Unfair Prejudice: Unfair Doesn’t Always Mean Prejudicial

Disputes among shareholders of private limited companies are commonplace. The basis of many disputes is that the actions of one or more shareholders in conducting the company’s affairs is unfair and prejudicial towards the interests of the others. This is often the case where a company’s minority shareholders, with little power and influence over the company, feel that majority shareholders act unfairly and prejudicially towards them.

One remedy available to shareholders in these circumstances is an Unfair Prejudice Petition, under which (if successful), the courts will seek to proportionately cure the unfair prejudice. The courts (using their very wide discretion) can make various orders including how the company is to conduct its affairs, what it must stop or refrain from doing, authorising legal proceedings, and providing for the purchase of shares of any members of the company by other members or the company itself.

In a recent High Court case, it was considered whether a company’s decision to action a debt equity swap (by directors appointed by the majority shareholder) writing off £67m worth of debt in exchange for shares, which diluted shareholdings of those who did not accept the offer, was unfair and prejudicial. The debt was owed to the majority shareholder of 94.22%, with the dilution resulting in an increase for him but a decrease for the claimant. Prior to the debt equity swap, the majority shareholder had fallen out with the claimant and refused an offer to buy his shareholding, which following the dilution decreased from 3.97% to 1.18%.

The claimant sought remedy for this, claiming that the majority shareholder had acted vindictively in orchestrating the dilution, which was unfair and prejudicial. It was also alleged as part of this that the directors appointed by the majority shareholder, breached their general duties in implementing the swap and subsequent dilution.

Even though the judge found that the majority shareholder had been motivated by vindictiveness, his actions were not “conduct of the company’s affairs”. What a shareholder does in his own affairs is irrelevant to that of the conduct of the company’s affairs.

In respect of the directors, the court found that one (who didn’t give evidence at trial) had breached their duty to act for proper purposes which gave rise to unfairness as claimed. However, the court concluded that there had been no prejudice because regardless of improper purpose, by allotting new shares and reducing the company’s debt, there was a proper reason for implementing the swap and resulting dilution.

What is unfair is not necessarily prejudicial within the realms of an Unfair Prejudice Petition. For the petition to be successful, it must be shown that both were present in relation to the company’sconduct and as seen here, a shareholder’s conduct in his own affairs will not be seen as the company’s affairs.

If you would like to discuss anything on the above or feel that we could assist you or your company in any other way, please contact our Corporate and Commercial department on 0116 289 7000 or info@bhwsolicitors.com.