We have seen an increase in the number of unfair prejudice claims, and enquiries relating to them, either from minority shareholders who feel their interest has been damaged, or by majority shareholders faced with a claim. What are these claims and what do you need to know to avoid them?
If a shareholder feels that business in the company is being conducted in a manner which is ‘unfairly prejudicial’ to them, they may petition to the court for a remedy. This complaint may be based on past, present or even anticipated future events, and the conduct may be unfairly prejudicial to all the shareholders, to some or only one of them. These claims can arise for any shareholder irrespective of the size of their share. This claim is typically pursued where a minority shareholder claims that a majority shareholder has acted unfairly regarding how the business is run and they must prove to the court there has been both prejudice and unfairness to them.
These claims arise more frequently where the parties do not have a Shareholders’ Agreement in place, as the Shareholders’ Agreement will enable an unhappy shareholder to pursue a breach of contract claim if a term of the agreement has been breached. We recently advised a shareholder and director who had started a business with friends and thought that a Shareholders’ Agreement was unnecessary. Over the years their relationship deteriorated, and the initial owner and director was unfairly dismissed from the business. The remaining shareholders continued to run the business and our client was deeply concerned about his exclusion from the business and their share value diminishing. Without a Shareholders’ Agreement detailing his rights, and as the relationship between the shareholders had broken down, they would pursue an unfair prejudice claim to enforce their rights.
The court takes a broad view of what behaviour might prejudice a minority shareholder. This could be a breach of the Shareholders’ Agreement or even extend to legitimate expectations which the shareholder may have about the running of the business. In some cases, the shareholder will be alleging that the value of their shares has been adversely affected and they can also make a claim relying on one of these events:
- Excluding minority shareholders from the running of the business, including management and information sharing;
- Excessive financial rewards made to a director;
- Diverting business to a different company;
- Mismanagement of the company; or
- Breaching a term of a shareholders’ agreement.
If successful with an unfair prejudice claim, the court has a very wide discretion when deciding what should happen and can make any order it thinks fit. The court may regulate future behaviour of the company, order that the shares are purchased by other shareholders, prevent the company from continuing with the act complained of or even winding up the company. The cost of reaching a court decision can be high and courts encourage the parties to try to resolve the dispute between themselves. The reality is that these claims are often resolved via an agreed settlement.
For these claims to succeed, the shareholder must prove that the company’s activity has resulted in prejudice to their position as a shareholder and the minority shareholder must present their claim as soon as possible. If a minority shareholder thinks they have grounds for this claim, it is vital to seek legal advice to consider the merits before continuing.
How can we help?
These proceedings are, by their very nature, expensive and time consuming, but they may be very necessary! We recommend shareholders get advice to take preventative steps such as engaging in mediation. Preventing these claims by having a well-drafted, comprehensive Shareholders’ Agreement in place will put the shareholders in a far better position than dealing with shareholder disputes or unfair prejudice claims.
If you think you might have an unfair prejudice claim, or if you are concerned about your potential liability to unfair and prejudicial conduct, we have extensive experience in minimising risk and bringing and defending these claims. We can assist and advise on all aspects of the court proceedings, including preparing Letters Before Action and if necessary, issuing the claim. The issues which are raised in these claims are often complex and obtaining pragmatic and tailored legal advice is essential.