What Amounts to Unfair in an Unfair Prejudice Petition?

Prejudice Alone Is Not Enough

A shareholder who has suffered real harm as a result of conduct by those controlling the company has not yet established a case under Section 994 of the Companies Act 2006. They must also establish that the conduct was unfair. These are two separate and independent requirements. Many situations that cause genuine harm to a minority shareholder do not amount to unfair prejudice in the legal sense, because the majority, however inconvenient or damaging to the minority, was acting within its strict legal rights in a way that cannot be characterised as inequitable.

Unfairness is not further defined in the Companies Act 2006. It has been developed through decades of case law and has come to mean conduct that is either contrary to the legal rules governing the company, contrary to equitable principles, or inconsistent with the legitimate expectations that shareholders have about how the company will be run. This chapter addresses what the courts have held to constitute unfairness and the main forms it takes in practice.

This page is part of the Shareholder Disputes Knowledge Guide. If you need legal advice on a shareholder dispute see my direct access barrister page.

Material Failure to Follow the Company’s Articles or Statutory Duties

Unfair prejudice may arise where those in control fail to follow the rules that govern how the company is meant to operate. This includes material breaches of the company’s articles of association, failures to comply with shareholders’ agreements, and breaches of the statutory duties imposed on directors by the Companies Act 2006.

These documents and duties form the framework on which shareholders invest. The articles define the procedural and governance rules of the company. Directors’ duties under sections 171 to 177 of the Companies Act 2006 require directors to act within their powers, to promote the success of the company, to exercise independent judgment, to avoid conflicts of interest, and not to accept personal benefits that conflict with the company’s interests. When these are ignored or overridden in a way that damages another shareholder, the resulting conduct may be both unfair and prejudicial.

Not every breach will amount to unfair prejudice. The key question is whether the breach causes real and meaningful harm to a shareholder’s interests as a member. Minor procedural irregularities that cause no practical harm are unlikely to ground a successful petition. The courts focus on substance and effect rather than technical breach.

Inequitable Conduct in Quasi-Partnership Companies

The most important and frequently litigated form of unfairness arises in companies that operate as quasi-partnerships: small private companies in which the shareholders have invested on the basis of personal relationships, mutual trust and an expectation of involvement in management. In these companies, the law looks beyond the formal constitutional documents to the informal agreements and understandings that shaped the shareholders’ commercial bargain.

Where the majority acts inconsistently with those informal understandings, for example by excluding a minority shareholder from management in breach of an expectation of ongoing participation, or by changing the profit sharing arrangements in a way that advantages one party, the resulting conduct may be unfair even though it does not technically breach the articles. This is because the courts will not allow strict legal rights to be exercised in a way that defeats the reasonable expectations of shareholders who invested on the basis of an agreed set of understandings about how the business would be run.

However, the courts are careful about the limits of this principle. Shareholders do not generally owe each other duties of good faith simply by virtue of being shareholders. Such duties arise only where there is a specific basis for them, most commonly where the company operates as a quasi-partnership or where the parties have expressly agreed to act in good faith in a shareholders’ agreement. Outside those situations, a shareholder is generally entitled to rely on its strict legal rights, even if doing so is commercially inconvenient for others.

For detailed guidance on quasi-partnerships see the chapter on what is a quasi-partnership and why is it relevant.

How Courts Assess Fairness

Courts do not assess fairness by asking what the judge personally thinks would have been the right outcome. Fairness is assessed by reference to the terms on which the shareholder agreed to become involved in the company, including any formal agreements, informal understandings and consistent patterns of conduct that shaped the commercial relationship between the shareholders.

This means that conduct that would be perfectly fair in one company may be unfair in another, depending on the history and expectations of the particular shareholders involved. A majority shareholder who removes a fellow shareholder from the board of a large formally governed company may be acting entirely within its rights and fairly. The same act in a quasi-partnership where the understanding was always that both shareholders would participate in management may be deeply unfair.

The court also considers whether the petitioner has clean hands. A shareholder who has themselves acted improperly in relation to the matters they complain of, or who has acquiesced in the conduct, may find that the court declines to grant relief even where unfairness is established. This equitable dimension of the unfair prejudice jurisdiction reflects the fact that the remedy is discretionary, not automatic.

Breach of Legitimate Expectations

A particularly significant category of unfairness arises where majority shareholders act in a way that defeats the legitimate expectations of minority shareholders. Legitimate expectations are the reasonable expectations shareholders have acquired about how the company will be managed, whether from formal agreements, informal understandings, or consistent established practices.

