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Topic Unfair prejudice

Shareholders remedy in practice is the ability of a member to petition for relief on the ground that the affairs
of the company are being or have been conducted in a manner which is unfairly prejudicial to the interests of
members generally, or of some part of its members under s.994.


1.0 Disputes in private companies

Vast majority of the companies registered under CA2006 + its predecessors (CA 1985) are private companies
Small number of shareholders, mostly directors + employees
Most of the shareholders are family members, or even if they are not, the relationships tend to be personal
and commercial
Disagreements normally come from:
1. Deciding the direction of the company
2. Respective merits of the contributions made by each participant
3. The extent to which a party benefitting financially from the business
4. Majority shareholder votes in view of removing the minority shareholder from his position as a
in solving the dispute: minority vs. directors

1. Voluntary exit by the minority shareholder may be difficult to achieve-legal action may be needed
2. Finding a purchaser for minority stake in a private company is not easy
3. Companys articles may constrain the minority shareholder as to whom he can sell his shares to. e.g
the company may need him to offer his shares initially to the existing members first and may require
the price to be determined by the companys auditor and not by the vendor (shareholder).
4. The board of directors has a power to refuse to register any transfer of any shares
5. Not easy for the minority shareholders to obtain accurate information about the companys affairs
when he has been removed from the board, since he no longer has access to the management
accounts and minutes of the board meetings1.
Prentice has noted a feature in shareholder disputes: parties chronic failure to anticipate the

nature, extent and consequences of a breakdown in their relationship. Reasons are

1. Parties unwilling to contemplate the future possibility of the breakdown of the relationship/dispute at
the beginning of the venture
2. Parties unable to anticipate future contingencies
3. Companys articles of association is just a standard version that does not address future breakdown
is implied and recommended by Prof John H. Farrar & Prof Susan Watson:

4. Effective methods of communication

5. Audits of dispute resolution methods
6. Education + Training
2.0 Disputes in public companies
Unlike private, disputes in public companies do not focus on personal participation in the running of
business. Most complaints revolve around
1. Standard of management
2. Level of their remuneration
do not have much options if they decide to seek for legal redress.

1. If the management has underperformed, shareholder can seek to address the issue by setting
contractual targets and remuneration linked to the companys performance.2
2. In the worst case of mismanagement, it may result in a sharp decline of the companys shares and
becomes a target of takeover. The most a shareholder could do is to exit the company.
3.0 Relationship between majority and minority shareholders
Majority can seek redress through the exercise of their voting power (i.e.manipulate the shares)

s.358 Shareholders have no right of access to board minutes, only to minutes of general meetings

s.439A, 226B, 226C: Shareholders have the right to vote and approve the remuneration policy by way of ordinary
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Minority can also behave in an obstructive way with a view to force the majority to buy them out at an
inflated value

- Acknowledged by Hoffman J in Re a Company [1986]: The very width of the unfairly prejudicial
jurisdiction can become a means of oppression, unless carefully controlled.

4.0 Governing principles

1. Proper plaintiff rule
The company should be the only party entitled to enforce a cause of action
Enforcing the fact that the company is a separate legal entity
Member is allowed to maintain proceedings about wrongs done to the company only in exceptional
2. The principle of majority rule in matters of internal management
Basic mechanism for decision-making in companies
Individual member is not able to pursue proceedings on behalf of company about matters of internal
3. Principle of non-interference by the courts in commercial decisions
Courts will not interfere provided the decision of the company is made in good faith, is reasonable,
having regard to relevant considerations
- Carlen v Drury (1812),, Lord Eldon: The Court is not to be required on every occasion to take the
management of every playhouse.. in the Kingdom
- Shuttleworth v Cox [1927],: It is not the business of the court to manage the affairs of the company
4. Recognition of the sanctity of contract
A member is taken to have agreed to the terms of the constitution when he became a member
In the interests of commercial certainty, the law should treat them as so bound
5. Principle of freedom from unnecessary shareholder interference
It is reflected under the tight judicial control of the derivative claim
Shareholders should not interfere without a good cause


s.994(1) CA 2006 [previously, s.459 CA 1985]
A member of a company may apply to the court by petition for an order on the ground
(a) that the companys affairs are being or have been conducted in a manner which 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.
s.994(3)(a) CA 2006
Company means a company formed and registered under the CA 2005 and its predecessors
s.996(2) CA 2006
If the court is satisfied that a petition under s.994 is well founded, it may take such an order it thinks fit for
giving relief in respect of the matters complained of.
1.0 Who can petition?

s.994: Company members (be it majority or minority)

s.994(2) extends standing to petition to persons who are not members of the company but have shares that
have been transferred or transmitted by law, such as personal representatives and trustees in bankruptcy

Case 1: Atlasview Ltd v Brightview Ltd [2004]

