Quick Guide: s.994 Companies Act Unfair Prejudice Petitions

This succinct guide provides essential insights into unfair prejudice petitions within the framework of English law. According to Section 122(1)(g) of the Insolvency Act 1986, if a minority within a company perceives oppression by the majority, they have the right to petition for the company’s winding-up on the grounds of justness and equity. However, if the minority prefers not to pursue this course of action, they have an alternative option available: to file an unfair prejudice petition under Section 994(1) of the Companies Act 2006 (the “Companies Act”).

What is Unfair Prejudice?

Unfair prejudice typically refers to actions or circumstances that unfairly disadvantage a member of a company, especially concerning the management of the company’s affairs and business. This disadvantage may arise from the actions or inactions of another member of the company. For unfair prejudice to be established, it is essential that the member’s interests have been harmed in a manner deemed unfair. Unfair prejudice comprises two main elements: “unfairness” and “prejudice”. However, it falls to the courts to determine what qualifies as “unfair” and “prejudicial”. Nonetheless, the member must demonstrate that they have suffered a loss due to unfair prejudice.

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Test for Unfair Prejudice

The assessment of unfair prejudice follows an objective standard, not a subjective one. Instead of focusing on whether the majority was aware that their actions would harm a member of the company, the key enquiry is whether a reasonable person would view the majority’s actions as unfairly detrimental to the interests of the minority. It’s crucial to understand that a remedy is less probable when there’s been no violation of the terms agreed upon by the member regarding the conduct of the company’s affairs.

What is an Unfair Prejudice Petition?

An unfair prejudice petition is typically seen as a recourse for addressing minority oppression, but it’s important to note that the remedy provided by Section 994 of the Companies Act is not only specifically applicable to minority shareholders. In cases where the minority holds a controlling stake, the majority can also initiate such a petition to protect their interests. However, if the majority shareholders have the means to rectify the situation through their controlling stake, a petition filed by them in court may not be granted.

Grounds for bringing an Unfair Prejudice Petition:

Sections 994(1) and 995(2) of the Companies Act provide that the grounds for bringing an unfair prejudice petition are:

“the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of members generally or some part of its members (including at least himself) or that any actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial”

This implies that a member cannot file a petition unless their own interests have been adversely impacted by unfairly prejudicial conduct. Based on the aforementioned provision, two grounds for an unfair prejudice petition can be identified:

• Conducting the affairs of the company in an unfairly prejudicial manner; and
• An act or omission that is or would be unfairly prejudicial.

While both of these grounds are often present concurrently, either one is sufficient for a petition. Additionally, the provision includes proposed actions, but mere concerns about how a company’s affairs may be conducted are insufficient for the purpose of filing a petition.

Which companies are subject to Sections 994 and 995?

Petitions under Sections 994 and 995 of the Companies Act can be filed for all companies defined within the definition in the said Act. Legal precedent has established that petitions can also be initiated concerning quasi-partnerships.

Who can bring an Unfair Prejudice Petition?

An unfair prejudice petition can be initiated by a member of a company. According to Section 112 of the Companies Act, a member is defined as a subscriber to the memorandum and any other individual who agrees to become a member of the company and is listed on the register of members. This includes shareholders or non-members who have obtained shares but have not been recorded on the shareholder register, or who have acquired shares through legal means, such as being a personal representative of a deceased individual’s estate. The individual initiating this action, is formally known as ‘the petitioner’.

Although the Companies Act technically permits majority shareholders to file a claim for unfair prejudice, in practice, such petitions are rarely successful, except in rare cases where the majority shareholder lacks voting control. Typically, majority shareholders possess the authority to influence the company’s decisions and affairs, unlike minority shareholders. Hence, most unfair prejudice petitions are initiated by minority shareholders.

How to bring an Unfair Prejudice Petition?

The Civil Procedure Rules (the “CPR”), particularly as outlined in CPR Practice Direction 49A, generally governs unfair prejudice petitions. However, specific rules outlined in the Companies (Unfair Prejudice Applications) Proceedings Rules 2009, detail requirements for such petitions and their service. Under Section 994 of the Companies Act, a petition is necessary, and any other approach would be deemed a procedural flaw. The petition must clearly outline the grounds for its submission and the desired relief.

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The court is required to schedule a hearing, known as the “return day”, during which both the petitioner and any respondents, including the company, must appear before the registrar or district judge. At this hearing, directions will be provided regarding the procedure for the petition. Upon setting the return day, the court will provide the petitioner with sealed copies of the petition for service, each marked with the return day and the time of the hearing.

The petitioner is required to serve a sealed copy of the petition on the company at least 14 days before the return day. Additionally, if the petition is brought by a member of the company, the petitioner must also serve a sealed copy of the petition on every respondent named in the petition at least 14 days before the return day. On the return day or thereafter, the court will provide suitable directions as deemed necessary. Interlocutory relief may also be attainable to safeguard both the Company’s and the Petitioner’s interests until the petition is heard. However, the court will not grant relief assuming unfair prejudice will be established during the trial.

