Unfair Prejudice Petitions in Family Business Disputes

Unfair prejudice is the most common legal route in family business disputes. Specifically, the unfair prejudice petition is brought under section 994 of the Companies Act 2006. As a result, almost every reported family business dispute case in the last forty years has involved an unfair prejudice claim. Importantly, the procedure is flexible and the available remedies are wide. By contrast, the cost of a contested unfair prejudice petition is significant. Crucially, family business owners considering an unfair prejudice claim need to understand both what the petition can achieve and what the consequences of pursuing it are likely to be.

This page sets out what an unfair prejudice petition is, when it is the right route, what it can deliver, and what to consider before pursuing one. Specifically, it covers the legal framework, the leading cases, the practical realities, and the alternatives.

What an unfair prejudice petition is

In short, an unfair prejudice petition is a court application brought under section 994 of the Companies Act 2006. Specifically, the petition is presented by a member of a company who alleges that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of its members generally or of some part of its members including the petitioner. Importantly, the petition can be brought by any shareholder, regardless of the size of their holding. As a result, even very small minority shareholders can bring a petition where the facts justify it.

Crucially, the test has two limbs. First, the conduct complained of must be conduct of the company’s affairs rather than personal conduct. Second, the conduct must be unfairly prejudicial to the interests of the petitioner as a member. As a result, not every unfairness gives rise to a claim. Specifically, the unfairness must relate to the petitioner’s interests as a shareholder. For the wider legal framework, see the legal framework for family business disputes.

Where the unfair prejudice provision came from

Importantly, the unfair prejudice provision has a long history. Specifically, it originated in section 210 of the Companies Act 1948 as an “oppression” remedy. As a result, the original concept was very narrow. Subsequently, the test was broadened in section 75 of the Companies Act 1980, which introduced the modern language of “unfair prejudice”. Section 75 was re-enacted as section 459 of the Companies Act 1985 and is now section 994 of the Companies Act 2006. Crucially, the test has not changed in substance since 1980. As a result, the case law decided under the earlier provisions remains directly relevant.

What conduct can amount to unfair prejudice

By contrast, what counts as unfair prejudice is not fixed. Specifically, the courts have deliberately avoided laying down a closed list of unfair prejudice conduct. Importantly, the leading authority on the test is O’Neill v Phillips [1999] 1 WLR 1092, in which Lord Hoffmann set out the modern approach. Specifically, unfair prejudice can arise from a breach of the terms on which the parties agreed the company would operate, or from the use of legal rights in a way that is contrary to good faith and the legitimate expectations of the parties.

In practice, the conduct that most commonly gives rise to family business unfair prejudice petitions falls into a number of recognisable patterns. Specifically, the most common are these.

• First, exclusion from management. Importantly, this is one of the most well-established grounds. Specifically, where a quasi-partner is excluded from management of the company in breach of the parties’ legitimate expectations, the conduct is unfairly prejudicial. The leading authority is Ebrahimi v Westbourne Galleries Ltd [1973] AC 360.
• Second, excessive remuneration paid to working directors. Specifically, this includes salaries above market rate, generous benefits, and the use of company assets for personal benefit. The leading authority is Re Cumana Ltd [1986] BCLC 430.
• Third, suppression of dividends. Crucially, where dividends are kept artificially low while value is extracted by the working family members in other forms, the courts have repeatedly found unfair prejudice. The leading authority is Re Sam Weller & Sons Ltd [1990] Ch 682.
• Fourth, denial of information. Specifically, where requests for management accounts, breakdowns of director remuneration or details of related-party transactions are refused, this can be evidence of unfair prejudice.
• Fifth, related-party transactions on unfavourable terms. For example, leasing property to the company at above-market rent. Likewise, buying services from companies controlled by working family members at non-market prices.
• Sixth, diversion of corporate opportunities. Specifically, where the family members in control take opportunities for themselves that should have been the company’s.
• Finally, mismanagement amounting to a breach of fiduciary duty. By contrast, ordinary commercial disagreements about strategy are not unfair prejudice. The conduct must rise above the level of a difference of business judgement.

