What is an Unfair Prejudice Claim?

An unfair prejudice claim is one of the most important legal protections available to shareholders in the UK. It allows a minority shareholder to take action where they have been treated unfairly by those in control of a company.

These types of prejudice claims are commonly used in disputes involving directors and shareholders, particularly in smaller or owner-managed businesses. Understanding how they work can help you protect your position and take the right steps if problems arise.

What is Unfair Prejudice?

Unfair prejudice occurs when the actions of a company or its controllers harm the interests of a shareholder in a way that is unfair.

The key legal basis for these claims is section 994 of the Companies Act 2006. This provision allows shareholders to apply to the court if the company’s affairs are being conducted in a manner that is unfairly prejudicial to their interests.

In simple terms, it means that even if something is technically legal, it may still be unfair, and therefore open to challenge.

Who Can Bring an Unfair Prejudice Claim?

Typically, an unfair prejudice claim is brought by a minority shareholder.

This is because majority shareholders often control decision-making and may use that control in a way that disadvantages others.

However, any shareholder can bring a claim if they can show that they have been treated unfairly.

Common Examples of Unfair Prejudice

There are many situations where prejudice claims may arise. Some of the most common include:

Exclusion from Management

A minority shareholder may be excluded from decision-making, particularly where they were previously involved in running the business.

Misuse of Company Funds

Directors or majority shareholders may use company funds for personal benefit or in a way that disadvantages others.

Failure to Pay Dividends

Profits may be retained or redirected unfairly, preventing minority shareholders from receiving a return.

Excessive Salaries or Benefits

Directors may pay themselves high salaries or bonuses, reducing profits available to shareholders.

Breach of a Shareholders Agreement

A shareholders agreement often sets out how the company should be run. Breaching these terms can form the basis of an unfair prejudice claim.

The Legal Test for Unfair Prejudice

To succeed in a claim under section 994 of the Companies Act 2006, a shareholder must show:

1. The company’s affairs have been conducted in a certain way
2. That conduct is unfairly prejudicial to their interests

This involves both a factual and a fairness assessment. The court will consider not just what happened, but whether it was fair in the circumstances.

What Can the Court Do?

The court has wide powers when dealing with unfair prejudice claims.

The most common outcome is an order requiring other shareholders to buy the shares of the affected shareholder.

This allows the minority shareholder to exit the company and receive fair value for their shares.

Other possible outcomes include:

• Regulating how the company is run
• Preventing certain actions from continuing
• Ordering compensation

The flexibility of these remedies is one of the reasons why unfair prejudice claims are so widely used.

The Role of a Shareholders Agreement

A well-drafted shareholders agreement can play a key role in preventing disputes.

These agreements often include:

• Rules on decision-making
• Dividend policies
• Exit provisions
• Dispute resolution mechanisms

If a shareholders agreement is in place and followed properly, it can reduce the likelihood of an unfair prejudice claim arising.

Relationship with Other Shareholder Remedies

An unfair prejudice claim is not the only option available to shareholders.

Other remedies may include:

• Derivative actions
• Claims for breach of duty
• Contractual claims under a shareholders agreement

However, prejudice claims are often preferred because they provide flexible and practical solutions.

Resolving Disputes Without Court

Although legal action is available, many unfair prejudice disputes are resolved without going to court.

Options include:

• Negotiation
• Mediation
• Structured settlement agreements

Early dispute resolution can save time, reduce costs and preserve business relationships.

When Should You Consider Legal Action?

You may need to consider legal action where:

• You are being excluded from the business
• Your financial interests are being harmed
• The majority is acting unfairly
• Attempts to resolve the issue have failed

Taking early advice can help you understand your options and avoid the situation escalating further.

Risks and Considerations

While unfair prejudice claims are powerful, they should be approached carefully.

Key considerations include:

• Legal costs
• Time involved
• The impact on the business
• The likelihood of success

Each case is different, and the best approach will depend on the specific circumstances.

How Expert Commercial Law Can Help

At Expert Commercial Law, we understand how complex shareholder disputes can be.

We are not a law firm, but we work with experienced professionals who can assist with:

• Unfair prejudice claims
• Disputes involving a minority shareholder
• Reviewing a shareholders agreement
• Advising on dispute resolution options

We can assess your situation and connect you with the right expert to help you take the most appropriate course of action.