Shareholders’ Rights and Unfair Prejudice

Do you feel the company’s affairs have been conducted in a manner which is unfairly prejudicial to you as a shareholder? Then read on for some guidance.

Statutory Protection

The rights of a shareholder aren’t only set out in the shareholders’ agreement, but are also entrenched in law. The Companies Act 2006 section 994(1) establishes a claim for the victim in a situation of unfair prejudice.

A complaint can be based on a past, present of future event and the conduct may be unfairly prejudicial to one or a group of shareholders. The conduct will be judged from the opinion of the impartial outsider, and must be viewed as both unfair and prejudicial to substantiate a claim.

Unfairness

To be confirmed as unfair, the action taken must amount to a breach of the shareholders’ agreement with regard to the way in which the company is run. The action must also be proved to have affected the shareholder in their capacity as a shareholder. The idea of affecting your capacity as a shareholder has been given an extremely wide definition, ranging from a reduction in your voting rights to a majority shareholder exploiting his power.

The shareholders’ agreement will have been agreed at the inception of the company, outlining the way in which shareholders want their company run. Whilst the company has its own corporate identity, it’s ultimately owned by the shareholders and managed by the directors. The shareholders’ agreement will therefore set out how the directors are to manage the company’s affairs.

Not always about your share value

In order to establish unfair prejudice it isn’t always necessary to prove that your share value has been adversely affected. However, this is normally the case in situations where decisions are made which adversely affect the company.

Examples of an unfairly prejudicial situation to the shareholders include (but not limited to):

• Non-payment of a dividend.
• A director or the directors awarding themselves excessive remuneration.
• The directors using their powers inappropriately or for an improper purpose such as freezing out a minority shareholder, (see our Knowledge Hub 'Minority Share Holder Rights’ article).
• In a small enterprise where there is an agreement that both directors and shareholders are to run the company, an exclusion of the shareholders right to do so.

Compensation

Any claim made for unfair prejudice will always be assessed by the court and there a numerous options available to the court to compensate an unfairly prejudiced shareholder. The Companies Act 2006 section 996 allows the court to make any order it sees fit in the situation.

The most commonly used remedy applied by the court, and confirmed in the Court of Appeal case of Grace v Biagioli [2005] EWCA Civ 1022, is an order that the other shareholders or company purchase the shares of the alleging party.

Whilst you may think this is a draconian measure by the courts, read the case: In the matter of Home & Office Fire Extinguishers Ltd [2012] EWCH 917 (Ch). Here, one of the two directors (both were also the company shareholders) attacked the other with a hammer when he didn’t authorise an advance on his salary! Now, I’m not saying all shareholder disputes result in one person assaulting another, but it’s clear that in these situations, these situations tend to be relationship destroyers (just as the hammer wielding shareholder demonstrates), and the court believes that the only option is for a buy-out of the disgruntled party.

Talk to fellow shareholders

Unfair prejudice offers a shareholder a statutory recourse when there has been mistreatment of their rights. But a word of warning if you’re the disgruntled party: you may lose your shareholding. So before you dive head first into legal fees, perhaps try talking to your fellow shareholders.