Shareholder Strategies: A practical guide to unfair prejudice petitions

When entering a corporate relationship, the possibility of an acrimonious split is unlikely to be at the forefront of parties’ minds. However, the reality is that even the best laid plans can crumble, relationships can sour and parties can find themselves in a position where a once positive business relationship is now fraught with difficulties.

Given the potential for that unpalatable outcome, at the outset of any corporate relationship, parties should familiarise themselves with the various forms of corporate disputes to ensure they know what their rights and duties are. This article focuses on unfair prejudice claims.

Often framed as akin to “corporate divorce”, an unfair prejudice claim (brought in the form of a petition) is a statutory remedy which offers relief for “unfairly prejudicial” conduct.

The statutory test for unfair prejudice petitions

The statutory test for an unfair prejudice petition is set out in section 994 Companies Act 2006 (CA 2006). In short, to establish grounds on which to bring a petition, an aggrieved shareholder must demonstrate that:

• the affairs of the company in question;
• are being, have been or are proposed to be conducted (by act or omission) in a manner that is or would be;
• unfairly;
• prejudicial;
• to the interests of the members generally, or some part of the company’s members (including at least the aggrieved shareholder).

These requirements, discussed further below, are to a large extent inter-related, but it is important to note that both unfairness and prejudice must be separately established. Conduct could be unfair without being prejudicial, and vice versa.

Who can bring an unfair prejudice petition?

Unfair prejudice petitions are brought by “petitioner(s)” who can be:

• Members of a company, being those who subscribe to a company’s memorandum and those who agree to become members of a company and are registered as such in the register of members¹.
• Non-members to whom shares in a company have been properly transferred (but where the transferee has not yet been entered onto the company’s register of members) or transmitted by operation of law, for example to a trustee in bankruptcy.

It is for the petitioner(s) to establish an entitlement to bring a petition and whilst the above may seem straight forward, difficulties can arise.

Member of the company 

Any member of a company, including both minority and majority shareholders, can bring an unfair prejudice petition.

The CA 2006 does not define what amounts to a minority shareholder but as a general rule, members who hold less than 50% of the shares in a company will be deemed minority shareholders for the purposes of a petition. Whilst a petition can be brought by majority shareholders, any such petition would be at risk of being struck out if those shareholders could remedy the prejudicial conduct without bringing a petition¹. However, there can be circumstances in which it would be appropriate for majority shareholders to bring a petition, for example if the company’s articles of association grant the minority rights at board level which deprive the majority of control³.

As set out above, unless the petitioner is a non-member to whom shares have been transferred or transmitted, he must be a member of the company whose name is entered in the register of members. This requirement has unsurprisingly given rise to questions regarding the maintenance of registers of members. By way of example, the court has confirmed that:

• Where a company fails to register a member⁴, the starting point is that the member does not have standing to bring a petition. However, if a potential petitioner can demonstrate an arguable right to retrospective rectification of the register, the court can decide to let the petition proceed and determine the question of standing within the petition⁵.  A key consideration for the court will be whether it is convenient to determine the rectification claim within the petition - and there may well be circumstances in which it is not convenient do that. In those circumstances, a potential petitioner would need to bring proceedings to be entered onto the company register before making any attempt to bring a petition.
• A petitioner who ceases to be a member after a petition has been issued remains in principle entitled to pursue the claim⁶ however the relief available may be impacted and the petition could be at risk of being struck out.

The company

It is important to bear in mind that a petition is not a claim against the company - it is a dispute between members (and as such, a company should not fund a claim or defence). However, a petition will be brought in respect of a company. In terms of the types of companies a petition can be brought in relation to:

Jurisdiction 

The sections of the CA 2006 that relate to unfair prejudice petitions⁷ apply to all UK registered companies and similar provisions apply to LLPs. They do not apply to companies registered abroad, meaning a petition cannot for example be brought in relation to companies registered in Guernsey, Jersey and the Isle of Man⁸.

Insolvent companies?

Whilst a company’s entry into insolvency, administration or liquidation will not automatically prevent a petition being brought, a petitioner will still need to establish prejudice. This can be difficult where a company is insolvent as there will be no prejudice unless:

• But for the alleged prejudice, the petitioner’s shares would have had a value (for example, if excessive remuneration rendered a company insolvent)⁹.
• The petitioner suffered prejudice in some capacity connected with its shareholding.

Dissolved companies? 

A company must be in existence for a petition to be brought against it. As a result, a petition cannot be brought against a dissolved company¹⁰. In circumstances where an aggrieved member is faced with a dissolved company, it may be appropriate to consider an application for the company to be restored to the register.

Affairs of the company

A petitioner must identify unfairly prejudicial conduct in respect of "the company's affairs". In some cases, it will be clear that conduct amounts to the company’s affairs, for example the directors of a company distributing profits to themselves as remuneration to the detriment of shareholders. However, the court has adopted a comprehensive approach to what can constitute the “company’s affairs” and this will for example also more broadly include management decisions (even where they do not involve the board of directors). The affairs of a parent company may also include the actions of a subsidiary company, particularly where the directors of the parent and subsidiary are the same¹¹.

