Spotting Unfair Prejudice

Written by Adam Chaffer

Thursday, June 6, 2019

There is no one reason why people seek to invest their money into a company. The rationale can range from wanting to seek a return on the success of an organisation to investing in ensuring a company can succeed.

The majority of the time an investment in shares can be a positive experience, however, a shareholder can develop an opinion that the affairs of the company have been, are being or will be conducted in a manner which is unfairly prejudicial to the members generally.

But what conduct could be described as being unfairly prejudicial?

The first port of call is the statute which currently regulates unfair prejudice. Shareholders should consider the legislation carefully as it identifies two grounds that unfair prejudice is based:

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,
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 legislation talks of ‘conduct’ and ‘actual or proposed act(s) or omission(s)’ as being the basis of unfair prejudice. These terms should be interpreted to cover a broad range of actions or inaction which may be deemed to be conduct which is prejudicial.

Of course, that all sounds perfectly simple, but what does it mean in reality? Well the best way to consider what unfair prejudice could entail is to consider some of the previous case law which has developed in the past few decades.

Case Law Examples

The Courts have accepted that unfair prejudice can mean:

conduct which breaches the fiduciary or statutory duties of a director which results in real prejudice being suffered;
allotting further shares in a company and ignoring the provisions of the Articles of Association or other constitutional documents to the detriment of a minority shareholder;
misuse or misappropriation of the companies assets;
amending the constitutional documents of the company in a manner which may subsequently be detrimental to the minority shareholder;
where a shareholder is permitted to appoint a director, and therefore have an involvement in the management of the company, but is prevented from doing so by the majority shareholder;
conducting the affairs of the company in a manner which is unfair to the shareholder’s interest in the company such as refusing to hold meetings, delating the issue of the company accounts could be construed as being prejudicial; or,
the payment of Directors at a level which is not appropriate could be seen to be unfairly prejudicial

As this short article has established, what constitutes unfair prejudice is something which covers a wide basis and largely turns on facts. Therefore the words of Charles Dickens in Great Expectations best summarises the approach to be taken: “take nothing on its looks; take everything on evidence. There’s no better rule” when considering whether you are facing an unfair prejudice position.