Unfair Prejudice Petitions: What they are and the grounds to be met

Unfair Prejudice Petitions provide a mechanism for one or more members of a company (or non-members in some circumstances) to petition the court for relief where they consider that the affairs of a company are or have been conducted in a way that is unfairly prejudicial to the interests of members of that company or an act or proposed act or omission of the company is or would be prejudicial.

For a petitioner to succeed, prejudice and unfairness must be shown, in addition to a causal link between what is complained of and the unfair prejudice.

How do you demonstrate prejudice?

Prejudice will be evident if the petitioner can show that the value of the shareholding has significantly decreased or is at risk of significantly decreasing due to the conduct the petitioner complains of. However, a decrease in the value of a shareholding is not the only way in which prejudice can be evidenced. Other examples include, but are not limited to, breaches of fiduciary duty, failure to pay dividends, mismanagement or the extraction of excessive remuneration.

What constitutes ‘unfair’ prejudice?

When the court considers whether there has been “unfairness”, this is not as clear cut. A court must adopt as a starting point the basis upon which the petitioner initially agreed to become a member of the company. The Court may refer to the Articles of Association and any Shareholder Agreements in place. The court must also take an objective approach by applying established equitable principles.

Available remedies

The court has a broad discretion when it comes to remedies should the petitioner succeed in demonstrating unfair prejudice. Remedies the court may order include, but are not limited to, a purchase order whereby the ‘wrongdoing’ member is ordered to purchase the petitioner’s shares (or in exceptional cases, the company purchases the shareholding itself), an order regulating the future conduct of the company’s affairs or requiring the company to refrain from the act complained of.

Alternative options

There are alternative or additional options members of a company may wish to consider deploying. An unfair prejudice petition may not be suitable in some circumstances and members may consider a derivative action or a winding up petition on just and equitable grounds in addition or as an alternative to an unfair prejudice petition.

It is important to take advice early so as to maximise the options which may be available to you before matters escalate and positions become entrenched. Accordingly, if you require advice and assistance in relation to a shareholder dispute, please contact Charlotte Burkert at [email protected].