Shareholders Remedies Unfair Prejudice

25 June 2004

Chris Rowbotham, Barry Jennings

Within a company structure, a minority shareholder will often find that he has little control over the way the company is operated. It has long been recognised that this can lead to problems of minority oppression.

Section 459(1) of the Companies Act 1985 enables a shareholder to petition the court for an order on the ground that the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its shareholders generally or of some of its shareholders (including at least himself). The prejudicial act need not have occurred but may merely be proposed.

The use of the word “unfair” enables the court to have regard to equitable considerations. For an act to be unfairly prejudicial it is not necessary to show that the majority acted in bad faith or with a deliberate intent to treat the minority shareholder unfairly. All that is needed is that the consequences of the conduct amount to unfair prejudice to his interests.

Lord Hoffmann, in O’Neill v Philips [1999] 2 BCLC 1, observed that a shareholder would not usually be entitled to complain of unfairness where there had been no breach of the terms on which he agreed that the affairs of the company be conducted. Therefore, the starting point is to consider whether the conduct complained of is in breach of the company’s Articles of Association and the powers which the shareholders have entrusted to the board of directors. The court may also consider any collateral agreements made between the shareholders.

The courts have also considered minority shareholders’ legitimate expectations that might result from the fundamental understandings that form the basis of the shareholders’ association. Where the company concerned is run along similar lines to a partnership, i.e. with members having formed the company on the understanding that they would all participate in the management and profits, then the court will consider it unfair for the other parties to later ignore these understandings.

The majority of section 459 petitions (especially successful ones) relate to small private companies. This is because in the context of public companies (and larger private companies) the courts have shown that they are less likely to find there is a concept of legitimate expectations outside of what is contained in the company’s public documents, i.e. its memorandum and articles, prospectus or listing agreements, etc.

Conduct found by the court to be unfairly prejudicial include, for example, exclusion from management when there is an expectation of participation, repeated failures to hold AGMs and to lay accounts before the members, conduct by those in control of the company which seriously diminished the value of a member’s shareholding and the majority shareholder diverting business to another company in which they hold a greater interest, or awarding themselves excessive financial benefits.

However, in Re Elgindata Ltd [1991] BCLC 959, Warner J observed that the court would be very reluctant to accept that managerial decisions could form the basis of a section 459 petition but that in an appropriate case, it might find that serious mismanagement of a company’s business did constitute unfairly prejudicial conduct.

If the court is satisfied that the complaint of unfair prejudice is well founded, it may make such order as it thinks fit for giving relief in respect of the matters complained of. Without prejudice to this general discretion, section 461(2) of the Companies Act 1985 sets out a non-exhaustive list of possible orders that the court can make. These are orders to:

· regulate the conduct of the company’s affairs in future;

· require the company to refrain from doing or continuing an act complained of;

· authorise civil proceedings to be brought in the name and on behalf of the company; and

· provide for the purchase of the shares in issue by other shareholders or by the company itself

In the vast majority of successful cases the remedy sought and granted is that of purchase of the minority’s shares by the majority. This remains the most attractive solution because it facilitates a “divorce” recognising that the relationship between the shareholder and the company is unlikely to recover.