The court ruled that the nominee shareholder (which was a company controlled by X here) was the
appropriate petitioner and X has no locus standi to be a petitioner. The court refused to strike out a petition
holding that the interests of a nominee shareholder were capable of including economic and contractual
interests of the beneficial owners of the shares.
It would be arbitrary to rule that the registered shareholder would have standing to petition as a member
but have no interests for the purpose of petition vs beneficial owner (who is not a member) would have an
interest but no standing to present a petition.
Case 2: Re Legal Costs Negotiators [1999]
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Held: There is nothing to preclude majority shareholder from petitioning but the court would expect the
majority shareholder to exercise his control of the company to bring to an end the conduct complained of.
There is no requirement for petitioners to come with clean hands. But the conduct of the petitioner may,
depending on (i) the seriousness of the matter & (ii) the degree of its relevance, lead to the court to refuse
relief, even though the conditions for the exercise of the discretion is satisfied.
Richardson v Blackmore [2006]
- Even if the conduct of the petitioner is neither sufficiently serious nor sufficiently closely related to the
respondents unfairly prejudicial conduct, it is inappropriate for the court to refuse to grant relief
David Cooke in Khoshkhou v Cooper [2014]: It is normally impossible with the hindsight for the court
to determine which of the parties in the breakdown of a business relationship was most at fault and the
court should not conduct a contest of virtue.
2.0 When can an action be brought?
**The petition brought must be against the conduct of the companys affairs**
s.994(1)(a) when companys affairs are being or have been conducted in a manner that is unfairly prejudicial
to the interests of the members generally
s.994(1)(b) when an actual or proposed act or omission of the company is or would be so prejudicial
Arden LJ in Graham v Every [2015] explained:
1. (a): petitioner can bring a petitioner against some other persons, including his fellow shareholders, as
long as those actions amount to the conduct of the companys affairs.
2. (b): petitioners must identify something which the company does or fails to do
Harman J in Re Unisoft Group (No 3) [1994]: difference between
(i) acts or conduct of the company (can found a petition)
(ii) acts or conduct of the shareholder in his private capacity (cannot found a petition)
Case 1: Re Legal Costs Negotiators Ltd [1999]
Facts: Complaint was about the failure of a shareholder to sell his shares. The company had been set up by 4
persons with equal shareholdings. All of the shareholders were directors and employees of the company. 3
directors fell out with the fourth director. The fourth director was dismissed as an employee and resigned
from the board just prior to being removed as a director. Having failed to persuade the fourth shareholder to
sell his shareholdings to them, the majority shareholders petitioned for an order that he should transfer or sell
his shares to them. They were unhappy with his continued presence as a shareholder in the prosperous
business that they were creating.
Held: CoA rejected the petition as it was not a complaint about the conduct of the companys affairs or an act
or omission of the company.
Case 2: Re Leeds United Holdings plc [1996]

Similar in this case

There was a disagreement between the shareholders as to the manner of disposal of their shares. Petition
was dismissed, matter did not relate to the conduct of the companys affairs.

Case 3: Re Coroin Ltd (No 2), McKillen v Misland (Cyprus) Investments [2013]

Facts: Barclays brothers obtained control of Coroin Ltd not by acquiring shares directly in Coroin Ltd

(which would have been in breach of the pre-emption provisions on a share transfer in Coroins articles of
association and share agreement), but by acquiring ownership of shares in Misland (Cyprus) Investments
Ltd, a shareholder in Coroin.
David Richards J: This was not in breach of the terms of those particular pre-emption rights3.

Pre-emption rights can give existing shareholders of a company a right of first refusal on the issue of new shares, thus
protecting their investment from dilution / or on the transfer of existing shares, thus protecting them from change of
control, alteration of the balance of shareholder power or from unwelcome third party investors.
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- A shareholder that does not comply with the pre-emption rights on transfer provisions in the companys

articles or a shareholders agreement does not amount to conduct of companys affairs (unless noncompliance is a part of a scheme to exclude minority from the company, as shown in Graham)
- s.994 is not directed to the activities of the shareholders amongst themselves, unless those activities
translate into acts or omissions of the company or the conduct of its affairs.
But if a failure by directors to exercise pre-emption powers in the articles if triggered by a shareholder
could be an omissions of the company and caught under s.994.
Case 4: Graham v Every [2015]

Summary: Diluting the shareholding of a company member could amount to conducting a companys
affairs in a manner that was unfairly prejudicial to that members interests within meaning of s.994.

Facts: The appellant presented a petition following his removal as a director of the company. He claimed

that inter alia, the respondent shareholders who had bought the shareholdings of two other members in
breach of a pre-emption term in the agreement. Had the pre-emption term been complied with, he would
have become 27% shareholding in the company.
Held: The non-compliance with a pre-emption requirement on transfer of shares by the other fellow
shareholders may amount to conduct of the companys affairs.
- McCombe and Vos LJJ: the non-compliance was part of a bigger picture of exclusion of the petitioner
and dilution of his influence in the management of what was a quasi-partnership (by diluting his
shareholdings) and hence it was part of the conduct of the companys affairs amounting to unfair
prejudice to the appellant.
- Arden LJ: here in this company, the directors were remunerated by dividends rather than salary;
therefore a directors shareholding would dictate his reward. Denying the appellants pre-emption right
while he was a director had arguably interfered with the way in which the company remunerated its
Case 5: Re Unisoft Group (No 3) [1994]
Facts are irrelevant here
Harman J: The act of individual shareholders exercising their rights to vote are not acts of the company or
part of the conduct of the companys affairs, the resolution subsequently passed on the exercise of their
voting rights is an act of the company and form part of the companys affairs.
The activity complained of must be the activity in the course of conduct of the companys affairs or is
by the company.
Case 6: Arrow Nominees v Blackledge [2000]
Held: CoA dismissed a petition based on allegations against the majority shareholders who were significant
lenders and suppliers to the company. The court noted that the complaints against the majority related to the
terms of those loan and supply contracts It related to the majoritys conduct as a lender and supplier to the
company and did not relate to the conduct of companys affairs by majority. A decision to lend to the
company at a certain rate of interest or to supply goods at a particular price could not amount to unfairly
prejudicial conduct of the companys affairs.
***BUT if they use their position to compel the company to accept the funds/supplies at that rate of interest/
price and prevent the company from securing other more favourable funding/suppliers, then it amounts to
unfair prejudice.
In determining whether the activity is a conduct of the company, the courts do not adopt a technical or
legalistic approach to what constitutes the affairs of the company but will look to the business realities; Re
Coroin Ltd (No 2), per David Richards J
It must be literally construed for the purposes of the section.
Case 8: Oak Investment Partners XII v Boughtwood [2010]