However, notwithstanding that breadth, some conduct will still fall squarely outside the remit of “company affairs”, including personal disputes between shareholders and / or other actions of shareholders (in that capacity).

Demonstrating interests as a member have been unfairly prejudiced 

A petitioner must also show that his interests as a member have been unfairly prejudiced.

What amounts to interests “as a member” has been widely construed. For example, whilst a member can clearly demonstrate prejudice if the value of his shares has been considerably impacted¹², prejudice can still exist even if there has been no detriment to the value of a member’s shareholding (albeit if there is no adverse financial consequence for a petitioner, it may be more difficult to demonstrate prejudice). A petition will however fail if a petitioner is in fact no worse off as a shareholder as a result of the allegedly unfairly prejudicial conduct, for example if a member brings a petition to further his interests as a prospective purchaser of company assets, rather than as a member seeking to protect its investment in the company¹³.

Petitioner(s) are not required to demonstrate that they have been treated differently to other shareholders and conduct that impacts all members equally may still be unfairly prejudicial. A petitioner must however demonstrate that his position has been both: i) prejudiced; and ii) that prejudice was unfair.

Petitions are highly fact specific so examples of when unfair prejudice may occur must be approached with caution. However, by way of illustration, unfair prejudice is capable of occurring where:

• There is a material failure to abide by company articles, a breach of some other agreement, or a breach of duty by company directors. For example, if shares were transferred with no reference to pre-emption rights in a company’s articles of association.
• The majority were subject to equitable considerations and taking those into account, have acted in a way that is prejudicial to the minority. Such equitable considerations would typically arise where members have entered into an informal agreement that the affairs of a company will be conducted in a particular way - for example, an agreement that particular shareholders will be involved in company management. A company formed on this basis has been described as a “quasi partnership”¹⁴.

Whilst prejudicial conduct must also be unfair, there is no need to demonstrate bad faith or an active effort to cause prejudice¹⁵.

Future unfair prejudice? 

A petitioner considering whether to bring a section 994 petition is not limited to identifying unfairly prejudicial conduct that has already occurred. A petition can be brought in respect of both continuing and proposed conduct. By way of illustration, there may be scope to bring a petition in respect of a proposed change to a company’s board of directors or share structure. 

Conduct of the petitioner(s) 

As a final point, when analysing whether there has been unfair prejudice (and any appropriate remedies), the court will take into account the conduct of all parties, including the petitioner. Any misconduct by the petitioner which is sufficiently connected to the unfairly prejudicial conduct complained of will be taken into consideration by the court. The weight attached to any such misconduct will be a matter for the court to decide.

Delay 

A party that has identified potentially unfairly prejudicial conduct and is considering whether to bring a petition should act promptly. Delay in bringing a petition can be fatal as it offers defendants an opportunity to claim that the petitioner acquiesced to conduct and waived the right to bring a petition. As a result, and depending on the particular circumstances of each case, it is often advisable to clearly set out objections to potentially unfairly prejudicial conduct without delay and advance a petition sooner rather than later.

Potential petitioners should also bear in mind the limitation period that applies to unfair prejudice petitions. Until early 2024, it was received wisdom that no limitation period applied to unfair prejudice petitions, however the case of THG plc v Zedra Trust Company (Jersey) Ltd [2024] EWCA Civ 158 (Zedra) turned that on its head, confirming that unfair prejudice petitions are in fact subject to limitation periods, the length of which will depend on the relief sought. At the time of writing, permission to appeal has been granted in Zedra, with a hearing scheduled for 17 February 2025 but as matters stand:

• If, as in most cases, a purchase order is sought, the applicable limitation period will be 12 years from the date on which the cause of action accrued.
• If the petitioner is seeking to recover a sum of money, the limitation period will be much shorter – 6 years from the date on which the relevant cause of action accrued.

Remedies for unfair prejudice

If the court agrees that there has been unfairly prejudicial conduct, it has a wide discretion to grant a remedy that would be fair, just and equitable in all the circumstances. Importantly, the court will not be constrained to granting the type of relief sought by either party. The gravity of the prejudice identified will be a key consideration for the court.

Notwithstanding the court's broad discretion, the CA 2006 specifically enables the court to make an order that¹⁶:

• regulates the conduct of the company's affairs in the future;
• requires the company to i) refrain from doing or continuing an act complained of, or ii) to do an act that the petitioner has complained it has omitted to do;
• authorises civil proceedings to be brought in the name and on behalf of the company by such person(s) and on such terms as the court may direct;
• requires the company not to make any alterations in its articles without the leave of the court; and / or
• provides for the purchase of the shares of any members of the company by other members or by the company itself and, in the case of a purchase by the company itself, the reduction of the company's capital accordingly.

