The Unfair Prejudice Remedy – A Weapon for Minority Shareholders

Shareholders in most Commonwealth countries, including the UK and Hong Kong, have access to the twin statutory remedies of ‘unfair prejudice’ and ‘just and equitable winding-up’. Both have been the principal weapons available to protect minority shareholders.

The unfair prejudice remedy, now contained in section 994 of the UK Companies Act 2006 (the equivalent of section 724 of the Hong Kong Companies Ordinance), entitles a member of a company to petition to the court where his interests have been ‘unfairly prejudiced’. The most frequently sought relief is a share buyout.

The concept of ‘unfair prejudice’ lies at the heart of the statutory remedy.  Three points are fundamental to establish unfair prejudice.

(1)   First, unfairness and prejudice are distinct concepts, both must be established in order to obtain relief: Re Saul D Harrison & Son plc [1995] 1 BCLC 14, 31c; Re Coroin Ltd (No.2) [2013] EWCA Civ 781 [15].

(2)   Second, ‘prejudice’ does not mean that there has to be financial loss to a member. Arden LJ said in Re Coroin Ltd (No.2) [2013] EWCA Civ 781 [16]: it may be enough to show that ‘the rights of the petitioning member have been infringed’ without showing that led to any financial consequences.

(3)   Third, the concept of ‘unfairness’ is to be judged, not by the subjective notion of fairness (the ‘legitimate expectation’ test), but by applying the traditional equitable principles: O’Neill v Phillips [1999] 1 WLR 1092, [1999] 2 All ER 961, [1999] 2 BCLC 1.

The case concerned a building construction company where the owner, Phillips, gave the petitioner, an employee, a minority shareholding and a directorship. During an informal discussion, Phillips expressed the hope that the petitioner would take over the management of the company, and indicated on that basis that he would receive half-share of the profits.  Later Phillips retired from the board, leaving the petitioner alone as a de facto managing director. When the company prospered, the petitioner was credited with half the profits. There were discussions about an increased shareholding, but no agreement was concluded.  In a later building recession, Phillips decided, as a controlling shareholder, to resume personal command and the title of managing director; he reduced the petitioner’s position to an ordinary manager, and terminated the profit-sharing arrangement.

The petitioner left the company and presented an unfair prejudice petition, complaining that Phillips had broken his promises in profit-sharing and share allotment. He failed at first instance, succeeded in the Court of Appeal, but lost in the House of Lords.