Summary: CoA endorsed taking an expansive view of whose conduct might amount to conduct of the

companys affairs. That said, it is possible for the conduct of a shareholder or a director carrying out of the
companys affairs, be caught under s.994 although he does not act through the company organ.
Facts: The respondent shareholder (held a majority of ordinary shares) and director had persistently failed
to adhere to his agreement management role and tried to dictate and ultimately seized control of the
management of the company.
Held: The behaviour was in breach of the constitutional arrangements agreed between him and the other
significant shareholder in the company as to the conduct of the companys affairs. Thus, the respondents
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conduct did amount to conduct of the companys affairs in an unfairly prejudicial manner, although the
conduct was not that of the board or of the directors.
- Sales J in the lower court: s.994 is a broad jurisdiction, the court is allowed to take into account myriad
ways in which the affairs of a company may be carried on.
Case 9: Re Citybranch Group, Gross v Rackind [2004]
CoA accepted that a shareholder in a holding company4 may petition for relief as to the conduct of the affairs
in the subsidiary company that are being conducted in an unfairly prejudicial manner, especially when the
subsidiary is wholly-owned and the directors of the holding company are a majority of the directors of
subsidiary. Likewise, the conduct of holding company towards a subsidiary company may constitute the
conduct of the affairs of the subsidiary and can be subject to complaint by the shareholder in the subsidiary.
Case 10: Scottish Co-operative Wholesale Society v Meyer [1959]
Facts: The parent company, through its nominee director, ran the business of the subsidiary towards the
advantage of the majority and disadvantage to the minority shareholders. It had conducted the affairs of the
subsidiary in an oppressive manner.
Held: Liable under s.994
A petitioner of a company can seek redress against the ones who control the corporate respondent, be it
individuals or a parent company, although they are not members of the company. That is provided that the
parent company/individuals have done something sufficiently implicated in the unfairly prejudicial conduct.
Case 11: F & C Alternative Invetsments (Holdings) td v Barthelemy [2012]
Facts: This case involves an LLP. Petitioners (A) who are the minority, file a petition against the majority
member of the LLP (B). B is the wholly owned subsidiary of C.
Held: A was entitled to relief in repsect of the conduct of the affairs of B, who had been carried out in an
unfairly prejudicial manner.
The essence of the unfairly prejudicial conduct was that B had unfairly removed decision-making and
control of the LLPs affairs from the minority members.
The court found that B was merely a decipher of Cs interests. That said, the benefits of the conduct was
tended towards C and C had the ultimate commercial interest in controlling the LLPs affairs.
C actively intervened in the conduct of affairs of LLP.
Hence, it was appropriate to order relief against the majority member B and its controller C.
Case 12: Re Astec (BSR) plc [1998]
While the petitioner can complain against the proposed acts of the company, which if carried out or
completed, would be prejudicial to the interests of the petitioner, the petitioner must not be too hasty.
Here, the petition was premature and it was brought at a time when the majority had only made statements
as to the steps which they would or might take in the future, but they had not taken any of those steps at
the time petition was filed.
Case 13: Re Bateson Hotels, Bateson v Bateson [2014]
Held: A petitioner cannot complain the past conduct if at the material time, all of the members consented.
** Conduct must be unfairly prejudicial to the interests of the members**
The conduct complained of must be the conduct which is unfairly prejudicial to the interests of the member
as a member of the company as opposed to the other interests of the member.
Case 1: Re J E Case & Son [1992]
Held: The petition was struck out when the petitioner was protecting his interests as a freeholder of a farm
rather than his interests as a member of the company running the farm.
Case 2: Re Unisoft Group (No 3) [1994]
Held: The petition concerned about the relationship of the parties as landlord and tenant rather than members
of the company.

Holding company is a parent corporation that exists with the sole purpose of controlling another companies, instead of
producing its own goods or services.
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Case 3: ONeill v Phillips [1999]

Lord Hoffman: The requirement that prejudice must be suffered as a member should not be too narrowly or
technically construed.
Removal as a director is a common basis for s.994 petitions. If a person is a member and also a director
participates in the management of the company, his removal as a director without cause is a prejudice
suffered in his capacity as a member.
Case 4: R & H Electrical v Haden Bill Electrical [1995]
Facts: There are four shareholders and directors with equal shareholdings. The petitioner was one of the
shareholders and he provided the company working capital through loans from another company wholly
owned by him. The relationship broke down and the other directors sought to remove the petitioner from
office as a director. He filed a petition. The respondents related to his role as a creditor of the company rather
than matters affecting his interests as a member.
Robert Walker LJ: The loan arrangements were sufficiently closely associated with his membership of
the company. Thus, it fell under s.994 as it was unfairly prejudicial to his interests as a member while he
was still a significant creditor of the company. He was entitled to relief.
Case 5: Gamlestaden Fastigheter AB v Baltic Partners [2008]
Facts: A similarly joint venture company was funded primarily by loans by the petitioner (again via a
company associated with the petitioner).
Held: Endorsed R & H Electrical v Haden. It would be appropriate to take into account the members
interest as a creditor of the company when considering whether to grant relief.
Lord Scott in Privy Council: Funding arrangements being part of the joint venture agreement shall be
taken into consideration, as was the case above.
Case 6: Re Woven Rugs Ltd [2010]
Facts: The shareholders had funded the company through large-scale, interest free debt. The director and
majority shareholder organised a restricting of the companys finances in a way which left the petitioners as
creditors. The majority shareholders debt was however repaid and replaced by expensive bank loans.
Held: The restricting was unfairly prejudicial to the petitioners interests as member and creditors, positions
which the court found (in substance) were indistinguishable.
s.994(1A): Removal of the companys auditor from office due to divergence of opinions on accounting
treatments on audit procedures, can be treated as unfairly prejudicial to the interests of some of the
companys members so as to enable the member (not the auditor) to petition for relief.
**Remark: This provision is to safeguard the independence of auditors from the undue pressure by the
companys directors.
** Unfair prejudicial conduct**
To bring a petition, the conduct of the company must satisfy both tests (prejudicial + unfair)
The conduct is prejudicial if
1. it causes financial damage: damage to the petitioners shares or loss of income.
2. or other harms
The conduct is unfair if
1. there is some breach of company law or the constitution
A conduct may be prejudicial but not unfair

