Safeguarding Against Unfair Prejudice: The Importance of Shareholders Agreement

In the recent High Court decision of Saxon Woods Investments Ltd v Costa [2024] EWHC 387 (Ch), a minority shareholder claimed to have been unfairly prejudiced when the company breached a clause in a shareholders agreement obliging it to work in good faith to achieve a sale of the company by a specific date. Mark Howell, a Solicitor in our Company Commercial team, explains the definition of Unfair Prejudice and the possible solutions to resolve it.

Unfair prejudice occurs when actions by a company's majority shareholders or directors are detrimental to minority shareholders. This can manifest in various ways, including unfairly discriminatory decisions, abuse of power, or in breach of the expectations and rights of minority shareholders. 

For instance, majority shareholders might manipulate company policies to dilute minority shares, restrict dividend payments, or exclude minority shareholders from significant decision-making processes.

Shareholders agreement offer essential protections for minority shareholders, outlining the rights and obligations of shareholders and reducing the scope for majority shareholders to engage in unfair prejudice. These agreements often include clauses that require supermajority approval for major decisions, grant tag-along rights to minority shareholders in the event of a sale, or specify mechanisms for resolving disputes.

Challenges and Legal Remedies

Despite these protections, minority shareholders can still experience unfair prejudice if majority shareholders exploit ambiguities in the agreement, or engage in conduct that, while technically within legal boundaries, undermines the spirit of fairness and equity.  When such situations arise, minority shareholders may seek redress through legal action, invoking laws designed to protect against unfair prejudicial conduct, such as Section 994 of the Companies Act 2006, which provides a remedy for shareholders who feel their interests have been unfairly prejudiced.  Courts then assess the conduct in question to determine if it is indeed prejudicial and if so, what remedial actions are appropriate.  

How We Can Help

Blanchards Bailey is well-equipped to assist minority investors in protecting their interests through shareholders' agreements and other mechanisms before they make their investments or advise existing minority shareholders where they feel they are being unfairly prejudiced.  For those already experiencing issues, Blanchards Bailey provides bespoke legal advice to challenge unfair prejudice and restore equity within the company framework. 

To speak to Mark about your business needs, please contact him at 01258459361 or, or visit our Commercial and Business Law page.  

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