Unfair Prejudice1

UNFAIR PREJUDICE

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 Unfair Prejudice2

UK Unfair Prejudice Shortcomings

The unfair prejudice remedy has been evolving into a significant remedy available for the

UK minority shareholders. While unfair prejudice for disgruntled shareholders to air their

grievances, most of these petitions fail due to insufficient evidence1. Despite that the remedy has

improved the protection of minority shareholders due to its wide range of applications and

reliable remedies, the unfair partiality remedy has multiple challenges2. There are several handles

to making a successful claim based on the current regulation. The chances of success have an

effect on the effectiveness of protecting the minorities in an organization. The remedy was

initiated after the domination remedy in Section 210 of the 1948 Companies Act3. Distressed

shareholders may file derivative claims at the petition for the company mismanagement on the

just ground before the introduction of the provision. Section 994 of the Companies Act 2006 is

the latest structure of the prejudice law4. It claims that members can petition the court to claim

that the company's activities are run fraudulently to the member's interests. Or that a proposed

law or error of the company is detrimental.

The effectiveness of the unfair prejudice after the latest remedy is questionable compared

to similar unfair prejudice in Hong Kong or New Zealand, which may be more effective5. The

English courts have employed the concept of unfair prejudice to provide judicial remedy from

the common majority law and static forms of action6. The latest remedy is likely to have

1
David Milman. "Revisiting shareholder litigation in private companies." Sweet and Maxwell's
Company Law Newsletter 421 (2020): 1-4.
2
Letza Kirkbride and Smallman 2009. Minority shareholders and corporate governance: Reflections on the
derivative action in the UK, the USA and in China. International Journal of Law and Management.
3
Leigh "Companies Act 1967." The Modern Law Review 31, no. 2 (1968): 183-193.
4
Ibid
5
Rita Cheung. "ADR and Shareholder Disputes: The Anglo-America Experience and Hong Kong
Challenges." Asian Disp. Rev. 10 (2008): 118.
6
Abugu, Joseph EO. "A Comparative Analysis of the Extent of Judicial Discretion in Minority
Protection Litigation: The United Kingdom and United States." International Company and Commercial
Law Review 18, no. 5 (2007): 181.
 Unfair Prejudice3

undesirable consequences generated by an overlap in the application of section 994 seeking

personal relief in a corporate claim7. The overlap may result in predicaments such as a court

discarding the 'no reflective loss' regulation and orders personal relief to redress a corporate

wrong. Additionally, ordering a personal remedy against the stakeholder in breach could reduce

the company against the breaching stakeholder. Such events may undermine the company's

"separate legal entity" status as the remedy for the loss will be directed towards shareholders and

not to the company8.

The next undesirable consequence resulting from the overlap after using section 994 to

seek corporate relief would raise concerns such as undermining the policy from the ruling in the

Foss v Harbottle where the court maintained that companies are collective entities and decisions

can be passed by a majority of the shareholders in the company910. Secondly, allowing

stakeholders to obtain corporate relief through a petition is a regressive approach as it may

render the derivative action obsolete. Ordering corporate relief by the courts under section 994

may open the floodgates to increased litigations by the stakeholders, resulting in abuse of the

process11. The other undesirable consequence resulting from the overlap of section 994 is the use

of the section to obtain an order authorizing a derivative claim, resulting in two threshold tests to

bring a derivative claim.

New Zealand

7
Harry McVea. "Section 994 of the Companies Act 2006 and the Primacy of Contract." The Modern Law
Review 75, no. 6 (2012): 1123-1136.
8
Paul Davies and Gower Lawrence. Principles of modern company law. Vol. 17511. London: Sweet &
Maxwell, 2008.
9
Foss v Harbottle 2 Hare 461, 67 ER 189
10
Spotorno, Agustin Ricardo. "Why Is the Rule in Foss v. Harbottle Such an Important One?." Business
Law Review 39, no. 6 (2018).
11
Harry McVea. "Section 994 of the Companies Act 2006 and the Primacy of Contract." The Modern Law
Review 75, no. 6 (2012): 1123-1136.
 Unfair Prejudice4

The New Zealand unfair prejudice law seeks to protect both the majority and the minority

shareholders in an organization. It is also concerned about former shareholders whose rights may

be violated by the majority shareholders through anonymous decisions. Before the Companies

Act of 1955, New Zealand's response to the inappropriate use of corporate power was restricted

to the narrow right-based approach provided in Foss v Harbottle12. This approach restricted

minority shareholders from suing the company for its wrongdoings or irregulating its internal

affairs. Irrespective of the damages resulting from the misconduct, the interests of the minority

would not have a course if the majority endorsed the conduct. This law was oppressive and

sought to be changed. The Companies Act of 1955 allowed both the minority and majority to sue

an organization if they feel that it is engaging in an unfair or discriminatory practice.