For the wider pattern, see the have and have-not pattern, which describes the most common family business unfair prejudice fact pattern.

Why family businesses are particularly exposed

Crucially, family businesses are particularly exposed to unfair prejudice petitions. Specifically, the reasons are structural. First, family businesses are often quasi-partnerships, which means that the shareholders have legitimate expectations beyond the strict legal rights set out in the articles. As a result, conduct that would be unobjectionable in an ordinary company can be unfairly prejudicial in a family business. For more on this, see quasi-partnership in family companies.

Second, family businesses frequently combine working and non-working shareholders. As a result, the have and have-not pattern can develop over years. Third, family businesses often run on informal arrangements that are never documented. Crucially, when those arrangements break down, the absence of documentation makes the conduct of the parties the central question. As a result, the unfair prejudice route is particularly well-suited to family business disputes because it can address the substance of how the parties have treated each other.

The Hoffmann test for unfair prejudice

Importantly, the modern test for unfair prejudice was set out by Lord Hoffmann in O’Neill v Phillips [1999] 1 WLR 1092. Specifically, his Lordship rejected the view that unfair prejudice required some independent unfairness over and above a breach of the parties’ agreement. By contrast, he held that the question is whether the conduct complained of is contrary to the terms on which the parties agreed the company would operate, including any legitimate expectations that flowed from those terms.

Crucially, this is the test the courts apply today. Specifically, the inquiry is whether the parties had a particular understanding about how the company would be run, and whether the conduct complained of departs from that understanding in a way that is unfair to the petitioner. As a result, the analysis is often heavily fact-specific. Importantly, the courts pay particular attention to what the parties said to each other, how they conducted themselves over time, and what reasonable expectations they had of one another.

What remedies are available

By contrast, the remedies available on a successful unfair prejudice petition are extremely wide. Specifically, section 996 of the Companies Act 2006 gives the court discretion to make such order as it thinks fit for giving relief. Crucially, the court is not confined to a fixed menu of remedies. As a result, the order can be tailored to the specific circumstances of the dispute.

In practice, however, the most common remedies fall into the following categories.

Court-ordered buyout

First, and most commonly, the court orders the respondents to buy the petitioner’s shares at a fair price. Importantly, this is by far the most common remedy in family business unfair prejudice cases. Specifically, it allows the petitioner to exit the company on terms that reflect the value of their shares and the impact of the unfair conduct. Crucially, the price is set by the court if the parties cannot agree. As a result, the question of valuation often becomes the central issue at trial.

Regulation of the company’s affairs

Second, the court can regulate the conduct of the company’s affairs going forward. For example, by requiring the directors to act in particular ways, or by appointing additional directors. Importantly, this remedy is less common but useful where the petitioner wishes to remain a shareholder and the conduct can be corrected by changes in governance.

Order requiring or restraining particular acts

Third, the court can order the company or the respondents to do particular things or to refrain from doing them. For example, ordering the company to pay a dividend, or restraining a particular transaction.

Authorisation of civil proceedings

Fourth, the court can authorise civil proceedings to be brought in the name of the company against directors who have breached their duties. As a result, this can sometimes be a more direct route than a derivative action.

Buyout by the company

Finally, where the respondents cannot fund a personal buyout, the court can order the company itself to buy the petitioner’s shares. Importantly, this requires a reduction of capital and is subject to particular statutory rules. As a result, it is less common but can be the only realistic remedy in some cases.

Share valuation in unfair prejudice cases

Crucially, share valuation is the issue that occupies most of the time and cost in many unfair prejudice cases. Specifically, the court has wide discretion as to how to value the shares. Importantly, the leading authority is Re Bird Precision Bellows Ltd [1986] Ch 658, in which the Court of Appeal confirmed the breadth of the discretion. The court can value the shares as at the date of the petition, the date of the unfair conduct, the date of the order, or some other date entirely. Likewise, the court can apply or disapply a minority discount.

