An unfair prejudice petition is the procedure by which a minority shareholder who is the victim of "unfairly prejudicial" conduct by the majority can obtain relief from the court.
The court has a wide discretion as to the appropriate remedy to grant, but will often order that the minority's shares be purchased by the majority at a predetermined value.
In the first decision summarised below the court had to determine what that value should be. In the second the court declined to order any relief.
When is it appropriate for the court to apply a discount to the shares of a minority shareholder in an unfair prejudice petition?
In Davies v Lynch-Smith and others  EWHC 2336 (Ch), the petitioner (Mr Davies) sought relief in the form of the purchase of his 25% shareholding on an undiscounted basis, primarily on the basis that he had been excluded from a management role in the company, but also on the grounds of unfair prejudice. The purchase of the minority shareholder's shares (usually at market value on a pro rata basis) is the usual remedy sought and granted in such petitions.
Did the exclusion of Mr Davies from management amount to unfair prejudice?
Mr Davies argued that, as the company's articles did not give either director the power to exclude the other from management, the company had 'breached' this requirement, which amounted to unfair prejudice. The judge dismissed this argument, as the controlling 75% shareholder, Mr Lynch-Smith, had the statutory power to terminate Mr Davies' appointment as a director and therefore his employment with the company. The first argument having failed, Mr Davies proceeded to argue that his exclusion fell within 'classic unfair prejudice', which relies on finding that the majority were constrained by equitable considerations outside the articles of association of the company, or other contractual rights, and that in light of those constraints, they acted inequitably in a prejudicial way to the minority. Given that Mr Davies was involved with a competing business and therefore had a conflict of interest, the judge also dismissed this argument holding that Mr Davies' exclusion was entirely justified.
Notwithstanding the judge's ruling that Mr Davies' exclusion from management was justified, he held that it was unfair to exclude him without giving him the opportunity first to sell his 25% shareholding at a fair price.
"Fair price" - when will a discount be applied to the minority shareholding?
The general rule is that there should be no discount on the value of the shares to be sold, but the court retains a wide discretion in this regard. In this case, the judge held that Mr Davies' shares should be valued on a fully discounted basis (60%), in light of numerous circumstances including:
- his behaviour, which justified his exclusion from the company;
- the fact that he had no prospect of securing a winding-up order of the company on the just and equitable ground;
- the fact that he was a willing, rather than a reluctant, seller;
- it was not a wholly unjustifiable reward;
- he had not provided anything more than the nominal value for his shares; and
- the business connections, expertise, opportunity and rationale for the company's establishment had been provided by Lynch Smith, the respondent, rather than Mr Davies.
The case is a useful reminder of the court's wide discretion in relation to the remedy to be granted in unfair prejudice petitions. Whilst it will usually order the sale of the minority's shares, whether or not this will be on a discounted basis depends on the specific facts of each case. Petitioners should be particularly mindful of their past conduct, which may result in an order that their shares be sold at a discounted price.
Unfair prejudice dismissed where remedy not needed
Following the sudden death of a company's managing director, Mr W, his shares in the company had been left to his widow, pursuant to his will. Relations between the remaining family members and the widow broke down, and the company passed a resolution adopting new articles of association which enabled it to refuse to recognise her as a shareholder and therefore also denying her dividends. The company dismissed both her and her son as employees of the company and actioned a transfer at undervalue of the company's 50% share of a property. The widow brought an unfair prejudice petition against the company (Weatherley v Weatherley and others  EWHC 3201 (Ch)).
Conduct during the trial
During the course of proceedings, the company agreed to adopt new articles or to amend the existing articles to permit the transmission of shares by will, which restored the position to that as set out in the original articles. The company agreed to and did recognise the widow as a shareholder and she was registered as such, receiving the dividends due on the shares. During the trial, the company also offered to re-employ her son, and all parties, including the widow, agreed that the remaining members would purchase the widow's shares.
The judge considered the remaining live issues. The transfer of the property had been ratified by all members of the company at the time, so could not be considered improper or unfair. The dismissal of the widow from employment was deemed to be fair as it was the result of her own conduct. Crucially, although the alteration of the company's articles had been unfairly prejudicial at the time, this had been remedied by the trial date, as had the refusal to register the widow as a shareholder and pay her dividends.
Was a remedy required?
In the circumstances, the judge was satisfied that there was no likelihood that these issues would recur and emphasised the importance of considering the reality of the situation at the time of the hearing of the petition. As the position had been remedied no order was required from the court, so the petition was dismissed.
The case is, (like Davies above) a reminder that the conduct of the petitioner will be considered in detail and that if the matters forming the subject of the petition have been remedied the petition will not succeed.
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