Re Batesons Hotels, Bateson v Bateson [2014]: If the shareholders agreed that the company should be

run in disregard of the obligations imposed by the Companies Act, none of them can complain that such
conduct by another shareholder is unfair on that ground alone.
Hawkes v Cuddy [2009]: A shareholder who had been party to the other shareholders unlawful
participation in the management of the company (in breach of s.216, IA 1986) could not then found a
petition under s.994 towards that unlawful conduct.
Fisher v Cadman [2006]: A shareholder can, on giving reasonable notice, revive her strict entitlements
under the articles, even though the shareholder has previously agreed or acquiesced for a period of years
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for the company to being run informally and in disregard of the requirements of the statute and
Grace v Giagioli [2006]: It may be prejudicial to remove member from his post as a director, but not
unfair, if his conduct merits the removal of director.
Re Metropolis Motorcycles v Waldock [2007]: It may be prejudicial not to consult a minority shareholder
but not unfair, if the minority shareholder (petitioner) has chosen to withdraw from active involvement in
the business.
A conduct may be unfair but not prejudicial

Irvine v Irvine (No 1): The court found that there had been a failure to meet the statutory requirements as

to approving the accounts and holding of annual general meetings, but the failures could not be said to
have caused the petitioner any material prejudice.
Re Sunrise Radio, Kohli v Lit [2010]: Isolated trivial complaints, even when in breach of some legal
requirement (and hence unfair), but has no impact on the value of the petitioners shares, will be ignored.
Re Coroin, David Richards J: When the breach of duty by directors causes no loss to the company and
no profit gained by the directors, it would be difficult for members to show prejudice, although the fact of
breach of duty would establish unfairness.
Rock Nominees v RCO (Holdings) plc [2004], Parker LJ: When judging whether the companys affairs
have been conducted in an unfairly prejudicial manner, the court will look at cumulative picture.
Re Tobian Properties, Maidment v Atwood [2013]: In the case of insolvency, the members should prove
prejudice by showing that his shares would have had a value but for the wrongdoing. The court take a
wide view of prejudice suffered as a shareholder.
- Arden LJ: The court should allow a petition if it can be shown the company may obtain potential
surplus although no unfairness to other parties is involved. (X unfair, X prejudicial, Y surplus)
- If it can be proven that the company would have gained surplus, had the respondent not acted as he had,
(like drawing excessive directors remuneration, permitting another business to use the companys
trading name without a fee, selling at an undervalue the companys name, showing goodwill on the eve
of companys liquidation) the petition should be allowed, and member suffered unfair prejudice. Court
could grant relief.


1.0 Summary of the case
The leading authority: ONeill v Philips [1999]
Facts: The petitioner, O joined the company as a manual worker in 1983. In 1985, the respondent P,
impressed by Os abilities, gave him 25% of the issued shares and appointed him as a director. Between 1985
and 1990, P retired from the board, leaving O as the sole director. The company prospered and O was
credited with half of the profits. There were discussions that suggests O to obtain 50% shareholding, but no
agreement was concluded. In 1991, P became concerned about the companys financial position and Os
management so he resumed personal command and gave O the option of managing the UK or German
branches of the business, under him. O decided to go to Germany and remained on board as a director. Later
that year P determined that O would no longer receive 50% of the profits but would be paid only his salary
and any dividends payable upon his 25% shareholding. O decided to sever his links with the company and
petitioned the court claiming that the companys affairs were being conducted in a manner unfairly
prejudicial to his interests.
Lord Hoffman concluded that the member will not ordinarily be entitled to complain of unfairness unless
there has been:
(A) some breach of the terms on which the member agreed that the affairs of the company should be
conducted; or
(B) some use of the rules in a manner which equity would regard as contrary to good faith, e.g. cases in
which equitable considerations make it unfair for those conducting the affairs of the company to rely
upon their strict legal powers
Held: The petitioner could not bring himself within either of the grounds identified by Lord Hoffman.

P had not acted in breach of the terms agreed upon

There was no ground consistent with the principles of equity, for any belief, any mutual agreement or
understanding, that O was entitled to half of the profits and half of the shareholdings.

Lord Hoffman rejected reliance on legitimate expectations as a basis for petition.

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- This has been the basis and prominent element in the past case law prior to this decision. O felt that he

had legitimate expectations to 50% of the shares in the company and 50% of the profits although he
could establish no entitlement in law or equity to such equality.
- Lord Hoffman conceded that he had used the phrase legitimate expectations in Re Saul D Harrison &
Son plc [1995] but he admitted that this use was a mistake.
Petition was dismissed.
2.0 Explain Lord Hoffmans speech on point A

A member is not able to complaint of unfairness unless there has been some breach on terms in

shareholder agreement
rules regulate the conduct of business and are agreed by members

Breach of the terms on Statute

Breach of CA 2006 is normally central to many petitions, including allegations of breaches of directors

