Unfair prejudice petitions (under section 994 of the Companies Act 2006) are a useful mechanism for shareholders of a company to apply to the Court to make an order that the Company's affairs are being or have been conducted in a manner unfairly prejudicial to their interests, or that an actual or proposed act of the Company is or would be prejudicial. Unfair prejudice petitions, therefore, provide a pathway for shareholders to seek remedy or redress where they consider that their interests are being harmed.
In order to be successful in an unfair prejudice claim, two elements must be present. Firstly, the offending conduct must be prejudicial to the rights and interests of the relevant shareholder(s). Secondly, that same conduct must also be unfair. These two criteria are explored in more detail below.
In terms of prejudice to a shareholder's rights and interests, the Court has regard to the rights contained within the Company's Articles of Association and also outside of the articles. For example, there may also be a shareholders agreement in place that could contain agreements such as a legitimate expectation to be involved in the Company's day-to-day running.
Certain companies may also have been formed based on a" quasi-partnership". Where this is the case, members may expect that they will be able to participate in both the management and the profits of the Company. This relationship is based on the intention upon which the Company was formed and would require evidence put forward in favour of a quasi-partnership being in existence.
The concept of unfairness is assessed by the Courts objectively in that conduct will be deemed to be unfair if a reasonable person would consider it so. Therefore, a shareholder does not need to demonstrate that the offending conduct that caused prejudice to them was intentional.
Once again, the Court will have regard to the contractual terms laid out within the Articles of Association and any shareholders' agreement on whether the offending conduct will be deemed unfair. If the conduct is legitimised by the Articles or any shareholders' agreement, it will be more difficult for a petitioning shareholder to prove it is unfair. If, however, the conduct is not permitted by way of the articles or any other agreement, it will not necessarily be deemed automatically unfair.
In order to bring an unfair prejudice petition, a shareholder contending that he or she has been, or is going to be the victim of unfairly prejudicial behaviour, must have sufficient standing (i.e. the shareholder must satisfy certain criteria).
In the recent case of Re Motion Picture Capital Ltd; Clarance v Nayar and others , the Court was asked to assess whether a shareholder who no longer held shares in the Company could obtain relief under s.994 in light of alleged unfairly prejudicial conduct towards him.
In this instance, despite the Petitioner having commenced proceedings at a time when he was still a shareholder, his shares were transferred by the Company before trial, pursuant to an entitlement to do so under a settlement deed. The settlement deed was entered into before the unfair prejudice petition was brought and was made between the Petitioner and the Company for repayment of funds, following an allegation that the Petitioner himself had misappropriated company funds.
Repayment had been secured by way of charge over the Petitioner's shares, and in the event of default, the Petitioner's shares were transferred into the names of its nominees under the deed, being the two Respondents.
Thereafter, the Respondents argued that the Petitioner's unfair prejudice petition should fail on the grounds that the Petitioner was no longer a member of the Company.
In consideration of this issue, the Court found that the Petitioner was able to proceed with the petition on the grounds that:
This decision is likely to have implications for how the Court will perceive standing in unfair prejudice petition cases and highlights the requirement on the part of a company to ensure that any compulsory acquisition of a member's shares is conducted in good faith and with the interests of the Company in mind.