Unfair Prejudice Flashcards
Who can bring a claim?
• Any member may apply to the court for relief under s 994 on the grounds of unfair prejudice.
• Section 112 defines a ‘member’ as a subscriber to the company’s memorandum and “every other person who agrees to become a member of the company and whose name is entered into the register of members”. However, case law indicates that the court will be prepared to interpret this broadly. For example in Harris v Jones they allowed a person whose shares had been transferred by had not yet registered as a member to bring a claim under s. 994.
Blunt v Jackson:The judge in this case noted that the court had the power to retrospectively amend the register of members, and so allowed a person who had agreed to become a 50% shareholder and had worked for the company on low wages in the belief that he was a shareholder, but was not registered as such, to succeed in a petition for unfair prejudice based on his exclusion from management.
The directors are responsible for the day-to-day running of the company and have the authority necessary to act on the company’s behalf in this regard
MA 3
Unfair prejudice- statutory authority
s 994 – 996 CA 2006
On what grounds can someone bring a claim?
Section 994(1)
(1) Conduct of the company’s affairs have been conducted in a manner which is
2) unfairly prejudicial to
3) the interest of the members
Conduct of company’s affairs
In order to succeed with a petition under s 994(1), a petitioner must establish unfairly prejudicial conduct arising from an act or omission of the company, or made on the company’s behalf. The conduct complained of must be an act or acts done by the company (eg by the directors), not the conduct of an individual shareholder acting in his private capacity. The complaint must relate to how the affairs of the company have been managed - personal disputes between shareholders fall outside the scope of s 994. Re Legal Costs Negotiators Ltd
Re Home & Office Fire Extinguishers Ltd
his case illustrates that there may be an overlap between the requirement that the conduct relates to the company’s affairs and personal disputes where such disputes make it impossible for the parties to continue working together as directors/shareholders.
(2) Interests of the members
The petitioner must also prove that his interests in his capacity as a member have been unfairly prejudiced as a result of conduct on the part of the company.
This requirement is construed widely. For example, members have an interest in the value of their shares and will therefore be able to bring a claim if they can show that “the value of their shareholding has been seriously jeopardised by reason of a course of conduct on the part of those persons who have had de facto control of the company, which has been unfair to the member concerned” Re Bovey Hotel Ventures Ltd
(3) Unfair prejudice
Following O’Neill v Phillips, in order to establish unfair prejudice, a petitioner must prove:
- Breach of contract (the articles or a shareholders’ agreement), or
- Breach of some fundamental understanding.
The court will begin by looking at whether the conduct complained about is in accordance with the articles.
The court will next consider the scope of any fundamental understandings between the parties.
Unfairness must be tested by looking at whether the majority had acted or was proposing to act in a manner which equity would regard as contrary to good faith.
Unlawful conduct will not necessarily be unfairly prejudicial, and trivial or technical infringements of the articles may not give grounds for a s 994 petition.
O’Neill v Phillips
The petitioner, O, was employed by the company, whose sole director and shareholder was originally P. P was impressed with O’s work and in 1985 O was awarded 25% of the company’s shares and made a director. P told O that he would eventually take over the business and would then receive 50% of the profits. In December 1985 P retired from the board and O became the sole director. The business initially did well but then began to decline and in August 1991 P used his majority voting rights to appoint himself managing director and took over management of the business, telling O that he would no longer receive 50% of the profits, or receive certain share incentives. O issued a petition for unfair prejudice based on a legitimate expectation of receiving 50% of the voting shares. The House of Lords held that there was no unfair prejudice here as the entitlement to 50% of the profits was never formalised and was conditional on O running the business, which he was no longer doing.