duties (e.g. misappropriation of corporate assets and improper allotment of shares), breaches of the
requirements governing the disclosure (e.g. failures to call meetings or to provide accounts).
The fact that the shareholders have ratified a breach of duty does not necessarily prevent conduct from
being unfair for the purposes of this section, if the ratification is contrary to the agreed basis as to how the
company is to be run.
- Ratification may not preclude a petition filed on the ground of s.994, but may preclude derivative claim
- Re Saul D Harrison & Sons plc [1995], Hoffman LJ: Enabling the court in an appropriate case to
outflank the rule in Foss v Harbottle was one of the purposes of the section.
Breach of no-conflict duty under s.175 amounts to conducting the companys affairs in an unfairly
prejudicial manner:
- The scenario is that when the majority and minority shareholders fall out, the majority look to use the
companys assets as their own and they often appropriate, without authorisation and for their own
benefit, opportunities and contracts which properly belong to the company.
- The majority extract from the company benefits beyond their strict entitlements and run down the
business of the company (so as to reduce the value of minoritys shareholdings), while transferring
business to another entity that is wholly owned by them.
Cases for breach of no conflict duty:
- Re Little Olympian Each-Ways Ltd (No 3) [1995]: The assets of the company were transferred at an
undervalue to another company wholly owned by the majority shareholders. The assets were then sold
on at their market value to a third party.
- Re Full Cup International Trading Ltd [1995]: The respondents were found to have stifled the
business of the company. They deprived it of its stock and business which was transferred to another
entity in which they, but not the petitioner, had an interest.
- Re Brenfield Squash Racquest Club [1996]: The majority shareholders and directors caused the
companys assets to be used as security for debts of their businesses and transferred to those businesses
assets that rightfully belonged to the company.
- Lloyd v Casey [2002]: A director arranged a variety of transactions for his own ultimate benefit
including payments to a company controlled by him and additional contributions to his own pension
- Allmark v Burnham [2006]: The petitioner (minority shareholder) maintained that the majority
shareholder had excluded him from the management of the company and had failed to consult him or
provide him with information about the companys affairs. The petitioner also maintained that the
majority shareholder had misappropriated the companys business or assets for use in his new shop and
had also paid himself excessive remuneration. The majority shareholder (who was also the director)
was found liable.
- Re Baumler (UK), Gerrard v Koby [2005]: The company was split 49-51 between 2 shareholders who
were also the directors of the company. An opportunity to acquire the companys premises and
adjoining land from their landlord was taken up by a third party acting on information provided to him
by the 51% respondent with the expectation of a secret profit. The court found that the underhand
conduct of the respondent in procuring the acquisition of the properties was a breach of duty by him
and conduct unfairly prejudicial to the petitioner.
- Irvine v Irvine (No 1) [2007]: The respondent director in breach of the articles awarded himself
excessive and unauthorised remuneration without reference to the board or the minority shareholders.
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As a result, the petitioner received less by way of dividend than should have been received consistent
with the companys policy of maximum profit distribution. Held liable.
- Grace v Biagioli [2006]: The unfairly prejudicial conduct of respondent was his decision not to pay an
agreed dividend but to distribute the relevant profits to himself alone in the guise of management and
other fees. However, he was not acting unfairly prejudicial in his decision to remove the petitioner as a
director as the petitioner had been negotiating secretly to acquire a company dealing in the same line of
business as the company. Hence, he had put himself in position of actual and potential conflict with his
duties as a director.
- Re McCarthy Surfacing Ltd, Hequet v McCarthy [2009]: The bonus agreement was deliberately
designed to benefit the directors (and majority shareholders) and to ensure that none of the profits made
on a particular project would be available to the other shareholders + the failure by the board to have
regard to the companys interests when negotiating transactions with the majority shareholder.
- Re Woven rugs Ltd [2010]: Respondent director refinanced the company in a way which favoured the
interests of the majority shareholders over the interests of minority shareholders + extraction of funds
from the company in the form of unauthorised remuneration and management charges = unfair
prejudicial conduct
- Re DR Chemicals Ltd [1989]: A company with 2 shareholders holds 60-40 shareholdings. They
eventually split up with the majority continues the business. The majority then used his position as a
director and majority shareholder to allot himself a further 900 shares at par without informing the
petitioner of what he was doing. It was unfairly prejudicial.
Breach of duty to act for a proper purpose and fairly between shareholders under s.171
- Common play: Directors make an allotment of shares, nominally to raise capital, but in fact, it is for the
purpose of diluting the petitioners interest in the company.
- Re Regional Airports Ltd [1999]: The ulterior motive to propose the rights issue5 was to enhance the
majoritys position and to increase pressure on the minority to sell their shares at discounted valuation.
It was obvious to the majority shareholder at that moment that the minority s shareholders either could
not or would not take up the rights issue (e.g.can be due to insufficient funds)
- Re a Company (No 002612 of 1984) [1984]: The rights offer was designed to deplete the resources
available to the petitioner to finance the litigation with the majority. Injunction was granted to restrain a
proposed rights issue. Had it gone ahead, the petitioners shareholdings would have reduced from 33%
to 0.33%
- Re Sunrise Radio, Kohli v Lit [2010]: Directors did not act fairly when determining the price of shares.
On the facts, directors (majority shareholders) issued shares at par without considering any alternatives,
particularly when the directors benefitted appreciably from the issue at par. In fact the shares could
have been issued for a significantly higher price. Minority suffered a dilution in the value and in size.
Here, the directors also in breach of their duty to act fairly between shareholders (s.172(1)(f)).
Breach of duty of care and skill: Courts are generally reluctant to find a unfair prejudicial conduct if there
is a disagreement over managerial decisions. The differences in commercial judgment are not for the
courts to adjudicate upon, unless there is an actual financial loss.
- Re Elgindata Ltd [1991]: Complaint was a broad complaint where the shareholder was simply
disappointed in the poor quality management of the business. It was insufficient to amount to unfair
prejudicial conduct.
- Re Macro (Ipswich) Ltd [1994]: Here, the petitioners father who was 83 years old mismanaged the
properties, e.g. failed to institute a proper maintenance system for the properties or to ensure that they
were properly let and rents were duly paid. As a result, value of these assets had been depleted. If it was
possible to point to specific management failures that repeated over many years that caused financial
loss to the company, it then amounted to unfair prejudicial conduct.
- Fisher v Cadman [2006]: The company was holding on properties in hope of realising capital gains
without spending large sums of money on repairing and letting properties. Inactive management of a
property (companys asset) by its directors does not amount to unfair prejudicial conduct.
Breaches of the requirements governing the disclosure: Repeated failures to hold annual general meetings
and to lay accounts before the members.
- s.336, 437: Only public companies are required to hold annual general meetings or to lay accounts
before such meetings.
- Re a Company, ex p Shooter [1990]: A failure to file accounts and other information can be unfairly
prejudicial if it prevents members from understanding the true position of the company.

