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Unfair prejudice
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Lecture notes study book Employment Law of Tamara Lewis (1-6) - ISBN: 9781912273300, Edition: 13th New edition, Year of publication: - (1st class notes)
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Unfair PrejudiceJust and Equitable Winding up
s994 – offer minority shareholders a way out.
No real way out for minority shareholders? All the complications and issues arising out of
derivative claims.
Background
Unfair prejudice remedy was introduced in 1948 in response to concerns about the difficulty
for minority shareholders to prove bad faith on the part of directors; and the limits of
winding up on the just and equitable ground as a means of protecting minority
shareholders.
Courts were initially reluctant to use it; but now this is the remedy most commonly sought
by minority shareholders in private companies as it allows them to exit from their
shareholding (remember that there will normally be restrictions on share transfers : Art
26(5) MAPC allows directors to refuse to register share transfer; this power must be
exercised in good faith (s172 CA 2006); and directors must give reasons: s771(1) CA 2006)
Petition about unfair prejudice
Who can bring a petition under s994?
A member, also including a person who isn’t a member, but the shares have been
transmitted to that person. Not a registered member, but the shares have been transferred
so they are entitled bring a petition under s994, they have the equitable entitlement but not
the legal. Equitable interest only.
HAS TO BE THE COMPANY’S CONDUCT.
Conduct has to be an unfair prejudice to the interests of the members.
s994(1): (1) A member of a company may apply to the court by petition for an order under
this Part on the ground—
(a)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 himself), or
(b)that an actual or proposed act or omission of the company (including an act or omission
on its behalf) is or would be so prejudicial.
The company’s affair has been conducted in a manner that is unfairly prejudicial.
What is unfair prejudice?
Two test have to be satisfied: Prove the conduct is unfair and prejudicial.
, Re Saul D Harrison Ltd per Hoffmann, LJ, conduct
Prejudicial in the sense of causing harm to the petitioner, and
Unfair, which may be a breach of company law, the company’s constitution, or some other
some other unfairness (including acting contrary to bargain or understandings between
shareholders, or some other use of management power which is objectively unfair)
It is an objective and not a subjective matter.
Must satisfy both tests.
Can be prejudicial but not unfair, or unfair not prejudicial.
E.G: a director getting removed, unfair and prejudicial to him, but not unfair because he
hasn’t been turning up to meetings, etc.
What is prejudice?
Means harm – harm has been done. Doesn’t have to be just financial.
The harm must be real, rather than merely technical or trivial.
Must cause prejudice or harm to the relevant interest of the member (usually, but not
limited to financial damage)
What is unfairness?
O’Neill v Phillips per Lord Hoffmann: in order to show unfairness, the petitioner normally
needs to show either:
What constitutes as commercial unfairness? Two categories:
1) some ‘breach of the terms on which he agreed that the affairs of the company
should be conducted’, which will encompass, the constitution, any shareholder
agreement and company law, including directors’ duties and (limited) good faith
obligation on general meeting. Breach of law, of the constitution, of the
shareholder agreement.
2) or some of use of the rules which equity would regard as contrary to good faith, e.g.
relying on strict legal powers to go against informal understandings about how the
company would be run. No breach of law/constitution/shareholder agreement, no
breach of legal rights. Removing a director from office is a typical example of this.
Infringement of their legal rights, as long as they secure an ordinary resolution it is
not. In equity it would be unfair.
1) Breach of law/constitution/shareholder agreement. IF SO, it is unfair.
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