| This article updates on developments in relation to unfair prejudice and shareholder disputes under English law. This article is no substitute for legal advice on the complex subject of unfair prejudice. If you would like further explanation of any points in this guide, or consider you have experienced unfair prejudice as a shareholder, please contact us. |
Whilst unfair prejudice and shareholder disputes have, at their core, remained the same over the last decade, the courts have subtly altered the landscape through caselaw, developing their opinions on specific issues. This article provides an update on how the law in relation to unfair prejudice petitions has changed.
This is prescient as there has been a notable rise in the number of unfair prejudice petitions filed, with 2024 witnessing a tripling of claims being advanced compared to the previous year. This surge is attributed to uncertainties around economic growth in the UK making shareholders more risk adverse and increased awareness of shareholder rights. Minority shareholders are therefore increasingly leveraging these claims as strategic tools to negotiate exits or address grievances.
Section 994 of the Companies Act 2006 allows a shareholder to petition the court when a company's affairs are conducted in a manner that is unfairly prejudicial. This is often employed by minority shareholders who feel marginalized or mistreated within the company structure.
Typical examples of unfairly prejudicial conduct include:
Importantly, the conduct of the majority shareholders must be both unfair and prejudicial to the interests of the minority shareholders. If both elements are not met then a claim will not succeed.
The typical remedy that the courts award (although many are available) is an exit for the unfairly prejudiced shareholder, their shareholding bought by the remaining shareholders for fair market value. What constitutes fair market value, and the application of minority discounts, is one of the key areas addressed by recent case law.
In the Wells v Hornshaw and others case the court held that a shareholder suffered unfair prejudice due to the use of outdated financial information, in a share valuation for a shareholder who was looking to exit the company. Reliance by an auditor on financial data up to 31 December 2014, despite the valuation occurring in June 2016, was deemed unfair and prejudicial despite it being in accordance with a mechanism in a shareholders’ agreement. The court therefore issued a revaluation order of the claimant’s shares based on up to date financial information.
This case shows that, even when conduct is in accordance with a shareholders’ agreement, it could still give rise to a petition for unfair prejudice.
The Court of Appeal in the THG v Zedra Trust case clarified that unfair prejudice petitions are subject to statutory limitation periods. Claims seeking monetary relief are generally subject to a six-year limitation period, whereas other forms of relief, such as share buyouts, may fall under a 12-year period. This distinction emphasises the importance of timely action when considering such petitions.
In the Primekings Holding Ltd v King case , the Court of Appeal emphasised that for conduct to be considered under section 994, there must be a causal connection between the alleged unfair conduct and the company's affairs. Personal grievances unrelated to the company's operations may not suffice even if it leads to a breakdown in trust and confidence between the shareholders.
It had long been accepted that where a minority shareholder’s shares are sold following a successful section 994 petition, a petitioner’s shares would be discounted to reflect the fact that they such shares might have limited affect on a company’s voting powers, have a limited market, or be difficult to realise. That is no longer the case.
In the Re Edwardian Group Limited case the court held that there was no presumption for or against a discount. This position has subsequently been reinforced, most recently in the Smith v Smith & Anor case , in which the court held that there was 'no presumption of applying a discount'. In particular the court recognised the unfairness in treating the petitioner as a willing seller and rewarding unfairly prejudicial conduct with a windfall by way of acquiring shares at a discount.
Courts will now look at all the circumstances before deciding whether it's fair to apply a discount.
Given the complexities involved in unfair prejudice claims, and the recent decision on limitation periods, shareholders should seek legal advice to assess the merits of their case and explore alternative dispute resolution mechanisms where appropriate. Early legal intervention or mediation can often lead to greater chances of success and preserve business relationships.
For more details on the elements needed to mount a successful unfair prejudice claim, you can refer to our original article.
If you would like to discuss a potential unfair prejudice claim please contact our commercial disputes partners Andrew Perkins and Tom Llewellyn.
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