Courts look at what shareholders could reasonably have expected when they invested, and assess whether the conduct complained of is inconsistent with those expectations in a way that the law regards as unacceptable. Common examples include the exclusion of a shareholder from management where participation was an express or implied term of the commercial bargain, changing dividend policy to deprive the minority of income while the majority extracts value through other means, and refusing to honour rights that the minority relied on when agreeing to become or remain a shareholder.

Where legitimate expectations arise from informal arrangements rather than written documents, they may be harder to establish and more difficult to enforce, particularly in larger companies where formal governance structures are more prominent. The clearer and more specific the evidence of the informal understanding, the stronger the claim.

Deliberate Unfairness and Bad Faith

Where those in control act deliberately to harm a minority shareholder’s interests, exercise their powers in bad faith, or make decisions designed to exploit or pressure the minority rather than advance the interests of the business, unfairness is more readily established. While deliberate misconduct is not required to establish unfairness, its presence significantly strengthens the case and may also affect the remedy the court is willing to grant.

Bad faith decision-making, where decisions are driven by personal agendas, hostility towards the minority, or self-interested motives rather than the genuine interests of the company, is a recognised form of unfairness. So too is conduct designed systematically to strip a minority shareholder of their leverage, exit options and influence in order to force a discounted buyout or otherwise obtain advantage at the minority’s expense.

Unfairness in Valuation

Even where a buyout is offered, the process by which the valuation is conducted can itself constitute unfairness. Where the majority controls the timing and methodology of the valuation in a way that suppresses the apparent value of the minority’s shares, where unreasonable discounts are applied, or where the valuation is timed to coincide with a period when the company’s value has been artificially depressed by the majority’s own conduct, the resulting price may be unfairly low.

Courts are alert to the risk that a buyout offer can crystallise the prejudice already suffered rather than remedy it. Where this is the case, the court may fix the valuation at an earlier date, adjust the methodology to exclude the effects of the prejudicial conduct, or otherwise ensure that the remedy properly addresses the harm rather than locking it in. For more detail see the chapter on remedies for a successful unfair prejudice claim.

Published Resources

My book Shareholder Disputes: A Practical Guide for Business Owners, Directors and Family Businesses addresses the concept of unfairness in detail, examining how courts have approached the question across a wide range of factual situations and applying the principles to the Whitcombe Family Business case study that runs throughout the book.

See all books.

Frequently Asked Questions

Does unfairness require deliberate wrongdoing?

No. The test for unfairness is objective, not subjective. It is possible for conduct to be unfair even where those responsible genuinely believed they were acting properly or within their legal rights. However, deliberate misconduct and bad faith make unfairness easier to establish and may affect the remedies available.

Can a breach of the articles always establish unfairness?

Not automatically. Not every breach of the articles will constitute unfair prejudice. The key question is whether the breach causes real and meaningful harm to a shareholder’s interests as a member. Minor or technical breaches that cause no practical harm are unlikely to support a successful petition.

What is the relationship between unfairness and legitimate expectations?

Legitimate expectations are one of the main ways in which unfairness is established in practice. If majority shareholders act in a way that defeats the reasonable expectations of minority shareholders about how the company would be run, particularly in quasi-partnership style companies, the resulting conduct is likely to be found unfair. The expectations must be genuine, reasonable and based on something more than a general hope or preference.

Can the majority use its strict legal rights to act unfairly?

In some circumstances yes. The exercise of strict legal rights in a way that is inconsistent with the informal basis on which shareholders invested, particularly in quasi-partnership companies, may constitute unfairness. However, outside quasi-partnership situations, shareholders are generally entitled to rely on their strict legal rights even if doing so is inconvenient for others.

Get in Touch

If you are facing a shareholder dispute and need to understand whether the conduct you have experienced amounts to unfair prejudice, I would be glad to discuss your situation.

Call 020 4538 0246, use the contact form below, or book a call directly.

Important disclaimer: This page is provided for general information and educational purposes only and does not constitute legal advice. The content may not be legally accurate for your specific situation. You must not rely on anything on this page in respect of your legal rights. The law in this area relates to companies registered in England and Wales only. Always seek independent legal advice from a qualified specialist before taking or refraining from taking any action. The author accepts no responsibility for any decisions made or outcomes arising from use of this material. If you would like specific advice on your situation, contact me here.

What amounts to “Unfair” in an unfair prejudice petition?