Issues in Unfair Prejudice Petitions

In this series of posts, Anna Lintner analyses key aspects of unfair prejudice petitions

S.994 Companies Act 2006 (“CA 2006”) permits a shareholder to petition the Court for relief on the basis that the affairs of the company are being conducted in a manner that unfairly prejudices her interests as a shareholder. Unfairness (addressed in the previous post in this series) is a necessary but not sufficient ingredient to obtain relief; the shareholder must also establish that the unfair conduct is prejudicial to her interests, such that she is in a worse position as a result. As Neil LJ observed in Re. Saul D Harrison & Sons plc[1]: “conduct may be unfair without being prejudicial or prejudicial without being unfair, and it is not sufficient if the conduct satisfies only one of these tests…”[2].

The courts generally take a wide view of what constitutes prejudice suffered by a shareholder. The requirements of unfairness and prejudice are distinct but closely linked and where a petitioner is able to establish unfairness it will often be possible to satisfy the requirement of prejudice. In Re. Tobian Properties Ltd[3], Arden LJ observed that “non-compliance by the respondent shareholders with their duties will generally indicate that unfair prejudice has occurred”[4]. There must, however, be a causal link between the unfair conduct of the respondent and the prejudice suffered by the petitioner: Re. Blackwood Hodge plc[5].

The type of prejudice suffered by the petitioner will depend upon the nature of the interest at stake. Damage to the financial position of a shareholder is the most usual form of prejudice. This commonly takes the form of a reduction in the value of the petitioner’s shares, for example because the respondent has misappropriated the company’s assets or business at an undervalue: see e.g. Re. The Stratos Club Ltd[6] in which the respondent director transferred two strip clubs owned by the company to companies owned and controlled by himself, without proper consideration. Where the company is insolvent, it will usually be necessary for the petitioner to show that her shares would have had value but for the wrongdoing of the respondents: Re. Tobian Properties Ltd  per Arden LJ[7].

However, adverse financial consequence is not an absolute requirement in order to establish prejudice. In Re. Coroin[8], David Richards J summarised the position as follows:^[9]

“Prejudice will certainly encompass damage to the financial position of a member. The prejudice may be damage to the value of his shares but may also extend to other financial damage which in the circumstances of the case is bound up with his position as a member. So, for example, removal from participation in the management of a company and the resulting loss of income or profits from the company in the form of remuneration will constitute prejudice in those cases where the members have rights recognised in equity if not at law, to participate in that way. Similarly, damage to the financial position of a member in relation to a debt due to him from the company can in the appropriate circumstances amount to prejudice. The prejudice must be to the petitioner in his capacity as a member but this is not to be strictly confined to damage to the value of his shareholding. Moreover, prejudice need not be financial in character. A disregard of the rights of a member as such, without any financial consequences, may amount to prejudice falling within the section.”[10]

Although, as David Richards J went on to acknowledge, “Where the acts complained of have no adverse financial consequence, it may be more difficult to establish relevant prejudice.”[11]

One situation in which it is not generally necessary to establish financial harm to the petitioner is where there has been a breach of duty by which the respondent wrongly puts himself in a position where his duty to the shareholders of the company conflicts with his own interests and then prefers his own interests. In Re. Edwardian Group Ltd[12] it was held that such breaches “by their very nature cause[d] all of the shareholders prejudice … That kind of conflict is corrosive of good administration and trust between shareholders and directors.” Similarly, in quasi-partnership cases (addressed further in the previous post in this series), the petitioner’s exclusion from the management and decision-making of the company may be held to be unfairly prejudicial, notwithstanding that there is no direct financial impact upon the petitioner.

Where the unfair conduct results in some financial impact upon the position of the company, but the effect upon the value of the petitioner’s shares is nominal the conduct may nevertheless be held to be prejudicial if it can be said that it is by its nature inherently prejudicial. In Re. Elgindata Ltd[13], Warner J held in respect of the respondent’s use of company funds to pay personal expenses:

“This is not, to my mind, a case in which it can be said that conduct that was unfair to the petitioners was prejudicial to their interests because it resulted in a serious diminution of, or in serious jeopardy to, the value of their shares. Of course, the misuse by Mr Purslow of the company’s money was reflected in its profit-and-loss account and to the extent that it reduced the company’s profits or increased its losses, it reduced the value of the petitioner’s shares. But it cannot have been a major cause of the diminution in the value of those shares. The reason why I have concluded that it was conduct unfairly prejudicial to the petitioner’s interests is that it was inherently so. By its very nature the misapplication of a company’s assets by those in control of its affairs for their own benefit or for the benefit of their family and friends is unfairly prejudicial to the interests of minority shareholders.”[14]

There are however limits to the scope of what constitutes prejudice for the purposes of s.994. Technical or trivial procedural breaches which have no causative effect are unlikely to give rise to sufficient prejudice: see e.g. Watchstone Group Plc v Quob Park Estate Ltd[15]. Further, the petitioner must show that the prejudice has been suffered in their capacity as a shareholder and not, for example, as an employee (see e.g. O’Neill v Philipps[16]).

Finally, it should be borne in mind that where the court finds that the respondent has engaged in unfairly prejudicial conduct but there has been no financial harm to the petitioner, this may be reflected in the relief ordered. Recently, in Re. Macom GmBH (UK) Ltd[17], Judge Hodge QC determined that where unfair prejudice related to the governance and management of the company and the petitioner had suffered no financial loss, it would be disproportionate to order a share buyout and an order regulating the future conduct of the company’s affairs was the most appropriate remedy. The issue of relief in unfair prejudice petitions will be the subject of the next blog post in this series.

In the next in this series of posts, Anna Lintner will look at relief in unfair prejudice petitions

[1] [1995] BCLC 14

[2]  At 31c

[3] [2013] BCC 98

[4] At [22]

[5] [1997] BCC 434 at 455

[6] [2020] EWHC 3485 (Ch)

[7] At [11].

[8] [2012] EWHC 2343 (Ch)

[9] Upheld on appeal in [2013] 2 BCLC 583 (CA)

[10] At [630]

[11] At [631]

[12] [2018] EWHC 1715 (Ch)

[13] [1991] BCLC 959

[14] At 1004f-g

[15] [2017] EWHC 2621 (Ch)

[16] [1999] 1 WLR 1092 at 1105

[17] [2021] EWHC 1661 (Ch)