5 An

issue of shares offered at a special price by a company to its existing shareholders in proportion to their holding of
of old shares
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- Re a Company, ex p Schwarcz (No 2) [1989]: If filing is merely late, it is unlikely to be unfairly


- Phoenix Office Supplies Ltd v Larvin [2003]: Refusing a quasi-partner who had resigned as a

employee and a director, from accessing to financial information for the purpose of valuing his shares
was not unfairly prejudicial.
- Re Saul D Harrison & Sons plc [1995], Lord Hoffman: Trivial infringements will not found a
petition under s.994.
- Re Sunrise Radio, Kohli v Lit [2010]: Trivial infringements may amount to unfairly prejudicial
conduct if the requirement infringed is imposed as an absolute requirement by the statute.
Breach of contractual agreements
- Moxon v Litchfield [2013], per Hildyard J: Neither equity nor the jurisdiction under s.994 sweeps
away contractual arrangements. At most, the exercise of contractual rights is subjected to the equitable
restraint if it would be unconscionable or unfairly prejudicial. If the exercise of the legal right would
not be unconscionable the consequences of its exercise must be permitted to follow.
- Here, the extensive legal agreements that govern the parties relations provided that a director who was a
bad leaver had to transfer his shares at par value which the court accepted was a potentially harsh even
draconian provision. But it was one that director had agreed to.
3.0 Explain Lord Hoffmans speech on point B

There has been some use of the rules in a manner which equity would regard as contrary to good faith.

Complaints on this ground have to show that the conduct of the companys affairs (while not in breach of
the statute or of the constitution) is in breach of the understandings which form the basis of the association
ONeill v Philips, per Lord Hoffman: The question to ask is whether the exercise of the power in
question would be contrary to what the parties, by word or conduct, have actually agreed.
3.1 Understandings as to the basis of the relationship

Ebrahimi v Westbourne Galleries [1972], per Lord Wilberforce: The fact that a company is a small one

or a private company is not enough for such considerations to arise. The superimposition of equitable
considerations requires something more, which typically include one or probably more of the following
elements (a non-exhaustive list)
1. An association formed or continued on the basis of a personal relationship involved mutual
2. An agreement, or understanding, that all or some (for there may be sleeping members) of the
shareholders shall participate in the conduct of the business
3. Restrictions on the transfers of the shares so that a member cannot take his stake and go elsewhere
These companies are commonly described as quasi-partnerships, although there may be other factors.
- The court is more generous in awarding remedy to the successful petitioner, if company is quasipartnership.
If the company is of this nature, then equitable considerations enable the court to hold the majority
shareholders to the mutual agreements, promises or understandings which form the basis of the
relationship; a petitioner may relate on this ground under s.994
In cases of public companies, the expectation would generally be that the entire relationship of the parties
is exhaustively determined by the constitution, and there is no scope for equitable considerations to arise.
- This is especially the case in listed public company, Re Astec (BSR) plc, per Parker J
If the relationship of the parties is spelt out in detailed agreements, especially agreements drafted by
professional advisers, there is little scope for arguing that the relationship is other than a purely
commercial one; Re a Company, ex p Schwarz (No 2) [1989]
- It does not matter if it is just a small company and there are personal relationships between the
- Moxon v Litchfield [2013]: The court found that the company was originally founded on personal
relationships (there were just 4 shareholders), the parties had chosen to govern the relationships
between the shareholders and between shareholders and the company with detailed legal agreements,
emphasising the commercial character of the company.
- Re Coroin (No 2) [2013]: The company had a small number of shareholders, but they were highly
sophisticated business people buying group of hotels for hundreds of millions pounds. They were
governed by lengthy and complex articles of association and shareholders agreements negotiated
between them. David Richards J: it would be inappropriate to lay equitable considerations on the
company structure.
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The nature of the relationship (between the petitioner and the respondent) is determined at the time of the
unfairly prejudicial conduct, as the parties relationship may change over time.

- Strahan v Wilcock [2006], per Arden LJ: In determining what equitable obligations arise between

