Can you exclude Section 994 – unfair prejudice – from your shareholders’ agreement?

Section 994 of the Companies Act 2006 offers a powerful remedy in shareholder disputes. This is known as an unfair prejudice petition, which shareholders can pursue if they have experienced unfairly prejudicial conduct.

If successful, the usual order sought and granted by the court is a buying-out order, requiring the wrongdoing shareholder to purchase the shares of the petitioning shareholder.

Given the significance of this remedy, parties may wish to limit its availability, particularly where there may be more expeditious or cost-effective ways of resolving disputes. This article explores whether unfair prejudice can be excluded or limited in a shareholders’ agreement, and why this is important for shareholders to consider.

Statutory v contractual rights

Unfair prejudice is a statutory remedy rooted in equitable principles and informed by public policy. It provides shareholders with a remedy to address situations that may be unfair or unlawful, and gives the court a wide discretion as to the type of remedy it may order.

At the same time, freedom of contract is a fundamental principle of English law. Where shareholders agree in contract to regulate their conduct in relation to each other and the company, the courts will generally recognise these rights, and won’t usually interfere unless there are compelling reasons to do so.

Waiver of statutory rights

It’s well established that parties can exclude certain rights in common law from contracts. For example, the courts have long recognised that contractual terms can exclude or limit a party’s liability in tort.

Although there’s a general principle that a person may, in certain circumstances, waive a right conferred on them by statute, difficulties can arise in determining whether a statutory right is exclusively personal (and therefore capable of being contracted out of) or whether it’s intended to serve broader public policy purposes. In the case of the latter, public policy would require the right to be treated as mandatory and incapable of exclusion or waiver.

Whether a statutory right can be waived depends on the overall purpose of the statute and whether that purpose would be frustrated by permitting parties to contract out of it. In Johnson v Moreton [1980], the House of Lords held that a tenant could not contract out of the protection afforded by section 24 of the Agricultural Holdings Act 1948, as this would undermine the Act’s overall purpose of promoting efficient farming in the national interest.

Applying these principles to section 994, the purpose of the provision is to give shareholders the right to obtain relief from unfairly prejudicial conduct and, in doing so, protect the integrity of corporate governance under the Companies Act 2006. Allowing parties to contract out of section 994, without providing an effective alternative for recourse, would likely frustrate the overall public purpose.

Trying to oust the court

A contractual provision that prevents a shareholder from petitioning under section 994, without a suitable alternative, could also amount to an attempt to oust the court’s statutory jurisdiction. This is also likely to be considered contrary to public policy.

However, a contractual requirement for disputes to be resolved by arbitration is more likely to be enforceable. In this sense, an arbitration clause can redirect the forum of the dispute, rather than exclude the right under section 994 itself. In the case of Fulham Football Club (1987) Limited v Sir David Richards, The Football Association Premier League Limited [2010], the court held that arbitration clauses can encompass unfair prejudice petitions under section 994.

What does this mean for shareholders?

While it’s unlikely that section 994 can be excluded from shareholders’ agreements on the grounds of public policy, the terms of such agreements may be relevant to the assessment of whether any conduct may be considered ‘unfairly prejudicial’.

A well-drafted shareholders’ agreement may narrow the practical scope of a section 994 claim, without purporting to exclude the statutory right altogether. It should anticipate situations that may arise and set out actions for dealing with them.

For example, where a shareholder ceases to be an employee or director, or commits a material breach of the shareholders’ agreement, it may be appropriate for a mandatory transfer of shares to be triggered, together with an appropriate set of provisions governing how those shares will be valued. In such circumstances, the parties are likely to be bound by, and limited to enforcing, the contractual arrangements they have agreed, with limited rights under section 994.

The value of a well-drafted shareholders’ agreement is therefore paramount. If you’re entering into a shareholders’ agreement or concerned about your position, independent legal advice at an early stage can help protect your interests.