What is an Unfair Prejudice Petition Under Section 994?

Disputes between shareholders can be some of the most complex and high-stakes issues in company law. Where a minority shareholder believes they have been treated unfairly, one of the most powerful remedies available is to bring an unfair prejudice petition under section 994 of the Companies Act 2006 CA.

This article explains what unfair prejudice claims are, when you can bring a claim, and how the court approaches these disputes.

What is an Unfair Prejudice Petition?

An unfair prejudice petition is a legal claim brought by a shareholder (known as the petitioner) where they believe the company’s affairs have been conducted in a way that is unfairly prejudicial to their interests.

Under section 994 of the Companies Act 2006 CA, a shareholder can apply to the court if:

• The company’s affairs are being conducted in a way that is unfairly prejudicial, or
• An act or omission has taken place (or is proposed) that would have that effect

These claims are commonly referred to as unfair prejudice petitions or unfair prejudice claims.

Who Can Bring an Unfair Prejudice Petition?

Only members of a company (i.e. shareholders) can bring an unfair prejudice petition. This includes:

• Registered shareholders
• Beneficial owners in certain circumstances
• Former shareholders (in limited cases, depending on the facts)

Typically, these claims are brought by a minority shareholder against majority shareholders who control the company.

What Does “Unfairly Prejudicial” Mean?

To succeed in an unfair prejudice claim, the petitioner must show two key elements:

1. Prejudice Suffered

There must be some form of prejudice suffered by the shareholder. This could include:

• Financial loss
• Exclusion from management
• Loss of dividends
• Dilution of share value

2. Unfairness

The conduct must also be unfair. This usually involves a breach of the shareholder’s reasonable expectations, particularly in smaller or owner-managed companies.

Examples of unfairly prejudicial conduct include:

• Excluding a shareholder from the management of the business
• Paying excessive salaries to majority shareholders
• Failing to declare dividends
• Misuse of company funds
• Breach of directors’ duties or breach of duty generally

The court will consider whether the conduct was allegedly unfairly carried out in the context of the relationship between the parties.

Common Examples of Unfair Prejudice

Unfair prejudice claims arise in a wide range of situations, particularly in closely held companies.

Exclusion from Management

In companies that operate like a quasi partnership, shareholders often expect to be involved in running the business. If a shareholder is excluded from management without good reason, this may amount to unfair prejudice.

Mismanagement of Company Affairs

If those in control of the company mismanage the company’s affairs in a way that harms minority shareholders, this may justify a claim.

Breach of Shareholder Agreements

Where shareholder agreements are in place, failure to comply with them can give rise to unfair prejudice claims, particularly if one party acts contrary to agreed terms.

Financial Misconduct

This includes:

• Diverting business opportunities
• Paying excessive remuneration
• Misusing company assets

Such conduct can amount to a serious breach of duty and may support a petition.

The Role of Quasi Partnerships

Many unfair prejudice petitions arise in companies that operate as a quasi partnership.

This is where:

• There is a personal relationship between shareholders
• All parties expected to be involved in management
• There is mutual trust and confidence

In these cases, the court may look beyond strict legal rights and consider whether the parties have been treated fairly in light of their relationship.

How to Bring an Unfair Prejudice Petition

To bring an unfair prejudice petition, the shareholder must issue a claim in court, usually in the High Court or a specialist business court.

The process generally involves:

1. Preparing evidence of the unfairly prejudicial conduct
2. Demonstrating the prejudice suffered
3. Filing the petition
4. Serving it on the company and other parties

The case will then proceed through the court process, unless it is resolved beforehand.

Time Limits for Bringing a Claim

Unlike many legal claims, there is no strict statutory limitation period for unfair prejudice petitions. However, delay can affect the strength of the claim.

In practice:

• Claims may relate to conduct going back several years
• In some cases, issues dating back up to 12 years may be considered, depending on the circumstances

That said, it is always advisable to act promptly and seek legal advice at an early stage.

What Can the Court Do?

If the court finds that unfair prejudice has occurred, it has a wide discretion in deciding how to resolve the dispute.

Common remedies include:

Share Buyout Orders

The most common outcome is that the majority shareholders are ordered to purchase the petitioner’s shares at a fair value.