Examples of unfairly prejudicial conduct
- Exclusion from management
- Mismanagement
- Breach of directors’ fiduciary duties
- Excessive remuneration and refusal to pay dividends
- Exclusion from management
- most common ground
- In a small quasi-partnership private company, a member may expect to continue to participate in the management of the company on the basis of a fundamental understanding between the parties, despite the fact that any director may be validly removed from office by an ordinary resolution of the members under s 168 CA 2006. However, this will not be the case in larger companies with outside investors. It is also not the case that in every small quasi-partnership company, the removal from office of a director will automatically give rise to an unfair prejudice claim – there needs to be some conduct which is “unfairly prejudicial” regarding the removal.
Re Tottenham Hotspur: Terry Venables, chief executive of Tottenham Hotspur football club, brought a petition claiming unfair prejudice after he was dismissed from office. It was held that he had no legitimate expectation of remaining in control of the company, so the action failed.
- Mismanagement
In general, poor management of a company will not give rise to a claim for unfair prejudice, since the courts are very reluctant to find that management decisions amount to unfair conduct. It has been held that the risk of poor management inherent in share ownership and the courts will not interfere with a bona fide business decision made by a company’s board or its majority shareholders except where there is a clear conflict of interests (Re Elgindata Ltd [1991] BCLC 959). However, where the directors have abused their powers or exercised them for some ulterior purpose, an allegation of mismanagement may amount to unfair prejudice.
Re Macro (Ipswich) Ltd [1994] 2 BCLC 354:In this case an allegation of mismanagement over 40 years resulting in economic loss to the company was found to amount to unfairly prejudicial conduct. Here the sole director of the two associated companies neglected his management responsibilities allowing dishonest employees to steal from the company. The petitioners successfully argued that substantial financial losses were suffered by the companies as a result, which caused unfair prejudice to them.
- Breach of directors’ fiduciary duties
This is a common ground for petitions for unfair prejudice and there have been a number of successful petitions brought on this ground. Examples are set out below.
Re London School of Electronics[1986] Ch 211:In this case the petition for unfair prejudice succeeded where those in control of the company had misappropriated its assets by diverting them to another business owned by them.
Re Little Olympian Each-Ways Ltd (No 3) [1995] 2 BCLC 420, ChD:The directors sold the company’s business at a substantial undervalue to another company as part of a wider transaction in which the directors received significant personal benefit. This was held to be unfairly prejudicial conduct.
Re A Company (No 005287 of 1985) [1986] BCLC 68: In this case the petition for unfair prejudice succeeded on the grounds that the directors had made secret profits.
- Excessive remuneration and refusal to pay dividends
Although generally companies’ articles of association provide that directors’ remuneration should be determined by the general meeting, in practice the power to determine directors’ remuneration is delegated to the board, and the court will tend not to interfere with the business judgement of the board provided it has honestly determined the level of remuneration. However, it is clear that there is ample scope here for abuse of this power, and in these cases the court will be prepared to hold that failure to pay dividends and/or directors’ awarding themselves excessive remuneration will be unfairly prejudicial conduct.
Re a Company (No. 004415 of 1996) [1997] 1 BCLC 479: Here the court held that if remuneration and dividend levels cannot be justified by “objective commercial criteria” then it would follow that the affairs of the company have been managed in a way which is unfairly prejudicial to the interests of shareholders who are not directors.
Remedies- s.996
The court has a wide discretion in determining the appropriate remedy. Section 996(1) states that the court may “make such order as it thinks fit for giving relief in respect of the matters complained of”.
Section 996(2) then lists possible orders that the court may make, although this list is not determinative.
Section 996(2) states that the court’s order may:
“(a) regulate the conduct of the company’s affairs in the future;
(b) require the company (i) to refrain from doing or continuing an act complained of, or (ii) to do an act which the petitioner has complained it has omitted to do;
(c) authorise civil proceedings to be brought in the name and on behalf of the company by such person or persons and on such terms as the court may direct;
(d) require the company not to make any, or specified, alterations in its articles without the leave of the court;
(e) provide for the purchase of the shares by any members of the company by other members of the company or by the company itself…”
