Unfair Prejudice Claims Against the Board

The board of directors plays a critical role in a company’s governance. It is responsible for overseeing management, protecting shareholders’ interests, and ensuring compliance with the company’s constitution. However, when directors act in ways that harm shareholders—particularly minority shareholders—they may become a focal point of unfair prejudice claims under Section 994 of the Companies Act 2006.

How the Board Can Cause Unfair Prejudice

Directors are fiduciaries who owe duties to the company as a whole, but their decisions can sometimes unfairly prejudice specific shareholders. Common examples include:

1. Misuse of Company Resources

Directors may use company funds for personal gain or approve transactions that benefit themselves at the expense of shareholders.

Example: In Re London School of Electronics Ltd [1986], the majority diverted a valuable business opportunity away from the company to another company it owned, harming the financial interests of the minority shareholder.

2. Exclusion from Management

Directors may exclude minority shareholder-directors from decision-making, particularly in private or quasi-partnership companies where active involvement in management is expected.

Example: In Re Bird Precision Bellows Ltd [1986], excluding a minority shareholder-director from board decisions was deemed unfair prejudice.

3. Failure to Declare Dividends

Boards may refuse to declare dividends without justification, even when the company is profitable. This deprives shareholders of their expected financial returns.

Case Example: In Re Sam Weller & Sons Ltd [1990], the court held that failing to increase the dividend for 37 years despite healthy profits was capable of being unfairly prejudicial and allowed the petition to proceed.

4. Manipulation of Governance Mechanisms

Those in control may change the company’s articles of association (which needs a special resolution of the shareholders, not just a board decision), voting rights, or share structures to marginalize minority shareholders.

Example: Amending articles to limit the voting rights of certain shareholders without their consent could lead to a claim.

Legal Remedies for Claims Against the Board

If the board’s actions are found to constitute unfair prejudice, the court has broad powers to order remedies, including:

• Management changes: Removing or replacing directors responsible for the misconduct.
• Restraining future actions: Preventing the board from taking similar unfair actions in the future.
• Share buyouts: Requiring majority shareholders to purchase the shares of minority shareholders if the board’s conduct was directed by them.

The goal of these remedies is to protect the interests of minority shareholders while maintaining the company’s stability.

Preventing Governance Failures by the Board

Companies can reduce the risk of unfair prejudice claims by ensuring the board operates transparently and fairly:

• Adhering to fiduciary duties: Directors must act in the best interests of the company as a whole, not just specific shareholders.
• Maintaining transparency: Boards should provide regular updates on company performance and decisions to all shareholders.
• Implementing checks and balances: Independent directors can help ensure fair decision-making and reduce conflicts of interest.

Key Takeaways

• The board can be a source of unfair prejudice: Common issues include misuse of funds, exclusion from management, and failure to declare dividends.
• Courts have broad powers to address misconduct: Remedies can include removing directors, restraining actions, or ordering share buyouts.
• Good governance is critical: Transparency, adherence to fiduciary duties, and independent oversight can help prevent disputes.