Unfair Prejudice vs. Derivative Actions: Which Remedy to Choose?

When shareholders encounter disputes or misconduct within a company, they may consider legal remedies like unfair prejudice claims or derivative actions. Both serve distinct purposes under UK company law and address different kinds of wrongs. This article compares the two remedies, outlines their key differences, and explains when each is appropriate.

What Is an Unfair Prejudice Claim?

An unfair prejudice claim, governed by Section 994 of the Companies Act 2006, protects shareholders from conduct by the company or its controllers that is both unfair and prejudicial to their interests. This remedy is often sought by minority shareholders to address:

• Exclusion from management or decision-making processes.
• Misuse of company funds for personal benefit.
• Unfair dilution of shares or denial of dividends.

The goal of an unfair prejudice claim is typically to compensate the shareholder or restore fairness, often through remedies like share buyouts or management changes.

What Is a Derivative Action?

A derivative action, governed by Sections 260–264 of the Companies Act 2006, allows a shareholder to bring a claim on behalf of the company against directors or other parties who have harmed the company. It addresses misconduct that affects the company as a whole rather than individual shareholders. Common grounds for derivative actions include:

• Breach of directors’ fiduciary duties.
• Negligence or mismanagement by directors.
• Fraud or unauthorized transactions.

The primary aim of a derivative action is to benefit the company by rectifying the wrongdoing and holding those responsible accountable.

Key Differences Between Unfair Prejudice Claims and Derivative Actions

While both remedies involve shareholder rights, their focus, scope, and outcomes differ significantly:

Aspect	Unfair Prejudice Claims	Derivative Actions
Who Benefits	Individual shareholder(s) bringing the claim.	The company as a whole.
Focus	Unfair treatment or harm to the shareholder’s rights.	Wrongdoing or harm caused to the company.
Examples of Misconduct	Exclusion from management, unfair dilution of shares.	Breach of directors’ duties, fraudulent transactions.
Remedies	Share buyouts, management changes, amendments to governance documents.	Compensation to the company, reversal of unauthorized transactions.
Legal Standing	Filed by the affected shareholder.	Filed on behalf of the company, requiring court approval.

When to Choose an Unfair Prejudice Claim

An unfair prejudice claim is appropriate when the harm is specific to the shareholder, not the company as a whole. Examples include:

• Being excluded from board meetings or decision-making roles.
• Unfair allocation of financial benefits, such as withholding dividends.
• Actions that devalue the shareholder’s stake in the company.

Shareholders seeking personal remedies, like a share buyout or reinstatement to a management role, are more likely to pursue this option.

When to Choose a Derivative Action

A derivative action is suitable when the wrongdoing harms the company and the shareholder is acting in its best interest. Examples include:

• Directors using company funds for personal expenses.
• Entering contracts that breach fiduciary duties or harm the company financially.
• Negligence that causes financial losses to the company.

Because the shareholder acts on behalf of the company, any compensation or recovery benefits the company rather than the individual shareholder.

Overlap Between the Two Remedies

In some cases, the line between unfair prejudice and derivative actions can blur. For example:

• Misuse of company funds could harm both the company and a shareholder’s dividends.
• Exclusion from management might involve breaches of fiduciary duties and unfair prejudice.

In such cases, shareholders must carefully evaluate their objectives. Seeking professional legal advice can help determine the most appropriate remedy.

Ntzegkoutanis v Kimionis [2023]

The 2023 Court of Appeal decision in Ntzegkoutanis v Kimionis offered significant clarification on the relationship between unfair prejudice petitions and derivative actions under UK company law. The case involved Coinomi Limited, a company co-founded by Mr. Giannis Ntzegkoutanis and Mr. Georgios Kimionis, who each held 50% of the shares. Mr. Ntzegkoutanis alleged that Mr. Kimionis had excluded him from the company’s management and diverted its assets to entities under his control, breaching his fiduciary duties.

Mr. Ntzegkoutanis filed an unfair prejudice petition under Section 994 of the Companies Act 2006, seeking remedies including the return of misappropriated assets to Coinomi and compensation for the company’s losses. Mr. Kimionis argued that these remedies were only available through a derivative action, a legal procedure requiring court permission and focused on addressing company losses directly.

The High Court initially sided with Mr. Kimionis, striking out parts of the petition on the grounds that it improperly sought to address company losses. However, the Court of Appeal reversed this decision, holding that courts have broad discretion to grant relief in unfair prejudice cases, including remedies that benefit the company itself. The court emphasized that shareholders may pursue such remedies through an unfair prejudice petition if the petition also seeks personal relief for the shareholders.

Key Takeaway: This case broadens the scope of unfair prejudice petitions, allowing minority shareholders to address company mismanagement and recover company losses without first navigating the more restrictive process of a derivative action. It provides a more accessible legal pathway for minority shareholders seeking justice in cases of governance failures.

Practical Tips for Choosing the Right Remedy

• Define Your Goals: If your aim is personal compensation or restoring fairness, an unfair prejudice claim may be better. If you’re addressing harm to the company, consider a derivative action.
• Assess the Evidence: Gather documents to support your claim, such as financial records, meeting minutes, and correspondence.
• Seek Legal Advice: Consult a solicitor experienced in shareholder disputes to evaluate the strength of your case and recommend the best course of action.

Key Takeaways

• Unfair prejudice claims protect individual shareholder rights: They focus on personal harm and seek remedies like share buyouts or management changes.
• Derivative actions address harm to the company: They aim to rectify misconduct by directors or others that impacts the company as a whole.
• Professional advice is crucial: Shareholders must carefully assess their objectives and evidence to choose the appropriate remedy.