In last week’s blog we looked at who could complain to the court. This week we examine the meaning of “unfair prejudice”.
Perhaps the greatest protection that your client has as a minority shareholder, is a right to petition the court for an order under section 994 Companies Act 2006 which provides that:-
“A member of a company may apply to the court… for an order… on the ground that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of its members generally or of some part of its members…”
In essence section 994 is attempting to protect minority shareholders, meaning those with a 50% shareholding or less in a situation where the majority shareholders are seeking to act in a way which is ‘unfairly prejudicial’ to the minority shareholders’ interest.
What does “Unfairly Prejudicial” mean?
In summary the minority member has to show serious mismanagement of the company’s affairs which usually includes evidence that there has been a misapplication of company assets or breach of a fundamental understanding amongst the members as to their participation in management.
Other typical examples of ‘unfairly prejudicial’ conduct include:-
- abuse of power by the controlling directors and breaches of the company’s articles;
- the awarding of excessive remuneration;
- exclusion from management in circumstances where there is a (legitimate) expectation of participation; and
- the diversion of business to another competing company in which the majority shareholder holds an interest.
What is “Unfairness”
However the court will not interfere in questions of commercial judgment and it also has to be established that the prejudice suffered was “unfair”. If all members are affected equally by a decision of the controlling directors then it would be difficult for a member to show that such a decision is “unfairly” prejudicial as demanded under s.994.
Further in the context of a special category of company (“the quasi partnership”) where the petitioner is excluded from participating in management the “unfairness” does not lie in removing the member as a director; rather it lies in excluding the member from the company without at the same time making an offer of “fair value” for the shares.-
In the next part of our Shareholder and Director Disputes blogs we will consider the tactical battles in the context of s.994 proceedings and we will then devote two blogs to the thorny issue of the valuation of shares in the context of a s.994 petition.
Written by Jeremy Boyle, solicitor and a partner at Summit Law LLP and Hugo Groves, Barrister, Enterprise Chambers.
Summit Law LLP’s senior partner, Jeremy Boyle is a fluent Spanish speaker having lived in Spain for many years.
We have also developed a trusted network of specialist local Spanish lawyers, forensic accountants and investigators around Spanish speaking countries.