“Unfair prejudice” is a legal action that exists pursuant to s.994 of the Companies Act 2006 to offer statutory protection for oppressed minority shareholders. When a shareholder feels that a company’s board of directors is acting in a way that prejudices him/her as a shareholder or a group of shareholders, that shareholder (or the affected group of shareholders) may have a right to bring an action for “unfair prejudice”.
In order to bring such a claim, a shareholder must show that:
- The conduct of the board caused prejudice or harm to the “relevant interest” of the shareholders or some of the shareholders of the company; and
- Such conduct was “unfair”.
The following is a non-exhaustive list of what the Courts have previously considered to amount to unfair prejudice:
- Breaches of directors’ fiduciary duties.
- Breaches of companies’ articles of association.
- Excluding shareholders from the management of quasi-partnerships.
- Diverting business to other companies in which the majority shareholder (but not the minority shareholders) holds an interest.
- Deliberately diluting a minority shareholding for no good reason.
- Causing a decrease in the economic value of the shares or placing the economic value of shares in jeopardy as a result of misconduct by the board of directors.
The Court has a wide discretion when it comes to relief and can order that the company’s affairs are judicially regulated in future or that the company refrain from acting in a certain way. Most frequently the remedy granted is to provide for the purchase of the shareholding of the unfairly treated member by the other shareholders or by the Company itself and, in the case of the purchase by the Company itself, the reduction of the Company's capital accordingly. The applicable valuation is often the price that would have been achieved as if the unfairly prejudicial treatment had not taken place.