The ruling by the Foss v Harbottle demonstrated some inconsistency that was rectified in

the Thomas v H W Thomas Ltd, and in Raymond v Cook where the courts responded by creating

a test reinforced by a fast approach131415. The tests were based on if the conduct complained

results in unjustly detrimental action. Section 174 may fail to provide the correct guidance on

how to decide if an event is fair, but the court in Latimer Holdings Ltd v SEA Holdings New

Zealand Ltd16. affirms that an unfair event requires a visible withdrawal from the values of a just

dealing based on the history and structure of a given firm and the reasonable expectations from

its stakeholders. The use of the term reasonable expectations in Latimer's case is similar to the

use of unjust detrimental in the case of Thomas17. These interpretations by the New Zealand

courts demonstrate that the court interprets section 174 of the companies act by trying to be fair
12
Foss v Harbottle 2 Hare 461, 67 ER 189
13
Thomas v HW Thomas Ltd (1984) 2 ACLC 610
14
Raymond v Cook - [1998] QCA 336
15
Foss v Harbottle 2 Hare 461, 67 ER 189
16
Latimer Holdings Ltd v SEA Holdings New Zealand Ltd [2004] NZCA 226
17
John Farrar, Watson Susan, and Boulle Laurent. "Dispute resolution in family companies." Canterbury L.
Rev. 18 (2012): 155.
 Unfair Prejudice5

to every stakeholder. The law is not restricted to the minority stakeholders as it can be revoked

by anyone against whom the corporate power is used, making it more comprehensive than the

UK laws.

Section 174 of the companies Act is assisted by section 175, which affirms that some

forms of conduct are unfairly prejudicial for the purpose of section 17418. New Zealand's

oppressed shareholder rule is the response to the potential misuse of corporate power by

organizations. The parliament amended the rule to amend its wording to ensure that the remedy

is flexible and broad to prohibit unlawful conduct by the stakeholders. Additionally, unfair

prejudice laws of New Zealand permit former shareholders to file a case against the company if

they feel that its affairs are conducted or are likely to be conducted in an oppressive, unfair, or

discriminatory manner which is not the same in the UK unfair prejudice laws19.

Hong Kong

Similarly, the UK's unfair prejudice shortcomings may borrow from Hong Kong's unfair

prejudice case laws. The application of section 168A of the Companies Ordinance is a remedy to

minority shareholder's concerns who have felt that the matters of a company are run in an unfair

prejudicial to their interests20. The court of appeal verdict in the Luck Continent Ltd v Cheng

Chee highlights that the relief can be pursued by both the minority shareholders and the majority

shareholders2122. The court held that the section is not limited to its application to minority

18
Peter Fitzsimons. "New Zealand Company Law." In Company Law in East Asia, pp. 597-626. Routledge,
2018.
19
Paul Paterson. "A criticism of the contractual approach to unfair prejudice." Company
Lawyer 27, no. 7 (2006): 204.
20
Winston Poon, and Loh Christine. "Section 168A of the Companies Ordinance-A Blunt Sword." Hong
Kong LJ 10 (1980): 292.
21
Continent Ltd v Cheng Chee Tock Theodor (CACV 107/2012)
22
Martin Kwan. "Should There Be a Limitation Period for Section 214 of the Securities and Futures
Ordinance." Hong Kong LJ 48 (2018): 883.
 Unfair Prejudice6

shareholders and small companies. Large companies with contentious issues and majority

shareholders in a company are all eligible for the submission of this section.

Additionally, the unfair prejudice law in the UK does not allow a former shareholder to

file a petition due to the fears that this would open floodgates23. However, this is not the same

case in Hong Kong, where section 168A of the Companies Ordinance provides that former or

current stakeholders who believe that they have been unfairly prejudiced or discriminated against

by the conduct of their companies conduct may file a case against the company2425. This section

seeks to give power to the stakeholders to prevent corporates from taking advantage of their

position to mistreat the minority stakeholders.

