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Minority Shareholders: The Unfair Prejudice Remedy

Thursday, 19 January 2012

Sections 994 to 996 of the Companies Act 2006 provide a mechanism for aggrieved shareholders to bring a court action against their company. Such claims are often brought against smaller, non-public companies by minority shareholders who feel that the company's affairs are being conducted in a manner which is unfairly prejudicial to them. The basic process requires the aggrieved shareholder to petition the court for relief. The courts have wide and flexible powers to grant relief according to the circumstances of the particular case.

Grounds for a Shareholder's petition

A shareholder may apply by petition for a court order on two grounds:

i) if the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or

ii) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.

The provisions apply to a person who is not a shareholder if shares in the company have been transferred or transmitted to them by operation of law, just as if they were a shareholder. The Secretary of State also has authority to bring a petition if it receives a report from either its own investigators or those of the Financial Services Authority citing similar grievances.

Typical scenarios where an aggrieved shareholder may commence unfair prejudice proceedings include:

• the shareholder (where also a director of the company) is excluded from management

• the majority take steps to dilute the equity of a minority shareholder, such as issuing more shares

• a majority shareholder has acted in his or her own interests, rather than putting the company first

• financial mismanagement of the company by the majority

Powers of the court

If the court considers a petition well founded, it may make an order as it sees fit, such as:

• regulating the company's affairs in future

• requiring the company to cease doing a particular act

• authorising civil proceedings to be brought in the name of the company by the petitioners

• preventing the company from amending its articles without the court's permission

• requiring that the company or other shareholders buy the petitioners' shares

The unfair prejudice remedy is extremely broad in scope. The court is given wide discretion to make an order, "as it sees fit" and the court may therefore look at the facts of each individual case in order to achieve outcomes that are fair.

It is important that minority shareholders seek specific legal advice regarding their circumstances if they feel unfairly prejudiced. Rollingsons has lawyers experienced in company law matters; if you need advice or would like more information please contact contact James Crighton via e-mail or by phone on 020 7611 4848.