parties, the court must look at all the circumstances, including the companys constitution, any written
agreement between the shareholders and the conduct of the parties.
A company may start out as a purely commercial footing but by the time of the conduct complained of, the
company may have become one where equitable considerations come into play.
- ONeill v Phillips: The petitioner initially was an employee of the company but the relationships within
the company changed over the years as he became a shareholder and a director, resulting in a quasipartnership company.
- Croly v Good [2010]: The petitioner initially was an employee and later became a shareholder on an
equal division of profits. The court found the relationship had changed from being that of employee to
that of a quasi-partner.
A company may start out as a quasi-partnership footing but by the time of the conduct complained of, the
company may have become a more commercial venture.
- Re A Company, ex p Harries [1989]: The parties started out as a quasi-partnerships, but overtime, the
petitioner turned into a passive shareholder role. The relationship moved on to a purely commercial
- Re McCarthy Surfacing Ltd, Hequet v McCarthy [2009]: Quasi-partners turn into commercial
relationship when the minority shareholders had ceased to be involved in the running of the company.
- Fowler v Gruber [2010]: Company started as a quasi partnership but became a commercial relationship
when the petitioner sold some of his shares and subsequently a local authority went onboard to become
a shareholder.
The purpose of s.994 is to provide relief for shareholders who have been unfairly prejudiced, not to enable
a locked-in minority shareholder to require the company to buy him out.
- Mere deadlock between parties who have lost trust and confidence in one another is insufficient to
merit relief under s.994.
- Re Phoenix Office Suppliers: The court rejected a claim by a shareholder that his co-shareholders and
directors were obliged to purchase his shares when he decided (for purely personal reasons) to leave the
- Hawks v Cuddy [2009]: It is insufficient to found a petition even if it shows a breakdown of trust and
confidence between the parties that subsequently makes it impossible for the company to conduct its
affairs as originally contemplated. It is still necessary to establish unfair prejudice, that results in the
irrevocable breakdown in trust and confidence between parties.
- Re Abbington Hotel Ltd, DiGrado v DAngelo [2012]: Relief was not granted because of deadlock, but
as a consequence of the wrongful conduct of the respondent.
- Oak Investment Partners XII v Boughtwood [2010]: The parties were dead-locked, but misconduct lay
in the respondents underhand, destructive and unconstitutional usurping of management power within
the company which destroyed relationship between quasi partners.
3.2 Understandings as to participation in management
If the parties in a small private company have come together on an understanding that all or some of them
shall participate in the management of the company, the exclusion of a shareholder from management by
removing him without a cause as a reactor is unfairly prejudicial to his interests as a member, in the absence
of a fair offer by the majority to buy petitioners shares or to make some other fair arrangement.
The majority s shareholder can remove by way of ordinary resolution under s.168.
Case 1: Brownlow v G H Marshall Ltd [2000]
Facts: The company was a family business built up over a long period of time and with the shares held
equally by a bother and two sisters. All of them are directors. Personal relationship broken down. An attempt
was made to exclude one of the sisters from the board.
Held: Attempting to exclude her without a fair offer for her shares amounted to the conduct of the companys
affairs that was unfairly prejudicial to her interests. She was entitled relief.
**Remark: But if the director (sister) has a service agreement, it will undermine the case as it suggests the
relationship was a commercial one rather than a broader association based on mutual understandings.
However, it was worth noting in this case, all the directors had service agreements. But the court found that
there was nothing in the arrangement reached. Thus, it changed the relationship to a quasi-partnership. The
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service agreement was not supposed to affect the shareholders position or to preclude any potential remedy
which a shareholder might have under s.994. Service agreement was meant to ensure fair arrangements for
the working directors.
Case 2: Quinlan v Essex Hinge co Ltd [1996]
Held: The court agreed that the service agreement between the director and the company did not prevent the
company having the characteristics of a quasi-partnership.
Case 3: Re Estate Acquisition and Development Ltd [1995]
But in the absence of a personal quasi-partnership elements, every director is subject to the possibility of
removal and has no right to remain in office.
Case 3: Re Coroin Ltd (No 2) [2013]: The majority took no steps to exclude the petitioner who continued to
attend and participate in board meetings in the usual way. No ground for complaint exists.
3.3 Understandings as to participation in financial returns
It is in the directors discretion to duly consider that no dividends should be paid for any particular period,
even a lengthy period, and do so bona fide in the interests of the company; it is not for the court to second
guess the directors reasoning or substitute its own view of what the directors ought fairly to have done.
The unfairly prejudicial conduct arises when the company does not declare dividends while continue to
amass reserves. The majority shareholders are subsequently awarded via directors remuneration.
Case 1: Re McCarthy Surfacing Ltd, Hequet v McCarthy [2009]:
Here, the board of directors fails even to consider the payment of any dividends. The breach of duty is a itself
unfairly prejudicial conduct.
Case 2: Re a Company, ex p Glossop [1988]: One of the prime purposes of the company is used as a vehicle
to earn profits which should then be distributed by way of dividend to the members.
Harman J: It is right to say that directors have a duty to consider how much they can properly distribute to
the members. They have a duty to remember that the profits belong to the members (owners of the
company). Company has to ensure that it is not trading in a risky manner and there are adequate reserves for
commercial purposes. By and large, trading profits should be distributed by way of dividends.
Case 3: Croly v Good [2010]
Facts: Quasi-partners had agreed upon a remuneration strategy. Each of them is allowed to withdraw money
from the company as required during the year (thus each of them will owe a debt to the company). A
dividend will be declared at the end of each year so as to reduce the debt owed by each of them. However,
the parties subsequently fell out and no dividends were declared. The petitioner owed the company a
considerable debt which would have been reduced had the dividends been declared.
Held: Given the understanding as to the manner of remuneration, the court found that the failure to declare
dividends (when funds were available) was unfairly prejudicial to the petitioners interests as a member.
Case 4: Re Metropolis Motorcycles, Hale v Waldock [2007]:
Held: If the companys financial situation prevents the company declaring dividends, the minority
shareholder has no grounds for complaint even if the majority shareholder as a director is able to continue
drawing a salary. However, the court noted that it would be unfair for this position to go on forever and the
majority will then have to recognise that the minority will have a legitimate claim to some form of return.
Mann J: It might be appropriate for the minority to come back to court at a later date if the majority did
not respond to the changed circumstances and make some provisions for a financial return to the minority
Case 5: Grace v Biagioli [2006]
Facts: The dividend had been declared, but the respondents, then deliberately chose not to pay the petitioner.
Instead, they distributed the available profits as management fees to themselves. This non-payment was
unfairly prejudicial conduct.
4.0 A fair offer-striking out petition
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The fair offer/strike out rule is used to force parties to the negotiating table.
Generally, the court will strike out a petition if an offer has been made to the petitioner that gives the
petitioner all the relief that he could realistically expect to obtain on the petition. It would therefore be an
abuse to continue with litigation. The court will ultimately force the respondent to make a fair offer under s.
A petitioner cannot reject a fair offer as the court will not allow petition to proceed in those circumstances.
What is a fair offer?

A purchase of the minoritys shares on a pro-rata basis, based on valuation made by an independent valuer.
The valuer must be independent.
The petitioner can choose not to accept any valuation carried out by the companys auditor or any auditors
that maintain a relationship with the majority shareholders, and move on to petition.

Lord Hoffmann in ONeill v Phillips provides a basic benchmark for a fair offer:

the offer must be to purchase the shares at a fair value;

if the value is not agreed, it should be determined by a competent expert;
the value should be determined by an expert, as an expert, not by a more complex procedure
the offer should provide for equality of arms between parties. Both should have the same right of
access to information about the company which bears upon the value of shares. Both should have the
right to make submissions to the expert;
the majority shareholder should be given reasonable opportunity to make an offer (which may
include time to explore the question of how to raise finance) before he becomes obliged to pay costs.

