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Commercial disputes do not only occur between business and business. They can also occur between members of the company who run the business as part of the company’s affairs, for example, between minority shareholders and directors. These types of disputes can be resolved by, for example, court litigation. One example of when you may need to do this is when, as a minority shareholder, you start civil proceedings for an unfair prejudice claim, such as due to a breach of the shareholder agreement. This article will, therefore, explain unfair prejudice petitions in terms of legal remedies and processes.
What is an Unfair Prejudice petition?
An unfair prejudice petition is useful when shareholders feel that a company is being run unfairly, as detailed in Sections 994 to 996 of the Companies Act 2006.
When Might I Bring An Unfair Prejudice Petition?
Any shareholder in a limited company can present an unfair prejudice petition. Legal non-members, such as a bankruptcy trustee, can also do this.
An individual can present an unfair prejudice petition when they believe their position as a shareholder has been unfairly prejudiced because of the way the company has been run. These petitions are not relevant to the person’s role as a director of the company.
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What is Meant by ‘Unfairness’ and ‘Prejudice’?
To present an unfair prejudice petition, you should meet the tests for the terms ‘unfairness’ and ‘prejudice’.
The test for unfairness is objective, so it does not require you to prove a person has acted in bad faith. Instead, the conduct of a person or people is relevant.
Unfairness will usually include, for example, actions that are outside the Articles of Association. For example, a breach of:
- director’s duties;
- a shareholder’s agreement; or
- the company’s Articles of Association.
Regarding what prejudice means, this usually requires you to prove that the unfair conduct caused your shares to devalue. However, it can also be, for example, a breakdown of trust and confidence.
Therefore, examples of unfair prejudice can include:
- not paying dividends;
- mismanaging the company; or
- a breach of director duties.
How Do I Present an Unfair Prejudice Petition?
The only way you as a shareholder can claim unfair prejudice is through an unfair prejudice petition, which you must present to a court. Getting legal advice and asking a lawyer to prepare this for you is advisable.
The petition must state:
- what you believe the unfair prejudice is; and
- what legal remedy you hope for.
Once the court receives your petition, it will provide a hearing date for you and the directors and shareholders involved. In the meantime, both parties should provide the court with documents relating to the issues.
What is the Effect of an Unfair Prejudice Petition?
If a company shareholder presents an unfair prejudice petition, the shareholder cannot offer their shares to third parties. Instead, the shareholder will likely need a court to intervene.
Once court litigation occurs, the effect of the shareholder’s unfair prejudice petition can be varied as the court has broad discretion when choosing a remedy. However, a court usually orders a majority shareholder to purchase the petitioner’s shares and determine the terms of this.
The court may alternatively, for example, order the following remedies:
- to wind up the company;
- an order to refrain from doing something or to carry something out; and
- if the directors gain property by breaching fiduciary duties, the court can order them to transfer it to the company.
Key Takeaways
If, as a shareholder, you believe the company you are part of acts with unfair prejudice through the company’s running, you may be able to present a court with an unfair prejudice petition. This details the actions of other directors or shareholders, which means your position as a shareholder rather than a director has been prejudiced. If a person has acted unfairly, it will concern their actions, such as a breach of the director’s duties. Prejudice means that the action has caused your shares to devalue. For example, directors not paying dividends can be an unfair prejudice action.
You can present an unfair prejudice petition at a court, but getting a solicitor to do this for you is advisable. The court will give you and the other party a hearing date. If they find that you have been unfairly prejudiced, the court has a range of remedies from which to choose. A court usually orders a majority shareholder to buy your shares from you.
If you need help understanding unfair prejudice petitions in the UK, LegalVision’s experienced disputes and litigation solicitors can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. So call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
1. What is an unfair prejudice petition?
An unfair prejudice petition is a petition a minority shareholder presents to a court where they believe their position as a shareholder has been prejudiced through the company’s running.
2. What is meant by unfair prejudice?
Unfair prejudice means that an unfair action by a director or shareholder has caused their shares to be prejudiced and have decreased value.
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