Unfair Prejudice Claim Solicitors: Protecting Your Position When Shareholders Fall Out
An unfair prejudice claim can arise when a shareholder believes that a company is being run in a way that unfairly harms their interests.
Shareholder disputes often begin long before court proceedings are issued. A breakdown in trust, exclusion from the management of a business, disagreement over control, concerns about company funds or a dispute following investment can quickly develop into serious litigation.
At Adam Benedict, our unfair prejudice claim solicitors advise shareholders, founders, investors, directors and companies on complex shareholder disputes, including bringing and defending unfair prejudice petitions under Section 994 of the Companies Act 2006.
Early legal advice can help you understand the strength of your position, protect the value of the business and identify whether the dispute can be resolved before court proceedings become necessary.
What is an unfair prejudice claim?
An unfair prejudice claim is a legal claim usually brought by a shareholder who believes that the company's affairs have been conducted in a way that is both prejudicial to their interests and unfair.
Section 994 of the Companies Act 2006 allows a company member to petition the court where the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally, or some part of its members.
This is sometimes referred to as an unfair prejudice petition or Section 994 claim.
The court has wide powers where an unfair prejudice petition succeeds. Under Section 996 of the Companies Act 2006, the court can make such orders as it considers appropriate to provide relief.
One of the most significant potential outcomes is an order requiring one shareholder to purchase another shareholder's shares, although the appropriate remedy will depend on the circumstances of the dispute.
When can you make an unfair prejudice claim?
Unfair prejudice claims can arise in many different commercial situations.
Common examples include:
Minority shareholder exclusion
Exclusion from management or important company decisions
Founder disputes
Investor and shareholder disputes
Misuse of company funds or assets
Diversion of business opportunities
Unfair dilution of a shareholder's interest
Failure to provide company or financial information
Non-payment or improper withholding of dividends
Breakdown in trust and confidence between shareholders
Disputes over management and control
Breaches of shareholder agreements or company arrangements
Disputes following investment into a business
Conduct benefiting majority shareholders at the expense of minority shareholders
These disputes can be particularly complex where the parties originally established or developed the business together.
Questions may arise around ownership, investment, individual contributions, control, valuation and the future direction of the company. What began as a commercial disagreement can develop into a dispute concerning both the legal rights of the shareholders and the future of the business itself.
Minority shareholder rights and unfair prejudice
An unfair prejudice claim is an important potential remedy for a minority shareholder who has been treated unfairly.
Holding a minority shareholding does not mean that the majority shareholders have an unrestricted right to run the company without regard to the interests or legal rights of other members.
Whether conduct amounts to unfair prejudice will depend heavily on the circumstances of the company and the relationship between those involved.
Relevant documents and evidence may include:
The company's articles of association
Any shareholders' agreement
Investment agreements
Board minutes and shareholder resolutions
Financial records
Correspondence between the parties
Agreements or understandings about involvement in the business
Evidence relating to investment, remuneration or dividends
Understanding the company's history and the expectations in which the parties entered into business together can be an important part of assessing an unfair prejudice claim.
What remedies are available in an unfair prejudice claim?
The court has broad discretion when determining how to resolve a successful unfair prejudice petition.
Depending on the circumstances, a remedy may involve changes to the way the company's affairs are conducted or restrictions on particular actions.
A particularly important remedy in shareholder disputes is a share buyout, where one party is required to purchase another shareholder's interest in the company.
Where a buyout is sought, the valuation of shares in an unfair prejudice claim can itself become a significant issue. The parties may disagree over the appropriate valuation date, the value of the business, the treatment of particular transactions or whether any discount should apply to the shares.
For that reason, unfair prejudice litigation often requires a strategy that considers not only whether the underlying claim can succeed, but also the commercial outcome the shareholder ultimately wants to achieve.
Defending an unfair prejudice claim
Not every disagreement between shareholders amounts to unfair prejudice.
Where a shareholder, founder, director or company is defending an unfair prejudice claim, the allegations should be analysed carefully and in the context of how the business has actually operated.
A defence may involve demonstrating that:
The company acted properly
The conduct complained of was commercially justified
The shareholder's alleged expectations were not legally protected
Decisions were made in accordance with the company's constitutional documents
The petitioner contributed to the circumstances giving rise to the dispute
The allegations do not amount to unfair prejudice
The petition is being used tactically within a wider shareholder dispute
The remedy being sought is disproportionate
The appropriate response will depend on the allegations, the company's history, the relevant agreements and the evidence available.
Taking advice at an early stage can also help prevent correspondence or internal company decisions from inadvertently weakening your position if proceedings follow.
Bringing an unfair prejudice claim
For a shareholder considering an unfair prejudice claim against another shareholder, early assessment is equally important.
Before commencing proceedings, it is important to establish exactly what conduct is being challenged, how it has affected the shareholder's interests and what outcome the shareholder ultimately wants.
That may involve considering:
The conduct giving rise to the dispute
The shareholder's legal and contractual rights
Evidence supporting the allegations
The value of the shareholding
Whether urgent action is required
The commercial impact of litigation
Potential settlement options
The remedy that should be sought
A strong legal claim without a clear commercial objective can still result in lengthy and expensive litigation. The strategy should therefore be built around both the legal merits of the case and the result the shareholder is seeking.
Can an unfair prejudice claim be settled without going to court?
Yes. A shareholder dispute does not necessarily have to proceed to a final court hearing.
Depending on the circumstances, negotiation, mediation or structured settlement discussions may provide an opportunity to resolve the dispute without full litigation.
Possible commercial outcomes can include:
One shareholder buying another shareholder's shares
An agreed shareholder exit
Changes to management arrangements
Agreements governing future decision-making
Payment of money or dividends
Changes to shareholder protections
Settlement of connected claims
However, settlement discussions need to take place against a clear understanding of each party's legal position.
Where negotiations fail, Adam Benedict can advise on pursuing or defending an unfair prejudice petition through the courts.
Why strategy matters in shareholder disputes
An unfair prejudice claim can be expensive, disruptive and damaging to the underlying business.
It can also become highly personal, particularly where the parties are founders, long-standing business partners or investors who previously had a close working relationship.
For a claimant, early advice can help determine whether there is a viable unfair prejudice claim, what evidence will be required and what remedy may realistically be achieved.
For a respondent, early intervention can help challenge allegations, protect the company and identify opportunities to prevent the dispute escalating unnecessarily.
In either case, the objective should be to establish a strategy before positions become entrenched and the commercial value of the business is put at greater risk.
Our unfair prejudice claim solicitors
If you are considering bringing an unfair prejudice claim, have received an unfair prejudice petition, or are involved in a wider shareholder or founder dispute, obtaining specialist advice early can significantly improve your ability to control the situation.
At Adam Benedict, our corporate litigation team advises on:
Unfair prejudice claims under Section 994 Companies Act 2006
Defending unfair prejudice petitions
Minority shareholder disputes
Founder and investor disputes
Shareholder exclusion
Disputes over management and control
Shareholder agreements
Share valuation and shareholder exits
Negotiation and mediation
Complex shareholder litigation
We combine litigation strategy with an understanding of the commercial realities behind shareholder disputes, helping clients protect both their legal position and their wider business interests.
Speak to Adam Benedict about an unfair prejudice claim or shareholder dispute.
This article is provided for general information only and does not constitute legal advice.
You should not act or refrain from acting based on its contents without seeking advice tailored to your specific circumstances.