By contrast, in a quasi-partnership case, the usual approach is to value the shares without a minority discount. Specifically, this is because the parties agreed at the outset to participate on equal terms, and the court will not allow the majority to use the form of incorporation to defeat that agreement. For a fuller treatment, see family business valuation in a dispute.

What an unfair prejudice petition costs

Importantly, unfair prejudice petitions are expensive. Specifically, a contested petition in the Business and Property Courts typically costs each side between £150,000 and £750,000 in legal fees, depending on the complexity of the case. As a result, the costs alone can exceed the value of the shareholding in dispute. Crucially, the judge in Re Solent Garage Services Ltd [2020] EWHC 1975 (Ch) observed that the legal costs in that case were likely to have exceeded the gap between the parties’ rival positions on valuation.

By contrast, the unsuccessful party usually has to pay a significant proportion of the successful party’s costs in addition to its own. As a result, the total exposure of a losing petitioner can be very substantial. Importantly, this is one reason why mediation is almost always a better starting point. For more on the cost picture, see the cost of family business litigation.

How long an unfair prejudice petition takes

Typically, an unfair prejudice petition from issue to trial takes between 18 and 36 months. Specifically, the early stages involve the exchange of statements of case, disclosure of documents, and witness statements. Importantly, the valuation evidence stage usually adds another 6 to 12 months. By contrast, the trial itself may last between two and six weeks. As a result, family business owners contemplating a petition need to be prepared for a significant disruption over a long period.

Crucially, the disruption is not just legal. Specifically, the business is often paralysed by the petition. Decisions become difficult. Key non-family employees lose confidence. Customers and suppliers notice. As a result, the business value at the end of the process is often significantly lower than at the beginning, regardless of who wins. Importantly, this is one of the reasons why early settlement is almost always preferable to running the case all the way to trial.

The strategic question: petition or mediate?

Importantly, in almost every family business dispute, the strategic question is whether to issue a petition or whether to try mediation first. Specifically, the considerations cut in both directions. On the one hand, issuing a petition concentrates the minds of the respondents. As a result, settlement discussions that have stalled often become productive once a petition is on file. By contrast, issuing a petition also hardens positions and starts the costs clock running.

Crucially, the Court of Appeal in Churchill v Merthyr Tydfil County Borough Council [2023] EWCA Civ 1416 confirmed that the court can stay proceedings and require the parties to engage in non-court dispute resolution. As a result, family business owners who issue a petition without first attempting mediation risk costs sanctions and adjournments. Importantly, the practical advice is almost always to attempt mediation first. For more on this, see why mediation is usually the right starting point.

The position of the respondent

By contrast, the position of the respondent to an unfair prejudice petition is its own subject. Specifically, the respondent has to balance the cost of defending the petition against the cost of settling it. Importantly, the cost of settling is usually a fraction of the cost of defending. By contrast, settling without proper advice can leave the respondent paying more than they need to, or buying out the petitioner on terms that destabilise the business.

Crucially, respondents to family business unfair prejudice petitions should take specialist advice early. Specifically, the advice should cover both the legal merits and the strategic options. As a result, even respondents who ultimately defend the petition benefit from understanding the strategic picture from the outset. For more on this, see direct access barrister: legal advice, advocacy and representation.

When unfair prejudice is not the right route

Importantly, unfair prejudice is not always the right route, even in a family business dispute. Specifically, the following situations call for different procedures.

• First, where the complaint is about a wrong done to the company rather than to the petitioner, the appropriate route may be a derivative action. For more on this, see unfair prejudice claims and derivative actions.
• Second, where the family business is a partnership rather than a company, the relevant law is the Partnership Act 1890. For more on this, see resolving business partnership disputes.
• Third, where the dispute concerns a promise about future ownership rather than current rights, the appropriate route may be a proprietary estoppel claim.
• Fourth, where the dispute arises out of a will or estate, the appropriate route may be a probate or inheritance claim. For more on this, see family business disputes after a death.
• Finally, where the relationship has broken down so completely that the company cannot continue, a just and equitable winding-up under section 122(1)(g) of the Insolvency Act 1986 may be appropriate. Importantly, this is a remedy of last resort because it destroys the value of the business.