Respondents to Unfair Prejudice Petitions

Typically, the respondent to a petition is the majority shareholder accused of oppressing the minority shareholder. However, the scope of potential respondents is wider. A past member of the company could also be a respondent. Furthermore, it’s possible to seek relief against an individual who isn’t or has never been a member or director of the company in question, provided that individual has knowingly received or aided in the improper diversion of the company’s assets. The company itself is often included as a respondent. This is because there might be instances where the company is obligated to buy assets or shares.

Principles of a Reasonable Offer in Unfair Prejudice Cases

In the landmark case of O’Neill v Phillips, heard in the House of Lords, it was established that a reasonable offer made by the majority to buy out the shares of the minority could prevent the alleged unfair prejudice against the petitioner’s interests. Following the guidance set forth in this case, a reasonable offer aligning with these principles could serve as a robust defence against any claims of unfair prejudice and reduce the risk of a significant adverse costs award.

These principles of a reasonable offer can be outlined as follows:

1. Price: The offered price should accurately reflect the true value of the minority shareholder’s stake in the company.
2. Expert Opinion: If there’s disagreement on the valuation, a professional should swiftly determine the fair value.
3. Information Equality: Both parties should have access to the same company information to facilitate fair price negotiations.
4. Costs: Typically, if the majority shareholder loses, they bear the costs, but offering a fair deal early on could mitigate these expenses.

In O’Neill v Phillips, Lord Hoffman outlined the characteristics of a reasonable offer as follows:

“In the first place, the offer must be to purchase the shares at a fair value. This will ordinarily be a value representing an equivalent proportion of the total issued share capital, that is, without a discount for its being a minority holding. The Law Commission (paras 3.57 to 3.62) has recommended a statutory presumption that in cases to which the presumption of unfairly prejudicial conduct applies, the fair value of the shares should be determined on a pro rata basis. This too reflects the existing practice. This is not to say that there may not be cases in which it will be fair to take a discounted value. But such cases will be based upon special circumstances and it will seldom be possible for the court to say that an offer to buy on a discounted basis is plainly reasonable, so that the petition should be struck out.”

“Secondly, the value, if not agreed, should be determined by a competent expert. The offer in this case to appoint an accountant agreed by the parties or in default nominated by the President of the Institute of Chartered Accountants satisfied this requirement. One would ordinarily expect the costs of the expert to be shared but he should have the power to decide that they should be borne in some different way.”

“Thirdly, the offer should be to have the value determined by the expert as an expert. I do not think that the offer should provide for the full machinery of arbitration or the half-way house of an expert who gives reasons. The objective should be economy and expedition, even if this carries the possibility of a rough edge for one side or the other (and both parties in this respect take the same risk) compared with a more elaborate procedure. This is in accordance with the terms of the draft regulation recommended by the Law Commission: see App C to the report.”

“Fourthly, the offer should, as in this case, provide for equality of arms between the parties. Both should have the same right of access to information about the company which bears upon the value of the shares and both should have the right to make submissions to the expert, though the form (written or oral) which these submissions may take should be left to the discretion of the expert himself.”

“Fifthly, there is the question of costs. In the present case, when the offer was made after nearly three years of litigation, it could not serve as an independent ground for dismissing the petition, on the assumption that it was otherwise well founded, without an offer of costs. But this does not mean that payment of costs need always be offered. If there is a breakdown in relations between the parties, the majority shareholder should be given a reasonable opportunity to make an offer (which may include time to explore the question of how to raise finance) before he becomes obliged to pay costs. As I have said, the unfairness does not usually consist merely in the fact of the breakdown but in failure to make a suitable offer. And the majority shareholder should have a reasonable time to make the offer before his conduct is treated as unfair. The mere fact that the petitioner has presented his petition before the offer does not mean that the respondent must offer to pay the costs if he was not given a reasonable time.”

Preliminary Hearings

The initial hearings in an unfair prejudice petition typically involve directives or rulings concerning disclosure and expert valuation evidence. Disclosure is crucial because the majority often controls the physical documents and/or electronic data relevant to the case. Consequently, disputes over what should or shouldn’t be disclosed are common, requiring the court’s guidance on disclosure matters. As previously mentioned, expert valuation evidence plays a pivotal role in assessing the value of the minority’s shares, which is the most frequent remedy in a successful petition. Consequently, the order typically includes provisions for one or more experts to offer valuations of the company and its shares.

