Unfair Prejudice and Just and Equitable Winding up Flashcards
What is unfair prejudice?
Allows a member to bring an action on the grounds that the company is being run in a way that they have suffered unfair prejudice
What is the authority for unfair prejudice?
S994 CA 2006
What are 3 examples of unfair prejudice?
1) Granting of excessive remuneration to directors
2) Directors’ dealing with associated persons; and
3) Non-payment of dividends
What is the difference between unfair prejudice claim and derivative actions?
Unfair prejudice is in shareholders personal capacity
How many grounds for s994?
2
What are the 2 grounds of unfair prejudice?
a) Company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members, or
b) That an actual or proposed act or omission of the company is or would be so prejudicial
What is the test of unfair prejudice?
The reasonable bystander test
What are some principles of unfairly prejudicial conduct that have been developed through case law?
1) Negligent management of company
2) Disagreements to company policy
3) Bad faith
4) Breaches of the Articles of Association
5) Claimant’s conduct
6) Excessive remuneration
7) Legitimate expectation of management
Tell me about negligent management of company
Will not amount unless it’s so serious and/or repeated which risks value of shareholder’s interest
Tell me about disagreements as to company policy
A change in direction of business will not afford grounds for petition under s994
Is there a requirement for bad faith?
There is no requirement for bad faith for an unfair prejudice claim
Is there a need for a breach of articles of association?
Ordinarily, yes. It would help the case a lot. Although, I don’t believe 100% needed
Does the claimant need “clean hands” to bring a claim?
No need whatsoever
What is the Court’s view of excessive remuneration in an unfair prejudice claim?
They take a wide view of prejudice that may be suffered by minority shareholder
What is the legitimate expectation of involvement in management by shareholders in smaller companies?
May equate unfair prejudice if shareholders are prevented from involvement in the management of the company
What are the remedies of unfair prejudice?
Whatever the court sees fit
What is the most commonly made order for unfair prejudice?
The wrongdoers will be forced to purchase the petitioner’s shares (either via company or shareholders)
What if director is minority shareholder and the petitioner is a majority shareholder?
Then they will unlikely order purchase of shares
What are some valuation principles in the remedy of purchasing petitioner’s shares?
1) Shareholders first attempt to use Articles valuation mechanism
2) Court may order a discount if shareholding viewed as investment
3) Valuation date is that on court order
4) Behaviour of claimant / petitioner may be relevant if they previously rejected a reasonable offer
What if there is a dispute on valuation?
Court will encourage parties to settle out of court by binding third-party valuation
What if petitioner objects to out of court settlement?
Court will require them to give reasons
What is the course of action if the shareholders wants to avoid a situation where court makes an order for the purchase of their shares?
A petition may not be suitable
What are the issues with section 994?
- Expensive
- Time-consuming
- Complication
- Uncertain remedy for petitioner
What is just and equitable winding up?
The most drastic remedy. Shareholder can apply for company to be wound up on grounds that it is just and equitable to do so
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