Unfair prejudice claims are a cause of action available to shareholders pursuant to section 994 of the Companies Act 2006.

Shareholders in a limited company who have been unfairly prejudiced by the other shareholders can seek relief from the court.

The relief the court can grant is very wide and can include an order that the shares of the wronged shareholder are purchased by the offending shareholder.

The value of the shares must be fair in all circumstances and account for and make allowance for the unfairly prejudicial conduct complained of.

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Valuation and minority discount

How shares are valued in a shareholder dispute is often fiercely disputed.

For instance, those defending an unfair prejudice claim and at risk of a court-ordered purchase will almost certainly argue a discount ought to be applied when valuing the shares to reflect any minority shareholding.

This is because it is likely the pool of willing buyers of a minority shareholding (aside from current shareholders who are looking to increase their shareholding by buying the minority shareholder's shares) will be very small.

That argument makes sense since, typically, a minority shareholder has fewer voting rights and less control over the company's affairs.

A discount should, therefore, reflect that a minority shareholding may be worth less on the open market than a larger shareholding.

The discount level will vary from case to case, but it can represent a significant percentage deduction on the pro-rata value of the minority shareholding.

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The court may apply a minority shareholder discount to the value of the shares when ordering shares to be purchased. However, it can also decide not to apply a discount; for instance, where it is established, a 'quasi-partnership' exists.

A quasi-partnership is a term used to describe a business relationship between two or more individuals that is similar to a partnership but does not have a formal partnership agreement.

In the context of shareholder disputes, a quasi-partnership is particularly relevant because the individuals involved in the quasi-partnership may not have clearly defined roles and responsibilities, which can lead to confusion and disagreement over the direction and management of the company.

There is also considered to be an element of good faith expected between partners which is not necessarily expected of shareholders.

A quasi-partnership can be sufficient to mean a minority shareholder discount is not applied when valuing a minority shareholding, although this is not always the case and remains at the court's discretion.

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No quasi-partnership

The position is less clear if a party cannot establish a quasi-partnership exists or where one does not exist.

In that case, a discount would normally be expected to be applied for a minority shareholding. However, recent case authority suggests that is not always the case.

The case of Smith v Smith & Anor [2022] EWCA Civ 825 involved an unfair prejudice claim brought by a minority shareholder who sought relief by way of a purchase of his shares.

The case related to a family investment company which was found to be a quasi-partnership. The court provided some interesting commentary regarding the approach to valuing the shares, stating there is no presumption of applying a discount simply because a quasi-partnership did not exist.

In coming to its decision, the court agreed with the petitioner that even if the company is not a quasi-partnership, it would not be appropriate to treat the petitioner as a "willing" seller since the petitioner would have preferred to continue as a director and shareholder in the company but was forced to bring an unfair prejudice petition because of the respondents' actions.

In those circumstances, it was not appropriate to apply a discount.

This decision illustrates how a litigant's conduct can influence the court's approach to valuing shares and how the court will be reluctant to reward unfairly prejudicial conduct by a respondent.

In those circumstances, the court may determine a minority shareholders discount ought not to be applied

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