Unfair Prejudice Petitions

Any member of the company may petition under section 994 of the Companies Act 2006, and the right extends to those to whom shares have been transferred or transmitted by operation of law. The petitioner is usually a minority shareholder, but a majority shareholder excluded from a quasi partnership can also petition in appropriate circumstances. The conduct complained of must affect the petitioner in their capacity as a member.

The conduct must be both prejudicial to the petitioner’s interests and unfair, judged objectively against the agreements and understandings between the shareholders. Established examples include exclusion from management in a quasi partnership, non payment of dividends while the majority extract value through remuneration, diversion of company business or assets, and improper allotments of shares that dilute the minority. Mismanagement alone is not usually enough unless it is serious and repeated.

A company formed or continued on the basis of a personal relationship involving mutual trust and confidence, typically where some or all shareholders are expected to participate in management. In such companies the court will hold the majority to the informal understandings on which the venture was built, not merely to the written constitution. Exclusion from management in a quasi partnership is the most common foundation for a successful petition.

Section 996 confers the widest discretion. The court may regulate the conduct of the company’s affairs, require the company to do or refrain from doing an act, authorise proceedings in the company’s name, restrict alterations to the articles, and most commonly order the respondents to purchase the petitioner’s shares. The buyout order at a fair value is the remedy sought in the great majority of petitions.

The court determines a fair value, usually with the assistance of independent expert valuation evidence. The central battlegrounds are the valuation date and whether a minority discount applies. In quasi partnership cases the ordinary rule is that the shares are valued on a pro rata basis without a minority discount. We work with forensic accountants so the figure advanced on your behalf is supported by evidence.

There is no statutory limitation period for a section 994 petition. However, delay is not neutral. A petitioner who continues to participate or stays silent for years may find the conduct treated as accepted, and the court can take delay into account on both liability and remedy. It is critical to seek legal advice promptly once the prejudicial conduct becomes apparent.

A contributory may petition to wind the company up on just and equitable grounds (under section 122(1)(g) of the Insolvency Act 1986), and the two petitions are sometimes issued together. Winding up is a drastic remedy of last resort and the court will not grant it where a reasonable alternative, such as a buyout offer, is available. We advise on the combination that gives you the strongest negotiating position.