These so called "corporate divorces" have historically arisen largely in small and medium size businesses. However, as the economic headwinds remain challenging, we have seen an increase in unfair prejudice petitions being filed by minority shareholders of larger corporates.

These claims are particularly attractive to shareholders as the courts have a wide array of powers to award relief when determining such petitions. As a result this developing area needs to be scrutinised by corporates, their shareholders and D&O insurers alike.

Statutory provisions

An unfair prejudice petition is a request by a minority shareholder for relief under s.994 or s.996 of the Companies Act 2006. In practical terms these claims arise where minority shareholders are of the view that the company is being managed in a way that is prejudicial to their best interests.

The intention of these provisions of the Companies Act is to protect shareholders of the company from mismanagement, abuse of power by the majority shareholders or the directors, and breaches of fiduciary duties by the directors.

To be successful, a petitioner needs to show that their interests have been prejudiced and that any prejudice is unfair.

The "prejudice" suffered will likely be a devaluation of the petitioner's shareholding, caused by the unfairly prejudicial conduct complained of, although prejudice is not confined to economic detriment. The prejudice can also take the form of the petitioner showing that the trust and confidence between the company and the petitioner has been damaged. Ultimately though, the petitioner will not succeed unless they show that they are worse off as a result of the conduct complained of.

The test for "unfairness" is objective. The courts also tend to consider, as a starting point, the basis on which the petitioner agreed to become a member of the company (for example, the company's articles of association, any agreements between the shareholders and any subsequent amendments). The court will then look at whether the alleged acts of the company and its officeholders have been unfairly discriminatory, oppressive or prejudicial to the interest of the minority. This often requires a detailed factual analysis of the rationale behind the various corporate decisions taken.

Claims on the rise

A challenging economy promotes a more fertile environment for corporate disagreements. Particularly in terms of contentious boardroom decisions such as the level of dividend payments, excessive director remuneration, or commitments to loan agreements. In a difficult economy, with high interest rates and low growth, it is easy to see how disagreements over such decisions can lead to corporate fall outs.

The risks posed by unfair prejudice petitions demonstrate the value of D&O insurance. If a policy is in place, it may cover the costs of the directors responding to an unfair prejudice petition as long as the allegations concern acts committed by the directors in their capacity as officeholders of the company. Where respondents are both directors and shareholders this question often requires detailed consideration. If the allegations relate only to alleged breaches in their capacity as shareholders (for example, breach of a shareholders’ agreement) then the policy may not cover the directors' defence costs.

If the policy does respond it will likely provide indemnity for the defence costs associated with such allegations. This is an important protection as such costs cannot lawfully be met by the company.

Given the wide range of remedies available to the court, close consideration also needs to be given as to whether the policy will respond for any of the losses awarded.

Conclusion

With corporate decisions continuing to be under the microscope we expect to see a continued increase in the prevalence of unfair prejudice petitions. This trend will remain of interest for companies, directors and their D&O insurers.