Unfair Prejudice in the Absence of Financial Loss
When will a court consider that a corporate member has been unfairly prejudiced, particularly where no financial loss is alleged?
Unfair prejudice usually arises in situations where majority shareholders – who are often shareholder/directors - use their powers to advance their own interests to the detriment of minority shareholders. Unusually (as in this case1), it is the majority shareholder who suffers a detriment.
Typically, the result would be a reduction in share value which would then trigger an unfair prejudice claim. In a successful claim, the court has wide discretion as to the remedies it can order.
What’s the background?
The company in this case was owned by a German company (the majority shareholder) and a German couple. The husband (D) was the sole director. The corporate shareholder later appointed another director but under the terms of the company's articles, any decision of the directors were to be made by a majority decision at a board meeting. Under the Shareholders' Agreement, D had the casting vote in the event of any disagreement within the board,
Tensions arose between the two directors following late payment of a dividend and its impact on, for example, the company accounts. Attempts by the corporate member’s CEO to help facilitate a resolution proved fruitless and the corporate then withdrew financial and IT support for the company.
D responded by temporarily restricting the other director’s access to the bank account and other information, and communications became increasingly strained.
The corporate member brought an unfair prejudice claim against D alleging (among other things) that he had acted against and undermined the corporate governance of the company and had breached the terms of the Shareholders' Agreement.
The court found on the facts that there had been unfair prejudice, even though there was no actual or prospective loss to the corporate member.
Breakdown of trust
The High Court clarified: “Prejudice is not limited to cases where there either is, or could be, a diminution in the value of the petitioner's shareholding; and it may extend to a breakdown of the relationship of trust and confidence amongst the shareholders as a result of the conduct of the company's affairs and failures of good administration.”
It also made clear that financial loss not necessarily prerequisite to a successful unfair prejudice claim: “Where a petitioner has a right to be consulted and involved in the management of the company as a condition of his investment, he may not suffer any financial loss if he is excluded from such consultation and involvement; but he may nevertheless suffer unfair prejudice because he is being denied the full benefit of his investment in the company”.
Exclusion amounted to unfair prejudice. But what was the appropriate remedy where there is no financial loss? The court took the view that ordering D to buy the corporate member’s share would be disproportionate in the circumstance. Apart from anything else, it would be financially crippling for D.
Instead, the appropriate remedy was an order regulating the future conduct of the company's affairs. For instance, regular board meetings followed by accurate minutes, financial information and reports provided in accordance with the Shareholder’s Agreement.
Key takeaways
Companies and their shareholders need to be mindful of the rights and obligations of other shareholders and the risk of facing a claim if such rights are infringed, whether or not a financial loss could result. Depriving a shareholder of its rightful involvement in corporate affairs can be sufficient for a successful unfair prejudice claim.
In a potential claim, the parties should consider the type of loss or other detriment and what remedy would be suitable on the facts. It’s clear that the court will take a proportionate approach when considering an appropriate remedy in a successful claim.
1Macom GmbH v Bozeat and others [2021] EWHC 1661
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