Unfair prejudice petitions under section 994 of the Companies Act 2006 remain a significant tool in shareholder disputes. They are also among the most commonly misunderstood.
While the jurisdiction is deliberately flexible, the courts have consistently made clear that it is not a remedy for every commercial disagreement or breakdown in working relationships.
Many petitions arise in closely held companies where trust has eroded and communication has failed. In those circumstances, it is often assumed that the court will intervene to impose a fair outcome, but that is not the case. The focus of the court is not on whether a situation feels unfair, but on whether the conduct complained of departs from the basis on which the shareholders agreed to associate.
This article explains how the courts approach unfair prejudice petitions in practice, with particular reference to 50:50 companies, quasi-partnerships, deadlock and breakdown of trust. It also considers the continuing influence of the House of Lords’ decision in O’Neill v Phillips [1999] 1 WLR 1092 and the strategic importance of buy-out offers in relation to the outcome of the dispute and potential costs exposure.
The statutory framework and the meaning of unfairness
Section 994 allows a shareholder to petition where the company’s affairs are being conducted in a manner that is unfairly prejudicial to the interests of members.
Two elements must therefore be established:
- There must be prejudice to the petitioner’s interests as a shareholder; and
- That prejudice must be unfair.
The concept of unfairness is not assessed by reference to abstract notions of morality or reasonableness. The court is concerned with whether the conduct complained of breaches the legal or equitable basis on which the shareholders agreed to operate the company. That may arise from the articles, a shareholders’ agreement or from understandings that formed part of the foundation of the relationship.
The jurisdiction is therefore fact sensitive, but it is not open ended. The courts have repeatedly emphasised that section 994 is not a mechanism for correcting every commercial disappointment or personality clash.
The continuing importance of O’Neill v Phillips
The modern approach to unfair prejudice is anchored in the decision of the House of Lords in O’Neill v Phillips [1999] 1 WLR 1092. The judgment remains central because it imposed discipline on a jurisdiction that had, at times, been treated as an invitation to litigate commercial grievances under the banner of equity.
Lord Hoffmann made clear that unfairness will usually require either:
- a breach of the company’s constitution or shareholders’ agreement; or
- the frustration of a legitimate expectation arising from an understanding or promise on which the petitioner relied.
A mere breakdown in relations, even if severe, is not enough.
Lord Hoffmann also emphasised that the court is not there to resolve all commercial fall-outs or to redistribute risk retrospectively when a business relationship ceases to work.
Quasi-partnerships and legitimate expectations
Despite the constraints imposed by O’Neill, the courts continue to recognise that some companies operate, in substance, as quasi-partnerships, despite being incorporated.
In small, owner-managed businesses, it is not uncommon for personal relationships and informal understandings to sit alongside formal documentation.
Where a company has the hallmarks of a quasi-partnership, the court may look beyond the strict legal rights set out in the articles. Exclusion from management, removal from decision-making or conduct that undermines an agreed basis of participation may amount to unfair prejudice, even if technically permitted by the company’s articles (Re Guidezone Ltd [2000] 2 BCLC 321).
That said, the existence of a quasi-partnership is not assumed, rather it must be established by reference to evidence, including the history of the relationship and the role each shareholder was intended to play. Not every small company will meet that threshold.
Deadlock and breakdown of trust
Deadlock is a common feature of unfair prejudice petitions, particularly in companies with equal shareholdings. However, deadlock alone does not justify relief.
The courts distinguish between:
- Neutral deadlock, where parties simply cannot agree; and
- Unfair deadlock caused or exacerbated by one party’s oppressive or obstructive conduct.
Where parties are simply unable to agree, the court will not intervene merely because the company is no longer functioning smoothly. By contrast, where one party’s conduct has undermined mutual confidence or deliberately obstructed the company’s affairs, the analysis may be different.
In Re A Company (No 004475 of 1982), the court held that where a relationship of mutual confidence has broken down due to one party’s conduct, relief may be justified even in the absence of technical wrongdoing.
Even in those cases, the petitioner must demonstrate that the conduct crosses the threshold of unfairness. Incompatible personalities or poor communication will rarely suffice alone.
Conduct capable of amounting to unfair prejudice
In practice, successful petitions tend to involve clear departures from the agreed basis of the relationship.
Common examples include:
- Exclusion from management contrary to an understanding;
- Abuse of majority voting power;
- Attempts to force a shareholder to sell at an undervalue;
- Diversion of business opportunities;
- Withholding financial information; and
- Manipulation of remuneration or dividends.
Conduct or behaviour that is merely abrasive, uncooperative or discourteous is unlikely to found a claim unless it forms part of a wider pattern of inequitable conduct. The court is concerned with substance rather than tone.
Remedies and valuation
Where unfair prejudice is established, the court has wide discretion as to remedy. The most common outcome is an order requiring one shareholder to purchase the other’s shares.
In quasi-partnership cases, shares are usually valued on a pro rata basis, without a minority discount and on a going concern basis. The valuation date is typically the date of the order, although the court retains discretion where fairness requires a different approach.
Valuation issues are often as contentious as liability and early consideration of valuation principles can materially influence litigation strategy.
The strategic importance of buy-out offers
A key practical lesson from O’Neill v Phillips is the significance of a properly framed buy-out offer.
An offer is likely to undermine a petition if it:
- Is made in good faith;
- Reflects a fair value;
- Applies orthodox valuation principles; and
- Does not seek to exploit the petitioner’s minority position.
Where such an offer is refused unreasonably, the court may view the continuation of proceedings as oppressive or abusive. That can have serious costs consequences, even if some elements of unfairness are established.
From a strategic perspective, early consideration of exit options and valuation can often provide a more controlled and proportionate route to resolution than prolonged litigation.
When to seek advice
Early advice is particularly important in potential unfair prejudice claims. Decisions taken at an early stage can affect costs exposure and the remedies ultimately available. Elysium Law advises both Petitioners and Respondents at this stage, helping to assess risk and determine the most appropriate course before positions become entrenched.
Shareholders should consider seeking legal advice where there is evidence of:
- exclusion from management;
- misuse of control; or
- conduct that appears inconsistent with the basis on which the company was formed.
We can advise on whether those concerns are capable of meeting the statutory threshold under section 994 and how the court is likely to approach them in practice.
Equally, those facing a petition should seek advice promptly to assess the strength of the claim and whether strategic steps, including a properly framed buy-out offer, may limit risk and costs.
Unfair prejudice litigation can be complex, fact-sensitive and potentially expensive. Our role is to provide early, specialist advice that allows parties to assess whether proceedings are justified, how the case is likely to be viewed by the court and whether a negotiated exit or alternative dispute resolution may offer a more proportionate outcome.
Conclusion
Unfair prejudice remains a powerful remedy, but petitioners should be aware that the courts have consistently resisted attempts to use section 994 as a substitute for commercial negotiation or as a forum for airing general grievances.
Successful petitions tend to involve a clear quasi-partnership context, identifiable understandings about participation or reward and conduct that goes beyond friction into the territory of inequitable abuse.
If you are involved in a shareholder dispute and are concerned about whether conduct within the company may amount to unfair prejudice, or if you are facing a petition and wish to understand your position, we can advise.
Elysium Law provides specialist advice on unfair prejudice petitions, including early assessment of merits, strategic options, costs exposure and exit routes.
If you would like to discuss your circumstances in confidence, please contact us to arrange an initial consultation.
