How Shareholders, Directors Can Stop Unfair Prejudice

Are You A Victim Of Unfair Prejudice?

If you are a minority shareholder and are being oppressed by the majority in your company then you may have grounds for a claim for unfair prejudice.

The majority of the company may be abusing their positions, leaving you out of key decisions, or not giving you a fair share of profits.

This may be ‘unfair prejudice’. Fortunately, there are various legal remedies that can help you to:

obtain justice
gain a fair financial settlement
ensure the company will be run properly in future for the benefit of all shareholders…not just a select few.

What Is Unfair Prejudice?

Unfair prejudice claims occur when the majority of a company (shareholders or directors) abuse their powers. Examples can be wide-ranging but typically include:

excessive remuneration or failing to pay dividends
failing to keep shareholders properly informed (and/or excluding them)
mismanagement, breaches of legal duties, breaches of shareholder agreements or the company’s articles of association.

You can bring claims under Section 994 of the Companies Act 2006 if:

you are a member of the company (or a non-member who’s been transferred shares or has acquired them by law)
you have been unfairly prejudiced by the actions of the company.

An unfair prejudice claim may be brought on one of the following grounds:

conduct of the affairs of the company in an unfairly prejudicial manner
a corporate act or omission which is (or would be) unfairly prejudicial.

The majority at fault do not need to be aware that their actions were prejudicial. Cases hinge on whether a reasonable person would judge the conduct in question as unfairly prejudicing the interests of the minority shareholder(s).

How Can You Stop Unfair Prejudice?

There are plenty of ways to deal with unfair prejudice (which is just as well, given how varied some of the examples of it can be). You will be seeking the assistance of the courts – and they have plenty of options at their disposal.

Available remedies include:

share buyouts
derivative action
regulating the company’s affairs and finances.

Buyout Of Your Shares

If you have suffered unfair prejudice, you may decide that you want nothing more to do with the company and the majority shareholders/directors who have transgressed. You want out: you want to sell your shares for a good price, exit the company and leave them all to it.

In this case, the court can order the company to buy you out for a fair price. Conversely, if the company offers you a fair price for your shares – and you refuse to accept it – you could be undermining your own case. It is therefore very important to get expert legal advice.

Derivative Action – Bringing A Claim On Behalf Of the Company

If a director is in breach of their duties to the company and an unfair prejudice claim is not appropriate to bring, you can seek to bring a derivative claim against the director(s).

Derivative action is a claim brought by a shareholder in relation to a breach of duty by a director(s) or a third party. It enables a shareholder to bring proceedings on behalf of the company to claim against a director (or a third party) for an act or omission involving any of the following:

negligence
default
breach of duty and/or breach of trust.

The court has discretion to determine whether a derivative action will be continued. There are a number of factors they can consider in making this decision. They are set out in Section 263 of the Companies Act 2006.

If you are considering making a derivative action then it is vital to get expert legal advice.

Regulating The Company’s Affairs And Finances

In cases of unfair prejudice, the court has discretion to regulate the conduct of the company’s affairs in the future. This can include ordering a single meeting to be held, or even go so far as setting a code of conduct for the future.

If the majority shareholders continue to ignore either an existing or new court-imposed code of conduct they could be in breach of contract. They could face sanctions in the form of damages or injunctions. A breach of injunction could then put them in contempt of court, with penalties including imprisonment, fines and confiscation of assets.

It follows from the above that having a well-worded shareholders’ agreement can help to resolve disputes between shareholders and prevent unfair prejudice occurring. A shareholders’ agreement is a fundamental legal document which sets out how the company should be run (along with the shareholders’ rights and obligations).

Not every company has one of these agreements. This is one reason why so many disputes occur between directors; two people mis-recall what was agreed because it was not documented correctly. Further, when disputes occur there is no agreement in place to rely on to resolve the matter.

If your company does not have a shareholders’ agreement – or if you believe that yours is overdue for a review – then we recommend that you contact us as soon as possible.

Why Family Businesses Are At Higher Risk Of Unfair Prejudice

Unfair prejudice can occur in any company, although family businesses can be at much higher risk of unfair prejudices. The reasons are as follows:

Relationships – family members do not always get on and disputes can become much more heated in a family context, especially where money is involved.
Informality – family businesses are often run more informally. Important business decisions can get made very informally. This can lead to a lack of proper documentation and record-keeping (which could be in breach of Companies Act requirements). Eventually, this can result in misunderstandings, distrust and rows.

Worried About Unfair Prejudice? You Need To Act Fast!

Unfair prejudice can be a complex and very wide-ranging area of the law. There are lots of reasons why minority shareholders may feel slighted by the practices and behaviour of the majority in a company.

Those suffering unfair prejudice must act quickly for various reasons:

There may be a limitation deadline on making a claim.
The longer it goes on, the worse it will be for you. You could suffer greater financial disadvantage.
The majority of the company could argue that your inactivity amounted to implied approval of the decisions they took or did not take – weakening your position.
There could be other victims of unfair prejudice in your company. If you do nothing (and are seen to do nothing), they may wrongly infer that you are failing in your duties as a shareholder, or even colluding with the majority.