Unfair prejudice in United Kingdom company law is a statutory form of action that may be brought by aggrieved shareholders against their company. Under the Companies Act 2006 the relevant provision is s 994, the identical successor to s 459 Companies Act 1985. Unfair prejudice actions have generated an enormous body of cases, many of which are called "Re A Company", with only a six-digit number and report citation to distinguish them. They have become a substitute for the more restrictive conditions on a "derivative action", as an exception to the rule in Foss v Harbottle. Though not restricted in such a way, unfair prejudice claims are primarily brought in smaller, non public companies. This is the text from the Act.
Contents
- History
- Right to complain
- Company affairs
- Unfairly prejudicial
- Interests of members
- Court remedies
- Reform proposals
- References
Four main issues arise out of the interpretation of s.994. First of all, who has a right to complain against whom? Secondly, what specifically does the "company's affairs" mean in s.994(1)(a)? Thirdly, when is something "unfair" and at the same time "prejudicial"? And lastly, when it says "the interests of members", what counts as an "interest" of a "member"? The defining feature of the s.994 action is that it is completely vague. Courts were therefore capable of interpreting the provisions gradually as they felt would be fair. After hearing a case, a court may make "such order as it thinks fit" under s.996. This wide discretion means that previous case law is not as weighty in precedent, as in other areas of law, since each case will be decided on its particular facts.
History
In Re Saul D Harrison plc, Hoffmann LJ remarked,
"'Unfairly prejudicial' is deliberately imprecise language which was chosen by Parliament because its earlier attempt in s. 210 of the Companies Act 1948 to provide a similar remedy had been too restrictively construed. The earlier section had used the word 'oppressive', which the House of Lords in Scottish Co-operative Wholesale Society v. Meyer [1959] AC 324 said meant 'burdensome, harsh and wrongful'. This gave rise to some uncertainty as to whether ' wrongful' required actual illegality or invasion of legal rights. The Jenkins Committee on Company Law, which reported in 1962, thought that it should not. To make this clear, it recommended the use of the term 'unfairly prejudicial', which Parliament somewhat tardily adopted in s. 75 of the Companies Act 1980. This section is reproduced (with minor amendment) in the present s. 459 of the Companies Act 1985."
Hence the unfair prejudice remedy was introduced as an implicit instruction to the courts to liberalise and broaden the law to allow for more petitions by minority shareholders.
Right to complain
To bring an action, one must be a member (a shareholder) of the company one complains against (this is defined by s.112 Companies Act 2006, the source of all sections hereafter, unless otherwise stated), or a number of members so long as they do not together hold a majority of votes. If they did hold a majority of votes, then they would be able to control the company and should not be relying on court to sort out their problems. Also able to bring actions are shareholder nominees, those "transmitted" shares by operation of law (s.994(2)), those transferred shares without yet having been registered as members and the Secretary of State (s.995). Shareholders may assert conduct was unfairly prejudicial even if it was before they joined the company and they may claim against a person who has already sold their shares (so the wrongdoer cannot escape). But once a claimant shareholder has sold his own shares and is no longer a member, no claim may be brought.
Unlike cases under trust law, there is no equivalent maxim that "he who comes to equity must come with clean hands" (because it does not say it in the statute). But it will be highly relevant how honourably a claimant may have acted to whether the relief should be granted. Sometimes unfair prejudice claims reveal a tangled history of "she did that, so I did this, and then she..." where it may prove difficult to discern who was really worse. Several cases have held that the controllers of a company may not use corporate assets to fight their side.
Company affairs
Unfairly prejudicial
Interests of members
Court remedies
The typical award made is for a minority shareholder's shares to be purchased at a fair value.
Reform proposals
The Company Law Review decided that it would not update the unfair prejudice provisions for the Companies Act 2006. It had examined various proposals that the Law Commission had made, but was unenthusiastic. A salient feature of the action is the sheer volume of cases brought, often with long complicated histories, as shareholders dig into the dirt of the past, with which to bring evidence of "unfair prejudice". Active case management has been one solution being pursued, since the Civil Procedure Rules 1998. The others included,
The Company Law Review explicitly rejected the last two ideas.