Minority shareholders can often have less power over the management of the company. This can lead to disputes between shareholders particularly where their relationship breaks down.
The classic litigation process for resolving shareholder disputes is the unfair prejudice petition under Section 994 of the Companies Act. This is typically brought by a minority shareholder in circumstances where the company’s affairs have been or are being conducted in a manner that is unfairly prejudicial to the interest of all or some of the members of the company.
Unfairly prejudicial conduct
For conduct to be unfairly prejudicial it must cause prejudice or harm to an interest of some or all of the members of the company and it must be unfair. Examples of unfairly prejudicial conduct are:
- Failure to pay dividends to the shareholders;
• Exclusion from management where there is a justified expectation of involvement;
• Breaches of the articles of association;
• Majority shareholders awarding themselves excessive remuneration; and
• Inequitable conduct.
The petitioner must demonstrate that they are worse off as a result of the conduct. The Court will take into account the legitimate expectations of the shareholder to define the parameters of the unfairly prejudicial conduct – for instance the rules in the articles of association or whether a “quasi-partnership” exists.
The Court has a very wide discretion to grant relief where unfair prejudice is found. The most common relief sought and granted is the purchase of shares which allows a “clean break” between the shareholders who can no longer work together. Other orders that the Court can make include:
• Regulate the conduct of the company’s affairs in the future;
• Require the company to refrain from or carry out an act;
• Authorise civil proceedings to be brought in the name of the company; and
• Prohibit the company from making changes to the articles of association.