Example High Court Case Management Directions

Typically, once an unfair prejudice petition is sealed by the Court, the Court will order, of its own motion that:

1. Practice Direction 57AD on Disclosure in the Business and Property Courts applies to the petition (and that the points of claim, points of defence and points of reply directed below shall be treated as particulars of claim, defence and reply respectively for the purposes of that practice direction).
2. The Petitioner(s) serve the petition by 4pm on [date];
3. The petition shall stand as points of claim;
4. The Respondent(s) (save for the company) shall file and serve points of defence by [date];
5. The Petitioner(s) file and serve points of reply (if so advised) by 4pm on [date];
6. The petition be listed for case management and (where appropriate) costs management on [date] with a time estimate of 1.5 hours [The parties are directed to CPR 3.12. If the parties seek an order dispensing with cost budgets they should inform the court in advance of the hearing, and in any event notify the court as soon as possible if the 1.5 hour time estimate is too long or too short or the date cannot be kept].
7. Where there is to be costs management: (a) the parties file and exchange costs budgets by 4pm on [date]; (b) the parties shall consider each other’s costs budget(s) and by 4pm on [date] identify to each other which phases in the other party’s/parties’ budget(s) are agreed and which are not agreed, in the latter case giving brief reasons and suggested alternative figures; (c) the solicitors for the Petitioner(s) shall file and serve by 4pm on [date]: (i) confirmation that all phases in the budgets are agreed; or (ii) a one page summary in tabular form setting out the figures for the phases in the budgets indicating which phases have been agreed and which have not been agreed together with a summary of the reasons for disagreement and suggested alternative figures; (d) the parties file and serve in the form below a non-binding indication of what they believe to be the approximate value of the shares in issue in the petition by 4.00 pm [date];
8. The parties shall file and serve in the form at the end of this order a non-binding indication of what they believe to be the approximate value of the shares in issue in the petition by 4pm on [date].
9. The parties be permitted to vary the above orders by consent so as to extend any period provided for by no more than 28 days. In the event that the hearing listed pursuant to paragraph 6 above needs to be vacated the parties are to notify the court as soon as reasonably practicable so the hearing may be vacated and re-listed.
10. The Petitioner(s) shall file and serve a hearing bundle (agreed if possible) complying with Appendix X of the Chancery Guide not more than 7 and not less than 3 days before the hearing.
11. Skeleton arguments complying with Appendix Y of the Chancery Guide shall be filed and served 2 days before the hearing.
12. Costs be in the petition.
13. The Petitioner(s) shall serve this order on the other parties at the same time as serving the petition.

Estimate of value

For the purpose of the hearing mentioned in paragraph 6 of the order dated [ ] I/ we put the following non-binding estimate on the value of the shares in issue in this petition on [insert date(s) ]: £[value].

Petitioner/petitioner’s solicitors/Respondent/respondent’s solicitors

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Remedies for Unfair Prejudice

The court possesses broad discretion to issue any order it deems fair and equitable to address the unfair prejudice experienced – just as it does when it determines what constitutes “unfair” and “prejudicial” behaviour. This evaluation considers the interests of other shareholders and creditors. The court, however, does not oversee the company’s management moving forward. Nonetheless, certain remedies are commonly employed by the court:

• An order for the majority shareholder(s) to purchase the petitioner’s shares at a fair value and according to terms set by the court.
• An order for directors to transfer property to the company that was obtained in breach of their fiduciary duties.
• An order compelling or prohibiting the company from taking a specific action – this could involve changes to the Articles of Association.
• An order for the minority shareholder to acquire the majority shareholder’s shares.
• An order for the company to be wound up (liquidated).

Limitations on Remedies in Unfair Prejudice Proceedings

Several factors may act as barriers to obtaining relief in unfair prejudice proceedings, which are instances where the court refrains from granting a remedy. Some examples include:

• Refusal of Fair Offer: If the petitioner declines a reasonable offer to purchase their shares.
• Existence of Exit Routes: If there are clear provisions in the company’s Articles of Association or a Shareholder Agreement outlining alternative resolutions for such disputes.
• Petitioner Misconduct: The court typically avoids rectifying situations where both parties have engaged in improper behaviour.
• Delay in Petition: If there’s a significant delay in bringing forth the petition, or if the petitioner has seemingly accepted the unfair treatment without objection.

In a notable change, the Court of Appeal has established that unfair prejudice petitions governed by section 994 of the Companies Act 2006 are subject to a statutory limitation period of 12 years. This decision marks a departure from previous interpretations and will influence the handling of similar claims in the future.

Instructing our Litigation Lawyers

LEXLAW provides the best possible outcome for our clients by conducting in depth investigation and research into the realistic prospects of a case before selecting the appropriate course of action in order to reduce time and expense.

Liability for costs is always an issue in litigation and based on our extensive litigation experience we provide our clients with as much strategic, practical as well as carefully considered legal advice in order to ensure minimum risk in respect of costs.

Where appropriate we encourage the use of alternative dispute resolution (such as mediation and without prejudice negotiation) and our lawyer’s negotiation skills are first class. If early settlement at advantageous terms is not possible, we are extremely experienced and capable at navigating our clients through the litigation process. For personalised guidance and representation in unfair prejudice matters, please reach out to us at [email protected] or give us a call at ☎ 02071830529.