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What is unfair prejudice?

A member of a company (shareholder) may seek relief from the courts where the affairs of the company are being conducted in a manner that is ‘unfairly prejudicial’ to the member’s interests, or an actual or proposed act or omission of the company is or would be so prejudicial (section 994, Companies Act 2006). 

The most common remedy is for the shares of the petitioning shareholder to be bought by other members of the company or even by the company itself. 

Allotting further shares in the company for the improper purpose of diluting a minority shareholder’s shareholding is an obvious example of unfair prejudice. 

Another good example is where a company’s directors (and majority shareholders) cause the company to borrow money to finance the repayment of the loans made to the company by them in preference to the repayment of loans from the minority shareholders.  

The courts will not interfere in questions of commercial judgment. However, where mismanagement, rather than a mere difference of opinion on the desirability of different commercial decisions, is established, this may constitute unfair prejudice if it is sufficiently serious having regard to the scale of financial loss arising and the frequency and duration of acts or omissions concerned. 

Setting the level of dividends payable to shareholders is a commercial decision with which courts are normally reluctant to interfere. The absence of dividends cannot, of itself, constitute unfair prejudice; the decision to pay dividends should always to be driven by commercial objectives that may mean that the company cannot afford to pay them. However, unfair prejudice may be established where for example, the directors have refused to pay dividends for improper purposes such as enhancing the capital value of their own shareholdings while deriving an income from directors’ fees. 

Shareholders may also seek to bring actions in the name of the company (derivative actions) or petition for the winding up of a company on the grounds that to do so is just and equitable.

 

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