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The right not to be unfairly prejudiced

If any member feels that what is happening within the company is ‘unfairly prejudicial’ to him, he has a right to petition the court. The complaint may be based on past, present or even anticipated future events, and may be unfairly prejudicial to all of the members or only some or one of them. Whatever what has happened, is happening or will happen amounts to ‘unfair prejudice’ is judged on an objective basis, from the perspective of an impartial outsider.

For the petition to be successful, the member must prove that he has been affected in his capacity as member, although this has been given a very wide interpretation. For example, if it was one of the terms of a takeover that the previous owner of the business would receive shares in the acquiring company and become a director of that company, it may follow that the loss of the directorship constitutes ‘unfair prejudice’ to the member as the two positions are inextricably linked.

unfairly prejudiced

In order to establish unfair prejudice, it is not necessary to prove that the value of the member’s shares have been adversely affected, although frequently this will have happened. Examples of potential unfair prejudice are:

  • Non-payment of dividends;
  • Directors awarding themselves excessive remuneration;
  • Directors exercising their powers for an improper purpose; and
  • Exclusion from management in a quasi-partnership type of company

If the court finds that a member has suffered unfair prejudice, it can make any order it thinks appropriate. However, the most common remedy given is an order that the other shareholders or the company itself should purchase the shares of the petitioner at a fair value. An example of this was Gerrard v Koby [2004], where the order was granted as it was impractical for the parties to continue to work together. The House of Lords in O’Neill v Philips [1999], held that the court’s powers were wide under s.994 but did not give an automatic right to withdrawal from a company where trust and confidence had broken down. Continue reading

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