This article explores the requirements for an unfair prejudice petition and potential remedies.
What is Unfair Prejudice?
Unfair prejudice occurs when a majority shareholder(s) abuses his/her/their power granted by their shareholding, and act “unfairly prejudicial” usually against a minority shareholder(s).
The minority shareholder will petition against the other members/directors for a return to their management role, a return of misappropriated company assets, or even to wind up the company. The claim is against the majority shareholder(s), not the company itself. The proceedings are concerned with ending mismanagement.
Section 994(1) of the Act provides: “a member of a company may apply to the court by petition for an order under this part on the ground:
- That 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
- 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.”
In the recent Court of Appeal case Ntzegkoutanis v Kimionis  (“Coinomi”), both grounds were met where:
- The petitioner relied on being excluded from management (where the respondent set up two companies outside of the jurisdiction of England & Wales, where he was sole owner/director, without the petitioner’s knowledge, or consent, using the Company’s name and goodwill); and
- Misappropriation of company assets (misuse of the company’s IP, where the respondent transferred the Company’s domain name and source code to one of the other companies, and licensed the domain name to the remaining company, and the two aforementioned companies received funds as a result of said misuse).
‘Unfairness’ and ‘prejudicial conduct’ are two distinct requirements, both of which need to be met.
Who can Petition?
There are four requirements a petitioner must fulfil in order to petition:
- That they are a member of the company;
- That the acts or omissions of which they complain are the management of affairs of the Company;
- That the conduct of those affairs has caused prejudice to their interests as members of the Company; and
- That the prejudice suffered is unfair.
The petitioner does not strictly need to be a ‘minority shareholder.’ For example, 50/50 partnerships/co-owners can petition against each other, as can majority shareholders where the shares owned have no voting rights.
Potential shareholders who have agreed with an existing member for the transfer of shares in the company (and execution of a proper instrument in respect of those shares) may also petition.
What is Prejudicial Conduct?
The Courts have taken a narrow view on what can be determined as prejudicial conduct. The main challenge of an unfair prejudice petition is proving the conduct is prejudicial. It is not enough to demonstrate that the conduct is unfair. It must be shown that the majority shareholder(s)’s conduct:
- constitutes the company’s affairs; and
- be shown to be unconscionable beyond their right to exert commercial leverage.
Conduct affecting all members of a company equally may be (unfairly) prejudicial. There is no need for a petitioner to establish that they have been treated differently to other shareholders.
What is Unfairness?
Unfairness is construed objectively, by the courts. Some examples include:
- Exclusion from management (such as the removal as a director – most common reason for petitions);
- Breaches of directors’ fiduciary duties;
- Misappropriation of company assets by directors (such as excessive remuneration);
- Breaching the company’s articles of association/shareholders agreement;
- Failure to consider, declare, or pay dividends; and
- Illegality and failure to comply with the CA 2006.
The general principles of unfairness have been established in O’Neill v. Phillips  and Grace v Biagioli . The court views unfairness objectively, but it is also reliant on the background facts. For example, there is a higher probability of equitable considerations in a petition within a family business, than a multinational corporation (e.g. the relationship between a feuding father and a son is more likely than not, more complicated than a relationship between two competing businessman. A father and son will have more than a contract determining their business relationship and management of the company. These facts need to be considered when assessing the behaviours of the shareholders and the (mis)management of the company).
Cannot use company funds
Unfair prejudice petitions are disputes between members of the company, not a dispute with the company. This means that directors are not allowed to use company monies or assets to fund the litigation of an unfair prejudice petition, and usually this encourages early settlement (Coinomi could have been an intellectual property dispute. If it were, the respondent could have defended the litigation with company funds). Unfair prejudice petitions can therefore be used strategically against other members to resolve a stand-off, expeditiously.
The relief available is deliberately broad. The court is concerned with ending the mismanagement of the company, but usually the respondent buys the petitioner’s shares for a fair value (although there are instances where the petitioner buys out the respondent).
O’Neill v Phillips Offer (“the Offer”):
The Offer is the most important aspect of the proceedings (arguably). The respondent usually makes the Offer in the first instance (which must be realistic). If the petitioner rejects the offer, then the court may order the purchase of a party’s shares to be determined by an expert witness, but then there arises the issue of how it is valued. At what point should the shareholding be valued (normally as of the date of the order), and by which method (EBITDA/DCF/Asset based valuation?).
On that basis, it is good practice to involve a valuation expert as early as possible, particularly for the respondent when making the Offer, as the Offer, if done correctly, is a strong defence to an unfair prejudice petition.
It is advisable to instruct solicitors when considering a petition, or when responding to a petition. Mismanagement of unfair prejudice petitions can be expensive and ruinous to the relationships between members. It is particularly crucial in a family business. There are countless instances of family feuds seeping into the management of family businesses, and a solicitor is able to provide objective analysis, without the fog of emotion clouding their judgment.
By Dominic Burgess, Solicitor.
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