Share purchase orders

In circumstances where a business relationship has soured, there is often much to be said for a granting the parties a “clean break”. This can be achieved by the court making a share purchase order (SPO).  This typically requires the wrongdoer(s) to purchase the shares of the petitioner at a price determined by the court, however a wrongdoer can also be ordered to sell their shares to the petitioner, for example if the court considers them no longer fit to be involved in company affairs.

The price at which a party’s shares should be purchased is often the most contentious issue in a petition. The starting point is determining the market value of the shares with reference to expert evidence provided by the petitioner and respondent. To establish the value of the shareholding, experts will typically value the company as a whole, assessing its value in the open market (assuming a willing buyer). The general rule is that the date of valuation will be the date of the purchase order however a party may wish to propose an alternative valuation date and the court has wide discretion to consider that. For example, if a petitioner claimed he was excluded from management and the conduct of the respondent subsequently rendered the company insolvent, the petitioner would likely argue the date he was excluded from company affairs is a more appropriate valuation date. Discussions around the date of valuation are often closely linked to questions regarding whether a petitioner is entitled to interest.

Once a valuation has been undertaken, it will need to be adjusted to reflect the circumstances of the case. For example, the figure may be discounted to account for unpaid dividends. Equally, where a shareholder has been excluded from management, the court may add back the salary that they should have received or take account of how the company would have performed had they not been excluded. As referenced above, an adjustment might also be made in light of the conduct of either party.

The next question will be what percentage of that company value should be attributed to the shareholding in question. A petitioner will usually seek an order for the purchase of the shares at a pro-rated price based on the value of the company on the valuation date. A respondent will typically seek a discount to reflect a petitioner's likely minority shareholding.

The valuation ordered will turn on the facts, including the severity of the unfair prejudice suffered. Whilst the opinion of expert valuers will be “respected and appreciated”¹⁷, the court retains overall discretion.

Concluding remarks on unfair prejudice petitions

Unfair prejudice claims are often highly nuanced, intensely fact specific and subject to an evolving case law landscape. Navigating these complexities requires a thorough understanding of both statutory provisions and judicial interpretations, which can significantly impact the outcome of a petition.

If a shareholder believes it may have suffered unfair prejudice, prompt action should be taken to obtain advice from an experienced corporate disputes lawyer. Early legal advice can provide clarity on the merits of the claim, potential remedies, and strategic considerations, such as the timing of the petition and the preservation of evidence. Whilst it is certainly possible to settle unfair prejudice petitions by negotiation, it is imperative that potential petitioners or shareholders defending a petition understand the strength of their position, their options and any alternative remedies.

More generally, at the outset of a corporate relationship, parties should carefully review company articles, shareholder agreements and any other relevant documents to ensure a clear understanding of applicable rights and obligations. Parties are also likely to benefit from proactively managing any corporate relationships, in particular ensuring any agreements and / or understandings are clearly documented.

Our expertise

With offices in many of the world’s major financial centres, including London, Paris, Geneva, Zurich, Dubai, Hong Kong and Singapore, we are ideally placed to work with you to prevent, resolve and assist with shareholder disagreements and disputes as they arise, and advise how to avoid them, whatever the law, language, rules, industry sector, or subject matter of that dispute may be. Our dedicated multicultural and multilingual specialists conduct proceedings under both common law and civil systems and regularly act in shareholder-related proceedings.

Whether you are a minority or majority shareholder or a board of a company, our strategically focused specialists will work alongside you through every aspect of any proceedings. Please contact the author or your usual Charles Russell Speechly LLP contact if you would like to get in touch.

¹ Section 112 CA 2006.

² That is, if they have access to alternative remedies (under the company’s articles of association or the CA 2006).

³ Re Macom GmbH (UK) Ltd [2021] EWHC 1661 (Ch)

⁴ And the member has not acquired shares by transfer or transmission by operation of law.

⁵ Contingent and Future Technologies Ltd, Re [2023] EWHC 2451 (Ch)

⁶ Re Motion Picture Capital Limited [2021] EWHC 2504 (Ch) 

⁷ Sections 994 to 999 CA 2006.

⁸ Being parts of the British Isles that are outside the UK.

⁹ Pickering v Hughes, [2022] EWHC 3359 (Ch)

¹⁰ Cherry Hill Skip Hire Ltd, Re [2022] EWCA Civ 531

¹¹ Gross v Rackind [2004] EWCA Civ 815

¹² Brenfield Squash Racquets Club Ltd, Re [1996] 2 B.C.L.C. 184

¹³ Loveridge v Povey [2024] EWHC 329 (Ch)

¹⁴ Ebrahimi v Westbourne Galleries [1973] A.C. 360

¹⁵ Sunrise Radio Ltd, Re [2009] EWHC 2893 (Ch)

¹⁶ Section 996(2) CA 2006

¹⁷ Re ICamera Ltd [2021] EWHC 1762 (Ch)