Unfair Prejudice Claims and ‘Standing’

Unfair prejudice petitions (under section 994 of the Companies Act 2006) are a useful mechanism for shareholders of a company to apply to the Court to make an order that the Company's affairs are being or have been conducted in a manner unfairly prejudicial to their interests, or that an actual or proposed act of the Company is or would be prejudicial. Unfair prejudice petitions, therefore, provide a pathway for shareholders to seek remedy or redress where they consider that their interests are being harmed.

In order to be successful in an unfair prejudice claim, two elements must be present. Firstly, the offending conduct must be prejudicial to the rights and interests of the relevant shareholder(s). Secondly, that same conduct must also be unfair. These two criteria are explored in more detail below.

Prejudice 

In terms of prejudice to a shareholder's rights and interests, the Court has regard to the rights contained within the Company's Articles of Association and also outside of the articles. For example, there may also be a shareholders agreement in place that could contain agreements such as a legitimate expectation to be involved in the Company's day-to-day running.

Certain companies may also have been formed based on a" quasi-partnership". Where this is the case, members may expect that they will be able to participate in both the management and the profits of the Company. This relationship is based on the intention upon which the Company was formed and would require evidence put forward in favour of a quasi-partnership being in existence.

Unfairness 

The concept of unfairness is assessed by the Courts objectively in that conduct will be deemed to be unfair if a reasonable person would consider it so. Therefore, a shareholder does not need to demonstrate that the offending conduct that caused prejudice to them was intentional.

Once again, the Court will have regard to the contractual terms laid out within the Articles of Association and any shareholders' agreement on whether the offending conduct will be deemed unfair. If the conduct is legitimised by the Articles or any shareholders' agreement, it will be more difficult for a petitioning shareholder to prove it is unfair. If, however, the conduct is not permitted by way of the articles or any other agreement, it will not necessarily be deemed automatically unfair.

• Exclusion from management – in order for a claim to succeed on this limb, as already noted, there must be a legitimate belief on the part of the shareholder that they are entitled to participate in the running of the Company, based on the Articles of Association or other such agreement.
• Misappropriation of company funds or assets – examples of this include:
  • the improper use of company funds or assets for a director's own benefit;
  • diverting funds away from the Company on purpose; and
  • trading in direct competition with the Company under the guise of still acting for the Company.
• Suppressing company information – in the absence of any shareholders agreement which expressly provides for company information to be provided to the shareholders, the directors can often blindside shareholders from viewing the inner working of the Company without any recourse. However, this behaviour could overstep the mark in certain circumstances and could warrant a claim of unfair prejudice. 

In consideration of this issue, the Court found that the Petitioner was able to proceed with the petition on the grounds that:  

• there is a requirement that shares are held until proceedings are brought to an end;
• the transfer of the Petitioner's shares had been done strategically to dismiss the petition on the grounds of standing; and
• the Petitioner had a good prospect of proving at trial that the Respondents had exercised their powers for an improper purpose and had not acted in good faith and in the interests of the Company.

This decision is likely to have implications for how the Court will perceive standing in unfair prejudice petition cases and highlights the requirement on the part of a company to ensure that any compulsory acquisition of a member's shares is conducted in good faith and with the interests of the Company in mind.