At the time of a company's formation, it is almost impossible to imagine the relationship between you and other shareholders (also known as members) of the company breaking down. Unfortunately, this does happen, sometimes in the form of majority shareholders acting or failing to act in a way that unfairly prejudices minority members. In this article, we set out the statutory remedy available for minority shareholders who face this situation, namely Section 994 of the Companies Act 1996.
What is Unfair Prejudice?
Unfair prejudice is where the majority shareholders of a company act unfairly towards minority shareholders. Unfair prejudice is governed by Section 994:
“Petition by company member(1) A member of a company may apply to the court by petition for an order under this Part on the grounds—
(a) that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or
(b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.”
Examples of Unfair Prejudice to Minority Shareholders
Unfair prejudice to minority shareholders can include:
- Not distributing dividends
- Creating more shares in the company (share dilution) without a shareholder resolution
- Mis-valuing a particular class of members' shares
- Prioritising a director's personal interests over the company's success
- Non-compliance with the company's articles of association
- Directors who are inappropriately dealing with company assets
- Withholding information, especially company accounts and reports
Who Can Bring a Section 994 Claim?
Any shareholder can bring a Section 994 claim. In addition, members to whom shares have been transferred but whose names have not been entered in the register of members can apply for relief, as can those to whom shares have been transmitted through law, e.g. upon the death of a member, and whose names have not been entered in the register.
When Can Petition Under Section 994 be Made?
If you are a minority shareholder and believe you have or are being treated unfairly, you can try and sell your shares. However, this may be difficult as majority shareholders may not be interested in purchasing shares with limited voting rights, especially if there are rumours that unfairness is taking place.
Before launching any formal action, the first step is to consider the company's documents, especially its Articles of Association and Shareholders' Agreement. These may provide quick solutions, such as provisions that say a majority shareholder must purchase a minority shareholder's shares.
If no relief can be found in the company's documents, as a company member, you can petition for relief under Section 994 if:
- The affairs of the company are being, or have been, conducted in a manner that is unfairly prejudicial to the interests of some or all its members, including you or
- An actual or proposed act or omission of the company is or would be prejudicial.
It is important to note that you must prove actual prejudice and unfairness. Being annoyed or having your feelings hurt is not enough to succeed under Section 994. You need to provide evidence of prejudice, for example, the directors paying themselves bonuses but refusing to release dividend payments.
What Relief Can the Courts Provide for Unfair Prejudice Claims?
To protect members' legitimate expectations, the Court can provide wide-ranging relief under Section 996 of the Companies Act 1996. However, in practice, a minority shareholder is likely to want the company or a majority shareholder to purchase their shares. This is because, if the situation reaches this stage, typically, the relationship has completely broken down, and a clean break is desirable for everyone.
Other remedies can include:
- Setting the price of shares, it orders to be sold
- Order the company to do something or not do something
- Insist any changes to the Articles of Association or Shareholders' Agreement can only be made after seeking and gaining the Court's permission
The Courts will refuse to make a compulsory purchase order if they feel that doing so would be disproportionate to the prejudice suffered by you, the shareholder. The Court will also strike out a claim where remedies are available via the Articles or Shareholders' Agreement, and it believes that you are trying to circumvent these remedies by making a Section 994 claim.
Why Would Members Pead a Quasi-Partnership?
Corporate quasi-partnerships occur when members have an expectation of participating in the management and profits of the company. This understanding derives from how the company was formed, and as such, it would be unfair for other members to ignore the expectation.
When claiming under Section 994, you may choose to plead that a quasi-partnership exists as, if the Court accepts this, it will not apply a minority discount to your shares if a buy-out is ordered.
Wrapping Up
In practice, unfair prejudice claims tend to occur in small companies where the shareholders have fallen out with each other. Although Section 996 provides the breadth of discretion needed for a Judge to resolve matters to promote the survival of the company effectively, formal litigation is expensive and stressful. Non-court-based resolution (also known as alternative dispute resolution (ADR)) methods are likely to be used in the first instance. The Court will expect you and the majority shareholder/s to have attempted to resolve matters through ADR.
An experienced commercial law solicitor can advise and represent you if you feel you have an unfair prejudice claim. They can present you with the various options available to resolve the dispute, including bringing a Section 994 claim and ensuring your best interests are protected.
How We Can Help
As experts in commercial litigation, we can provide expert advice and representation on all insolvency and company law matters. Contact us on 0330 173 6983 or send us an email for more information.
