The right not to be unfairly prejudiced

If any member feels that what is happening within the company is ‘unfairly prejudicial’ to him, he has a right to petition the court. The complaint may be based on past, present or even anticipated future events, and may be unfairly prejudicial to all of the members or only some or one of them. Whatever what has happened, is happening or will happen amounts to ‘unfair prejudice’ is judged on an objective basis, from the perspective of an impartial outsider.

For the petition to be successful, the member must prove that he has been affected in his capacity as member, although this has been given a very wide interpretation. For example, if it was one of the terms of a takeover that the previous owner of the business would receive shares in the acquiring company and become a director of that company, it may follow that the loss of the directorship constitutes ‘unfair prejudice’ to the member as the two positions are inextricably linked.

unfairly prejudiced

In order to establish unfair prejudice, it is not necessary to prove that the value of the member’s shares have been adversely affected, although frequently this will have happened. Examples of potential unfair prejudice are:

  • Non-payment of dividends;
  • Directors awarding themselves excessive remuneration;
  • Directors exercising their powers for an improper purpose; and
  • Exclusion from management in a quasi-partnership type of company

If the court finds that a member has suffered unfair prejudice, it can make any order it thinks appropriate. However, the most common remedy given is an order that the other shareholders or the company itself should purchase the shares of the petitioner at a fair value. An example of this was Gerrard v Koby [2004], where the order was granted as it was impractical for the parties to continue to work together. The House of Lords in O’Neill v Philips [1999], held that the court’s powers were wide under s.994 but did not give an automatic right to withdrawal from a company where trust and confidence had broken down.

In Re Phoenix Office Supplies Limited [2003], the Court of Appeal confirmed that s.994 is not available to effect an automatic exit route from a company. In this case, the petitioner had voluntarily severed his links with the company and was using a s.994 petition as a way of trying to obtain the highest price possible for the sale of his shares. In Exeter City AFC v Football Conference [2004], it was held that the statutory right of shareholders to petition for relief under s.994 was inalienable and could not be diminished by a contract for arbitration between the parties. The Court of Appeal has reaffirmed that the normal way of dealing with internal company disputes in small private companies where unfairly prejudicial conduct has been proved is an order for a share purchase under s.996; this was seen in the case of Grace v Biagioli [2005].

In Nagi v Nagi [2006], it was held that one director removing another director without notifying him amounted to unfair prejudicial conduct. A buy-out under s.996 was therefore ordered by the court.

If a company is a ‘quasi-partnership’, i.e. a small group of participants who are directors and shareholders, then equitable considerations come into play. This makes it more likely that a court would grant an order under s.996 to buy out a disaffected party.

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