Shareholder disputes – how to bring an unfair prejudice petition as a minority shareholder

An unfair prejudice petition is a legal mechanism available under Section 994 of the Companies Act 2006, which allows a shareholder to recover losses and/or be compensated when a company’s affairs are conducted in a way that unfairly harms their interests (or the interests of a section of the company’s members).

In our earlier article in this series, we set out the test for unfair prejudice. As a brief reminder, you need to show that your complaint involves the management or conduct of the company’s affairs and that it has unfairly impacted you as a shareholder.

In this article, we focus on the steps that you, as a minority shareholder, can take to bring an unfair prejudice petition.

The petition

To bring a claim of unfair prejudice, the shareholder issues a petition at court. The petition is a particular type of claim form which specifies the grounds of the claim and the damages being sought by the shareholder (petitioner) bringing the claim.

Evidence

It’s vital that the petition is as comprehensive and detailed as possible in relation to its grounds. For example, if certain meetings are said to be relevant to the grounds set out in the petition, the dates, locations and attendees at the meeting should be included, along with details of what occurred. The detail must be clear and concise but also enable the responding party or parties (respondent) to fully understand the allegations being made and to respond to them.

Corroboratory evidence, such as emails, text messages, letters, audio or video files and documents, should be safely retained. You’re also obliged to retain any evidence which adversely affects and/or is relevant to the allegations set out in the petition. All relevant documents, if not disclosed along with the petition, will need to be disclosed at a later stage in the proceedings.

Experts

In unfair prejudice proceedings, it’s common for expert evidence to be required by the petitioner and respondent(s). This usually involves a forensic accountant helping to value the company so the value of the shareholding can be calculated. For example, one option for the court, if there has been unfair prejudice, is to direct that the majority shareholders purchase the minority shareholder’s shares at fair value. To establish the relevant fair value, a valuation report is usually required. It’s often the case that the petitioner and respondent will have separate experts, rather than a single joint expert.

An expert’s ultimate duty is to the court, and your instructions to such an expert are not privileged. They can be disclosed in the proceedings and are often appended to the expert’s report. It’s therefore important to carefully control what is provided to the expert.

Relief

It’s possible for a minority shareholder to seek immediate interim relief (temporary relief) to protect the company’s or their position pending the hearing of the petition. However, this only applies if the majority shareholder respondent is seeking to devalue the company or remove assets to avoid having to meet a claim.

Other forms of relief available include:

• Compulsory share purchase
• Reverse share buy-out
• Orders for management
• Orders to provide information.

The court has flexibility to grant relief that’s specifically tailored to the prejudice suffered by the petitioner (where prejudice is found). In our experience, the most common relief order is a share buyback by the respondent(s) or the company.

Next steps

Once the petition has been presented to the court, the court will fix a date for a hearing, along with directions to be met in advance. The court will give directions regarding service of the petition on the respondents, the date for filing and serving points of defence and points of reply and costs management.

Generally, the first hearing listed before the court will be a case management hearing (and costs management, where necessary). At this hearing, the court will set out further directions to trial, including directions for disclosure, witness statements and expert reports where relevant.

Respondents to a petition

The shareholders or directors who are alleged to have engaged in unfair conduct should be named as respondents, together with all members of the company whose interests have been affected by the alleged misconduct, or who would be affected by a subsequent court order.

A third party who is not a member of the company can also be joined if they might be affected by the remedy sought or were directly involved in the allegedly unfairly prejudicial conduct.

Finally, the company itself (or companies) is normally named as a respondent, although it’s usually a nominal or neutral respondent and has no active part to play.

It’s important to bear in mind that communications between the company and its lawyers may not be privileged from production in unfair prejudice proceedings. Specific advice should be sought to ensure that such communications are properly protected.