suffered, unfairly, as a result of corporate action (or inaction), at the hands of those who manage the company, perhaps in breach of some promise or agreement.

The growing number of unfair prejudice actions over recent years, and months, reflects the dual emerging trends of stakeholders-particularly minority shareholders-litigating to protect their rights, and of courts considering, and perhaps expanding, the scope of the unfair prejudice jurisdiction.

These trends are likely to continue. We consider some of the factors to keep in mind when preparing, or responding to, unfair prejudice petitions.

What are Unfair Prejudice Petitions and How Do They Work?

Aggrieved shareholders, unhappy with the performance of those running the company, commonly have two potential courses available to them (absent a wish to seek to wind up the company). First, in specific (and rather limited) circumstances, they may be able to pursue a so-called derivative action, in the company's name, against its directors. Secondly, they may be able to establish that their interests have been unfairly prejudiced through the conduct of the majority shareholders, and/or, increasingly, the directors of the company, and obtain relief by way of an unfair prejudice petition.

Whilst the two mechanisms have the potential to overlap, derivative actions-for which judicial permission is required-may be more appropriate where the shareholders act as one, to seek a remedy for the company. In cases of intra-shareholder disputes, however, where the remedy being sought is for the benefit of the shareholders, unfair prejudice petitions are often seen as the more attractive option.

Unfair prejudice petitions are based upon the statutory provisions in sections 994-996 of the Companies Act 2006 (the "Act"). Section 994 entitles a member (that is, a shareholder) of the company to petition the court for relief on the grounds that:

  • the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of the members generally or of some part of its members (including the petitioner); or
  • an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.

Each element will commonly be construed broadly, and the courts repeatedly demonstrate a willingness to apply the tests flexibly, whether that be by reference to the conduct of the company's affairs, or the interests in issue.

Indeed, the jurisdiction has been described, by Lady Justice Arden, as having "an elastic quality which enables the courts to mould the concepts of unfair prejudice according to the circumstances of the case".1This flexibility has significant appeal for prospective petitioners.

Nonetheless, it is a statutory jurisdiction and, as such, will only be available if the requirements of section 994(1) are satisfied.

Who Can Bring Unfair Prejudice Petitions?

Any company satisfying the Act's definition of a company, i.e. one formed and registered under the Act or its predecessor statute,2will be subject to the jurisdiction of section 994. It does not apply to overseas companies.

The ability to petition the court under section 994 is limited to:

  • membersof the company in question; and
  • non-members(i) who are transferees of shares (by virtue of a properly executed instrument of transfer, and regardless of whether the company in fact registers the transferee as a shareholder); or (ii) to whom shares have been transmitted by operation of the law, such as in the context of a bankruptcy

There is some uncertainty as to the point(s) in time at which the petitioning party must satisfy the standing requirements; this has been the subject of recent disputes. Whilst a party must satisfy those requirements at the time the petition is filed, it is not necessarily the case that it must continue to do so through the course of the action and through to judgment; recent authority suggests that standing is not lost upon the petitioner ceasing to be a member.3

There is no prohibition on majority shareholders presenting petitions under section 994. In practice, however, such petitions are vulnerable to challenge, and would ordinarily be struck out, given that any prejudice suffered will not be considered unfair if it can be rectified by the petitioner itself (which, of course, will likely be the case for majority shareholders). A situation which can arise in this context is where the petitioner becomes the majority shareholder after filing the petition as a result of a change of control; this does not, without more, jeopardise the action, as the conduct complained of could still have reduced the company's value.

Difficult issues can arise in the context of trustees presenting-or not presenting-petitions; whilst the relevant interest for the purposes of considering unfair prejudice is that of the beneficial owner of the shares, beneficial owners under a trust do not fall within the section 994 requirements (i.e. they are not themselves members or transferees of shares) and cannot, therefore, present a petition directly.

Similarly, insolvency scenarios can present difficulties. A shareholder may still bring a section 994 petition in an insolvency scenario, but there will be additional difficulties in establishing that, essentially, it was the allegedly unfairly prejudicial conduct complained of which led to the company's insolvency and that the shares would have had a value but for that conduct.

Notwithstanding these issues, however, as a general proposition, the unfair prejudice mechanism is available to shareholders of the company in question.

Who Is The Appropriate Respondent?

A key question in the context of unfair prejudice is the appropriate respondent(s) to a petition: whose conduct should the petition address and from whom should redress be sought?

Unfair prejudice claims can, and do, target a range of potential parties. Most frequently, the principal focus of the action will be the party or parties with the ability to control the company, i.e. the company's majority shareholder(s). In addition, however, relief may be sought as against former and non-shareholders, including company directors and third parties. The propriety of pursuing non- shareholders in unfair prejudice petitions will depend upon the circumstances of the case and, most pertinently, the conduct in question and the capacity in which the relevant parties were acting. These are rarely straightforward issues.

Nonetheless, the courts have frequently demonstrated their willingness to entertain unfair...

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