What are your options? What are your rights?

Unfairly Prejudicial Conduct explained.

In closely held companies in which directors and shareholders have agreed to conduct the company’s business operations in a certain way based on mutual trust and confidence, there may often be little provision in place on how a situation in which a breakdown occurs between business partners will be addressed if it occurs down the line. When it does occur, however, a question arises as to whether the understanding between the members is one that can be adhered to and whether the law provides the member complaining of the breakdown with adequate protection.

Concerns that a shareholder will usually have, relate to how the breakdown will affect their option to continue doing business as an investor in the particular company, as well as their right to exit the company and on what conditions.

This is normally when the need to establish that there has been ‘unfairly prejudicial conduct’ arises. The term ‘unfairly prejudicial conduct’ is a legal term and the legal basis that will enable the court to consider options to be offered to the minority shareholder complaining of such behaviour.

It is important to note that the complaint must be about the way affairs of the company are being conducted, and not behaviour of the shareholder and/or directors in their private capacity.

Under s 994(1) of the Companies Act 2006 a member of a company may petition the court for an order on the ground that: “the affairs of the company are being or have been conducted in  a manner which is unfairly prejudicial to the interests of its members generally or some of the members (including at least himself) or that any proposed act or omission of the company (including any act or omission on its behalf) is or would be so prejudicial.”

Section 994 has generated much litigation and has become the principal remedy for the minority shareholder, especially in small private companies. The decision in the first s 994 case to reach the House of Lords was O’Neill v Phillips (1999), which clearly sought to place limits on the application of the section. In a nutshell, courts seem prepared to hold there has been Unfairly Prejudicial Conduct where a) there has been a breach of the agreement between the shareholders and b) directors are in breach of their duties to the company but are protected by the principle of majority rule.

If you have any company law enquires please call 020 7112 8841 and ask for Dr Georgina Tsagas or email georgina.tsagas@sr-law.co.uk