Unfair prejudice petitions: compensation for shareholders and companies?

Business-related disputes can arise in a variety of forms, including between shareholders and directors. In such situations, two of the most common actions to obtain remedies are unfair prejudice petitions and derivative action.

Below is a brief explanation of each of these actions and the potential overlap between the two following the recent Court of Appeal case of Ntzegkoutanis v Kimionis [2023] EWCA Civ 1480.

Unfair Prejudice Petitions

If a shareholder feels that the company’s affairs are being conducted in a manner that is ‘unfairly prejudicial’ to them, they have a right under the Companies Act 2006 (section 994(1)) (the “CA 2006”) to petition the court for specific remedies.

The behaviour in question can be past, present or even anticipated events and can impact one, some or most of the shareholders.

The court will apply an objective test and will look at whether the behaviour complained about was unfair and prejudicial (it must be both) from an impartial outsider’s perspective. The essential element is whether there has been a breach of the agreement as to how the company was going to be run. The behaviour must have impacted the shareholder in their capacity as a shareholder, but the value of the shares held does not have to go down.

Examples of potentially unfairly prejudicial behaviour include:

1)    Non-payment of dividends.

2)    Directors awarding themselves excessive remuneration.

3)    Directors exercising their powers for an improper purpose.

4)    Exclusion from the management of the company. However, this will only apply to small companies.

Should the court find that the behaviour was unfairly prejudicial, it has wide discretion under s996(1) of the CA 2006 to award any order it deems fit. One of the most commonly sought remedies is an order that the other shareholders (or the company itself) buy the shares of the prejudiced shareholder.

Derivative Action

Here, a shareholder or shareholders will bring a claim on behalf of the company seeking a remedy the company is allegedly entitled to. Here, the shareholder(s) will be putting themselves in the shoes of the company, but the company will be added as a defendant to any such claim.

As with unfair prejudice petitions, the alleged wrongdoing can be past, present or proposed actions and can include negligent actions (or omissions), breach of duties, and breach of trust.

However, derivative actions can be difficult to bring and there are several hurdles to overcome. As such, these actions are not common and there are many examples of shareholders trying to introduce such actions into unfair prejudice petitions and/or bring such actions under the guise of such petitions.

Ntzegkoutanis v Kimionis

The recent Court of Appeal case related to a company (C) set up by two individuals – Mr Ntzegkoutanis (N) and Mr Kimionis (K). N and K were C’s sole shareholders and directors.

As time went on, N claimed that K had excluded him from the management of C and that K had diverted C’s assets to a separate company set up and owned by K. As such, N brought an unfair prejudice petition against K, which sought the following remedies:

1)    Confirmation that the assets diverted from C were held in trust for C.

2)    That K and his companies should compensate C for any losses it suffered.

3)    K sells his shares in C to N at a reduced value.

In response, K claimed that remedies 1) and 2) were remedies for C and not for N as a shareholder. As such, K argued that the only way such remedies could be awarded would be for N to bring a derivative action on behalf of C. K further claimed that N had tried to bypass the hurdles associated with derivative claims by trying to shoehorn these actions into his petition.

In its judgment, the Court disagreed with K and acknowledged that the court has a wide range of discretion and flexibility under the CA 2006 to make any order it deems fit to address claims of unfairly prejudicial behaviour, including an order compensating the company rather than the shareholder.

However, the Court did agree with K that an unfair prejudice petition cannot be used as a bypass to try and obtain a remedy that would not otherwise be available via a derivative claim.

In its judgment, the Court set out the following simple and practical guidance for future claims:

1)    On an unfair prejudice petition, the court can grant an order compensating the company rather than the shareholder; however, the compensation must correspond to any compensation that the company could have obtained via a derivative claim.

2)    The court will not grant compensation – or any remedy – to the company under an unfair prejudice petition if that is the only remedy being sought or if the shareholder has no genuine interest in the other remedies being sought.

As such, if the shareholder bringing the unfair prejudice petition is not only seeking remedies for the company – and has a genuine interest in the remedies it is seeking for themselves – then the court will likely hear the petition. Therefore, in practice, it will be extremely important for any petition to be drafted carefully.

Conclusion

If you are a shareholder of a company and find yourself prejudiced at how the company is being run, then there are several options available to you individually and the company. However, as with all disputes, time is of the essence and action should be taken promptly. As such, you should always take professional advice at the earliest opportunity.

Should you require legal advice concerning any such dispute, do not hesitate to reach out to Geldards LLP’s expert Commercial Disputes Resolution teams who are happy to discuss your situation and help you work out the best way forward.