Regulation of Company Affairs

The court may order changes to how the company is run going forward.

Injunctions

The court may prevent certain actions from continuing.

Other Remedies

In rare cases, the court may order the company to be wound up, although this is less common.

The flexibility of the court’s powers is one of the reasons why unfair prejudice claims are such a powerful tool for minority shareholders.

The Court’s Approach

When deciding an unfair prejudice petition, the court will consider:

• The conduct complained of
• The expectations of the parties
• The terms of any shareholder agreements
• Whether the conduct was unfairly prejudicial

Ultimately, it is for the court to decide whether the behaviour complained of crosses the legal threshold.

Risks and Challenges

While unfair prejudice claims can be highly effective, they are not without risk.

Cost and Complexity

These claims are often:

• Legally complex
• Fact-heavy
• Time consuming

Relationship Breakdown

Bringing a claim will almost always signal the end of the working relationship between shareholders.

Uncertain Outcomes

Given the court’s wide discretion, outcomes can vary depending on the specific facts of the case.

Alternative to Litigation

Before deciding to bring a claim, it is often worth considering alternative options, such as:

• Negotiating a buyout
• Mediation
• Restructuring the business

Many unfair prejudice disputes are resolved without the need for a full trial.

When Should You Seek Legal Advice?

If you believe you have been treated unfairly as a shareholder, it is important to seek legal advice as early as possible.

Early advice can help you:

• Assess whether you have grounds to bring an unfair prejudice petition
• Understand your legal options
• Avoid unnecessary escalation
• Protect your position

Speak to an Expert Today

At Expert Commercial Law, we provide access to a trusted panel of commercial solicitors and expert witnesses experienced in unfair prejudice claims and shareholder disputes.

We can connect you with specialists who can advise on:

• Whether you can bring a claim under section 994
• Strategy for resolving disputes
• Negotiated exits and share buyouts
• High Court litigation

We are not a firm of solicitors, but we work with regulated professionals who can support you through every stage of your dispute.

Request a call today to speak to a commercial law solicitor or expert from our panel.

FAQs: Unfair Prejudice Petitions

What is an unfair prejudice petition?

An unfair prejudice petition is a claim brought by a shareholder under the Companies Act 2006 where the company’s affairs have been conducted in a way that is unfairly prejudicial to their interests.

Who can bring an unfair prejudice claim?

Only members of a company (shareholders) can bring an unfair prejudice claim, typically a minority shareholder against majority shareholders.

What counts as unfairly prejudicial conduct?

Unfairly prejudicial conduct can include exclusion from management, misuse of company funds, breach of duty, or actions that go against shareholder agreements.

What is the most common outcome of an unfair prejudice petition?

The most common outcome is a court order requiring the majority shareholders to buy the petitioner’s shares at a fair value.

Is there a time limit to bring an unfair prejudice petition?

There is no strict limitation period, but delays can weaken a claim. In some cases, issues going back several years (even up to 12 years) may be considered.

Do unfair prejudice claims go to court?

Yes, these claims are usually heard in the High Court or specialist business courts, although many disputes are resolved before trial.

Can I bring an unfair prejudice petition as a minority shareholder?

Yes, unfair prejudice petitions are most commonly brought by a minority shareholder who believes they have been treated unfairly by those in control of the company.

What evidence is needed for an unfair prejudice claim?

You will need evidence of the unfairly prejudicial conduct, such as financial records, communications, board decisions, and any breach of shareholder agreements or duties.

Can unfair prejudice claims be settled without going to court?

Yes, many unfair prejudice claims are resolved through negotiation or mediation, often resulting in a share buyout without the need for a full trial.

What is a quasi partnership in company law?

A quasi partnership refers to a company where shareholders have a relationship based on mutual trust and an expectation of involvement in management, similar to a partnership.

How long does an unfair prejudice claim take?

These claims can be time consuming, often taking several months or longer depending on complexity, although some disputes settle earlier.

Can majority shareholders be held accountable for unfair conduct?

Yes, majority shareholders can be held accountable if their actions amount to unfairly prejudicial conduct or involve a breach of duty.