Frequently asked questions

What is an unfair prejudice petition?

In short, an unfair prejudice petition is a court application brought under section 994 of the Companies Act 2006. Specifically, the petition is presented by a shareholder who alleges that the company’s affairs are being conducted in a manner unfairly prejudicial to their interests as a member. Importantly, the petition can be brought by any shareholder, regardless of the size of their holding. The most common remedy is a court-ordered buyout of the petitioner’s shares at a fair price.

What conduct can amount to unfair prejudice in a family business?

Typically, unfair prejudice conduct includes exclusion from management, excessive director remuneration, suppression of dividends, denial of information, related-party transactions on unfavourable terms, diversion of corporate opportunities, and serious mismanagement. Importantly, the test is whether the conduct departs from the terms on which the parties agreed the company would operate, including any legitimate expectations that flowed from those terms. The leading authority is O’Neill v Phillips [1999] 1 WLR 1092.

How much does an unfair prejudice petition cost?

Generally, a contested unfair prejudice petition costs each side between £150,000 and £750,000 in legal fees, depending on complexity. As a result, the total cost across both sides can easily exceed £1 million. Importantly, the costs often exceed the value of the shareholding in dispute. Crucially, this is one of the reasons mediation is almost always a better starting point than litigation. For more on this, see the cost of family business litigation.

How long does an unfair prejudice petition take?

Typically, an unfair prejudice petition from issue to trial takes between 18 and 36 months. Specifically, the trial itself may last between two and six weeks. Importantly, the disruption to the business during this period is often significant. As a result, the business value at the end of the process is often significantly lower than at the beginning, regardless of who wins.

Can an unfair prejudice petition be settled out of court?

Yes, and most are. Specifically, the great majority of unfair prejudice petitions settle before trial, often through mediation. Importantly, the Court of Appeal has confirmed that the court can stay proceedings and require the parties to engage in non-court dispute resolution. As a result, family business owners should expect to engage seriously with mediation, whether before or after issuing the petition. For more on this, see why mediation is usually the right starting point.

Further reading on this site

• Family Business Disputes (main page)
• The Legal Framework for Family Business Disputes
• Quasi-Partnership in Family Companies
• Shareholders’ Agreements
• Family Business Valuation
• The Have and Have-Not Pattern
• The Passive Shareholder
• Why Mediation Is Usually the Right Starting Point
• The Cost of Family Business Litigation
• The Most Important Family Business Cases
• Unfair Prejudice Claims and Derivative Actions
• Direct Access Barrister

Get advice on your situation

An unfair prejudice petition is a significant undertaking. Specifically, the costs are substantial, the timetable is long, and the consequences for the business and the family can be severe. As a result, early specialist advice is one of the most valuable investments you can make. Importantly, this applies whether you are contemplating bringing a petition or whether you are responding to one. Specifically, I act as a direct access barrister, commercial mediator and mediation advocate in family business disputes throughout England and Wales.

Call 020 4538 0246, use the contact form, or book a call directly. In addition, my book Winning in Family Business Disputes (forthcoming) covers unfair prejudice petitions in detail, alongside my published works on shareholder disputes and commercial mediation. The text of section 994 of the Companies Act 2006 is available on the legislation.gov.uk website.

Important disclaimer: This page is provided for general information purposes only and does not constitute legal advice. The content may not be legally accurate for your situation or at all. You must not rely on anything on this page in respect of your legal rights. Before taking or refraining from taking any legal action, you should seek advice from a qualified lawyer. I disclaim any and all liability for any loss, damage or expense howsoever caused by reliance on the contents of this page. If you would like advice on your specific situation, contact me here.