What Can You Do if a Shareholder Is Running the Company Against Your Interests?

Summary

A member of a company can apply to the court by petition for an order on the ground that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least the applicant). This is an unfair prejudice petition under section 994 of the Companies Act 2006. The court may make such an order as it thinks fit for giving relief in respect of the matters complained of. The most common remedy is a court-ordered buyout of the petitioner’s shares at a fair valuation. England and Wales has no limitation period for unfair prejudice claims.

Key points

•  You can petition the court under section 994 of the Companies Act 2006 if a shareholder or director is running the company in a way that is unfairly prejudicial to your interests.

•  Unfairly prejudicial conduct includes exclusion from management, misappropriation of company funds, failure to pay dividends, and breaches of legitimate expectations in small companies founded on personal relationships.

•  The most common remedy is a court-ordered buyout at fair value, typically excluding any discount for a minority shareholding if unfair prejudice is proved.

•  No limitation period applies to claims under section 994 of the Companies Act 2006.

•  Small companies founded on personal trust (quasi-partnerships) attract additional equitable considerations beyond the strict terms of the articles of association.

You own part of a business. You and the other shareholders started it together, perhaps after months of discussion around someone’s kitchen table, with a handshake and a shared plan. Now one of those shareholders is making decisions behind your back, paying themselves excessive management fees, freezing you out of meetings, or refusing to buy you out despite your working relationship collapsing.

A member of a company may apply to the court by petition for an order under section 994 of the Companies Act 2006 on the ground that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members. The petition is presented to the High Court (Business and Property Courts in England and Wales), and the proceedings are governed by the Companies (Unfair Prejudice Applications) Proceedings Rules 2009. This remedy is designed precisely for shareholders who are being squeezed out or harmed by those who control the company.

What counts as unfairly prejudicial conduct?

Unfairly prejudicial conduct includes conduct in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members. The test is objective. The court asks whether a reasonable bystander would regard the conduct as unfairly prejudicial, given the particular facts and context of this company.

Examples include exclusion from management or the board when you had a legitimate expectation to participate, misappropriation of company money (for example, excessive director salaries or payments to related parties without proper approval), failure to pay dividends when the company has distributable profits and no commercial reason to retain them, dilution of your shareholding through an unfair share issue, and breach of a shareholders’ agreement or informal understandings that formed the basis on which you joined the company. A single breach may suffice, but the court will not consider petitions for trivial or technical infringements of the articles. The conduct must be genuinely prejudicial to your interests as a member.

When can you apply for a buyout?

The court’s order may provide for the purchase of any member’s shares by other members or by the company itself, and, in the case of a purchase by the company itself, for the reduction of the company’s capital accordingly. A buyout order is by far the most common remedy in successful unfair prejudice petitions. The court will typically order the respondent shareholders (or the company) to purchase the petitioner’s shares at a fair value determined by an independent valuer or by the court following expert valuation evidence at trial.

Fair value usually means the pro-rata value of the entire company, without a minority discount, where unfair prejudice is proved. In a small company with two equal shareholders, for example, a 50% shareholding would be valued at 50% of the enterprise value as a going concern, not at a discounted price reflecting lack of control.

The court has a wide discretion over the valuation date. Where the respondent’s conduct has depressed the value of the company, the court may order a valuation as of a date before the wrongful conduct began or as of the date the parties’ relationship irretrievably broke down. Where the petitioner has been excluded from management, the valuation date is often set at the date of exclusion.

What other remedies can the court order?

The court may make such an order as it thinks fit to give relief in respect of the matters complained of, including orders regulating the conduct of the company’s affairs in the future. Other possible remedies include an injunction restraining further breaches (for example, an order that the petitioner be reinstated as a director or allowed to inspect the company’s books), an order that the company pay a dividend, appointment of an independent director to oversee the company’s affairs, an order that the petitioner sell their shares to the majority at a fair price (though this is rare and usually only in cases where the petitioner is at fault), and in extreme cases, a winding-up order.

The court has a very wide discretion as to the remedy. The aim is to provide relief tailored to the unfair prejudice suffered. The court is not confined to the remedy requested by the petitioner.

Why quasi-partnerships matter

A quasi-partnership is a small private company in which the relationship among shareholders has characteristics similar to those of a partnership: mutual trust and confidence, an agreement or understanding that all or some shareholders will participate in management, and restrictions on share transfers. Many family businesses and companies founded by two or three individuals fall into this category.

In a quasi-partnership company, legitimate expectations will usually be found in the understandings between the members at the time they entered into association. In Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, the House of Lords recognised that in such companies, a shareholder may legitimately expect to participate in management. That exclusion from that role can amount to unfairly prejudicial conduct, even where the articles of association technically permit it.

The quasi-partnership label does not create an automatic right to exit or to demand a buyout. The court will examine whether there were understandings or promises beyond the articles, whether those understandings have been breached, and whether that breach is unfairly prejudicial.

What to do before issuing a petition

Review the shareholders’ agreement (if one exists). Many disputes can be resolved under a shareholders’ agreement that provides for deadlock resolution, a share-sale mechanism, or a third-party valuation. Triggering those mechanisms first may avoid court proceedings altogether.

Take legal advice early. Unfair prejudice petitions are complex and costly. The courts expect parties to have explored alternatives. Mediation or direct negotiation for a buyout on agreed terms will usually be quicker and cheaper than litigation.

Preserve documents. Save emails, board minutes, financial records, and correspondence that evidence the conduct you complain of. The court will need contemporaneous evidence. If you are excluded from the company’s premises or systems, write immediately to request access to the statutory registers and accounts.

Consider whether an interim injunction is needed. If the respondent is disposing of company assets, removing money, or about to issue further shares to dilute you, you may need urgent interim relief before the full trial.

Frequently asked questions

Do I need a shareholders’ agreement to bring an unfair prejudice claim?

No, a shareholders’ agreement is not required. Section 994 applies wherever the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members. In small companies founded on personal trust, the court will look beyond the articles of association to identify informal understandings and legitimate expectations.

Can I be bought out at full value even if the company is worth less than when I joined?

Yes, if unfair prejudice is proved. The court has discretion to fix the valuation date and methodology. Where the respondent’s wrongful conduct has reduced the value of the company, the court may value the shares at a date before that conduct began. Where the company has been deliberately run down or stripped, the court may adjust the valuation or award compensation separately.

How long does an unfair prejudice petition take?

No limitation period applies to claims under section 994 of the Companies Act 2006. From the presentation of the petition to trial, it typically takes 12 to 24 months. Case management directions will be given at an early hearing and will include timetables for pleadings, disclosure, witness statements, expert valuation evidence, and trial. Many cases settle before trial once the parties have exchanged valuation evidence.

Talk to Smalleys

If you are a shareholder facing exclusion, financial misconduct, or another serious dispute, please call 0115 955 6555 or fill in our contact form.