Case 1: North Holdings Ltd v Southern Tropics [1999]

Facts: The respondents misused companys assets to develop the business of another company in which they
were interested. The court thought the valuation of the petitioners shares in this case raised serious questions
of law and thus it was not appropriate to leave to a valuer.
Held: The offer was not sufficient to remove any potential unfair prejudice and the petition should not be
struck out.
Case 2: Hallmark v Burnham [2006]
Held: The offers were unsatisfactory due to (1) an absence of equality of arms between the parties where the
respondent was allowed to influence the valuation (2) an absence of detail on matters such as the fair value
to be paid, e.g whether a minority discount would apply (3) the date of valuation and the absence of proper
accounts in relation to the company
Case 3: Graham v Every [2015]
Held: CoA agreed that it was not unreasonable to refuse an offer where (1) the petitioner had not been sent a
copy of the valuation report at the time of the offer. (2) He was not able to make any submissions to the
valuer before the valuation was completed (3) He did not have access to the information (4) he was not
offered his costs (5) the valuation did not take into account his allegations about financial mismanagement of
the business
Case 4: Harborne Road Nominees Ltd v Karvaski [2012]
Held: There were a number of factors in this case where the court refused to strike out the petition and
thought that the petitioner may well obtain from the court an offer that is more advantageous to him
1. A failure to resolve all the disputes between parties
2. Ambiguity as to whether the company would declare certain dividends
3. A lack of information about the companys affairs
HHJ David Cooke: It would be a cardinal error to assume that if an offer complied with the guidance any
petition would inevitably be struck out. Lord Hoffmanns guidance does not have the status of legislation.
He also noted that the guidance was given in the context of a majority shareholder buying out a minority
shareholder, not in the context of equal shareholders (where it is always unclear which shareholder should
exist from the company). In that case, he said it would be unjust if one of them was able to seize control of
the company and then effectively force the other to accept an offer.
Normally the relief sought is wider than the purchase order offered by the respondent. Hence, the offer
does not give the petitioner all that (relief) he could reasonably achieve at trial.
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The petitioner often has limited access to the information about the company and so cannot determine
whether the offer made by the respondent reflects the true value of his shares.

He also stated that if a fair offer is made which clearly and finally cures the alleged prejudice, but is later

rejected by the petitioner, the petitioner cannot complain that he is left without an exist mechanism. He
shall remain as an unhappy minority shareholder. This does not mean he is forever without a remedy. If
there is any unfairly prejudicial conduct subsequently happens, the petitioner is allowed to petition again.

s.996(2) Without prejudice to the generality of that power, the courts order may
(a) regulate the conduct of the companys affairs in the future
(b) require the company
(i) to refrain from doing or continuing an act complained of, or
(ii) to do an act that the petitioner has complained it has omitted to do
(c) authorise civil proceedings to be brought in the name and on behalf of the company by such person or
persons and on such terms as the court may direct
(d) require the company not to make any, or any specified, alterations in its articles without the leave of the
(e) provide for the purchase of the shares of any members of the company by other members or by the
company itself, and in the case of a purchase by the company itself, the reduction of the companys
capital accordingly.
1.0 The most commonly sought relief: Purchase order
Obtain a purchase order requiring the respondents to purchase the petitioners shares at a fair value which
normally requires the shares to be valued as if the wrongdoing had not occurred so ensuring that the
shareholder recovers any diminution in the value of his shares caused by the wrongdoing. A petition would
normally be struck out if the respondents made a fair offer for her shares as it gives her everything she could
reasonably expect to achieve under s.994.
Case 1: Grace v Biagoli [2006]
Facts: The respondents consciously and deliberately failed to pay a dividend which had been declared and
the available profits were distributed instead as management fees to the respondents.
Buy-outs have a number of benefits:
1. The possibility of future difficulties between shareholders is removed
2. They allow an otherwise locked-in minority to extract his share of the value of the business to exit
3. The company and its business is preserved for the benefit of the respondent shareholders
4. The company is free from the claims of petitioning shareholder
Case 2: Re Coloursource, Dalby v Bodilly
Unfairly prejudicial conduct was a dilution of 50% shareholder to a 5% shareholder. Granted purchase order
Valuation of shares (for quasi partnership)
Re Bird Precision Bellows [1984] included key considerations in valuing the shares
a) The court should value the shares not as they are, but as they would have been if events had followed a
different course, i.e. if the unfairly prejudicial conduct had not occurred
b) No general rules that the shares have to be bought on a pro-rata basis, or on a discounted basis reflect the
fact that they are a minority holding. It depends on circumstances
c) Generally, the court would distinguish between two types of shareholding in small private companies:
Company in quasi-partnership and company not in quasi-partnership
d) The general rule in a quasi-partnership is for the minority to sell to the majority the shares on pro rata
Valuation of shares (for non-quasi-partnership)
The field price will normally be discounted to reflect the fact that it is a minority holding
Re McCarthy Surfacing, Hequet v McCarthy [2009]
- The relationships originally were quasi-partnership, but after dispute the position had reverted to a
formal commercial relationship so a purchase order on a discounted basis was appropriate.
Re Planet Organic Ltd [2000]
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- Investors should be bought out at discounted rate, since they are not active participants in the running
of the company

Irvine v Irvine (No 2) [2007]

- The relationship was a non-quasi-partnership but the petitioners held substantial shareholdings
(49.96%). Still bought out on discounted rate.

Arden LJ, Strahan v Wilcock [2006]: Pro-rata valuation would not be appropriate if there is no quasi
partnership relationship


Re Sunrise Radio, Kohli v Lit [2010]

- A non-quasi partnership but the court ordered a pro rata valuation.
- Four reasons were given but only one particularly compelling: The company was very successful and

was likely to be floated on the stock exchange in the near future, something which the petitioner would
have benefitted from, had she not exited the company reluctantly.

2.0 Shares should be valued at which point of time?

At the date of the courts order for purchase, which is also the day where the unfairly prejudicial conduct is
brought to an end.
Exception: On the ground of fairness, valuation date can be adjusted to an earlier date, such as the date of
petition or the date of improper exclusion from participation in the management of the company
- E.g. the value of the companys shares decline significantly after the exclusion, then the date of
improper exclusion from participation may apply; Croly v Good
Exception, On the ground of fairness, the court may also award interest to the petitioner
- Profinance Trust v Gladstone [2002]
3.0 Alternative remedy
Petitioners can choose to contract out of the protection offered by s.994 and be bound by an arbitration
agreement; Fulham Football Club v Richards (1987)
- Remark: However, minority shareholders would be ill-advised to give up their right to petition under s.994
given the expansive jurisdiction with flexible remedies. The facts of the case was unusual

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