How might the courts approach claims of unfair prejudice against shareholders where there is no financial loss? The award-winning commercial and corporate lawyers at Bahamas law firm ParrisWhittaker regularly advise directors and corporates on company disputes and effective resolution of the issues.
In a somewhat unusual High Court1 ruling from the UK, a successful unfair prejudice claim led to a measured and fair remedy being ordered. The ruling has persuasive authority on the courts in The Bahamas and should be noted by company directors and shareholders.
What is ‘unfair prejudice’?
Unfair prejudice claims are brought where the majority shareholders (who are often directors), abuse their powers to further their own interests to the detriment of the other shareholders. Typically, it lead to the devaluation of their shares. In this case1, it was the majority shareholder who suffered a detriment.
The court has wide discretion what remedies to order in successful unfair prejudice claims.
What’s the background?
The majority shareholder of a company was a German company and the minority shareholders were a German couple. The husband (H) was sole director and the corporate shareholder went onto appoint a second director.
The company’s articles of association made clear that any decision by the directors had to be made by a majority decision at a board meeting. Where a disagreement arose, H held the casting vote.
Difficulties arose between the directors following the late payment of a dividend. The CEO of the corporate member took steps to try to help them resolve the issues, but this proved unsuccessful. The corporate then withdrew financial and IT support for the company.
H then decided to temporarily restrict the other director’s access to the bank account and other information. Unsurprisingly, communications between them became increasingly strained and toxic.
The corporate member brought a claim for unfair prejudice against H. It claimed that he had acted against and undermined the corporate governance of the company; acted in breach of the terms of the Shareholders’ Agreement; and caused the company to breach the agreement.
The court agreed that there had been unfair prejudice – even though there was no financial loss of devaluation in share value.
What does this mean?
Tensions and disputes can arise between shareholders – that’s a risk in the life of any company. However, it is important that efforts by the parties to resolve and work through difficulties are done in accordance with the company’s articles and that no powers are abused to the detriment of other shareholders.
Here are key points clarified by the court which companies, shareholders and directors would do well to note:
Financial loss is not necessarily prerequisite to a successful unfair prejudice claim. A petitioner may suffer unfair prejudice because they are being denied the full benefit of their investment in the company.
Exclusion from company affairs can amount to unfair prejudice.
The court has power to grant an alternative remedy instead of ordered the shareholder to buy the other’s shareholding.
What should we do?
We advise and represent companies and individual stakeholders in all types of disputes, including disputes between shareholders and directors. Contact the experienced commercial disputes lawyers at ParrisWhittaker for robust assistance and representation as early as possible.