Based on the two provided examples of Hong Kong and New Zealand, the UK can learn

several things to make the unfair prejudice regulation more effective. A liberal approach would

allow the UK justice system to interpret the situation to eradicate some of the challenges it

currently faces in the implementation of unfair prejudice. This approach would not significantly

impact the economy, as demonstrated by the unfair prejudice case laws of New Zealand. The

approach would help reduce the challenges the UK faces in balancing the wide discretion and

protecting the minority shareholders in an organization from unfair prejudicial conduct by a

corporate while preventing malicious lawsuits. Recent case laws highlight this struggle where the

courts are less willing to participate in a fact-intensive exercise to dispense the faults, as

demonstrated in the Phoenix Office Supplies Ltd v Larvin26. Courts may be willing to intervene

and protect minority shareholders while limiting the application. However, the structure of

23
Shenara Perera. "Reconceptualising Shareholder Remedies to Mitigate the Problems Caused by the
Overlap between Section 994 and Part 11 Companies Act 2006." UCLJLJ 8 (2019): 1.
24
Letza Kirkbride and Smallman 2009. Minority shareholders and corporate governance: Reflections on the
derivative action in the UK, the USA and in China. International Journal of Law and Management.
25
David Kershaw. Company law in context: text and materials. Oxford University Press, 2012.
26
Phoenix Office Supplies Ltd. & Ors v Larvin | [2003] 1 BCLC 76
 Unfair Prejudice7

section 994 makes it challenging for these courts to get the right balance between protecting the

minority shareholders and limiting the applications.

Secondly, courts may accept several cases of unfairly prejudicial behaviour in a petition

based on section 994, such as omission from the administration, which involves most of the

petitions, especially where small partnerships are involved, as demonstrated in Brownlow v GH

Marshall Ltd2728. The typical allegations may entail a breach of a firm's article of association or a

violation of the company director's duties that may involve the misappropriation of an

organization's assets. By taking New Zealand's approach, the UK should allow interpretation of

the law to be comprehensive by judging if it is acceptable to the plaintiff and the defendant.

27
Brownlow v GH Marshall Ltd [2000] 2 B.C.L.C. 655
28
Flourentzou, Cyprus Lawyer Natasa. "Minority Shareholders: Applicability Of unfair Prejudice."
Shambartas)< http://www. mslawyers. eu/images/publication_documents/Minority_Shareholders-
_Applicability_of_Unfair_Prejudice. pdf> accessed 9 (2015).
 Unfair Prejudice8

Bibliography

Abugu, Joseph EO. "A Comparative Analysis of the Extent of Judicial Discretion in Minority

Protection Litigation: The United Kingdom and United States." International Company

and Commercial Law Review 18, no. 5 (2007): 181.

Brownlow v GH Marshall Ltd [2000] 2 B.C.L.C. 655

Cheung, Rita. "ADR and Shareholder Disputes: The Anglo-America Experience and Hong Kong

Challenges." Asian Disp. Rev. 10 (2008): 118.

Continent Ltd v Cheng Chee Tock Theodor (CACV 107/2012)

Davies, Paul L., and Lawrence CB Gower. Principles of modern company law. Vol. 17511.

London: Sweet & Maxwell, 2008.

Farrar, John H., Susan Watson, and Laurent Boulle. "Dispute resolution in family

companies." Canterbury L. Rev. 18 (2012): 155.

Fitzsimons, Peter. "New Zealand Company Law." In Company Law in East Asia, pp. 597-626.

Routledge, 2018.

Flourentzou, Cyprus Lawyer Natasa. "Minority Shareholders: Applicability Of unfair

Prejudice." Shambartas)< http://www. mslawyers.

eu/images/publication_documents/Minority_Shareholders-

_Applicability_of_Unfair_Prejudice. pdf> accessed 9 (2015).

Foss v Harbottle 2 Hare 461, 67 ER 189

Kershaw, David. Company law in context: text and materials. Oxford University Press, 2012.

Kirkbride, J., Letza, S. and Smallman, C., 2009. Minority shareholders and corporate

governance: Reflections on the derivative action in the UK, the USA and in

China. International Journal of Law and Management.

 Unfair Prejudice9

Kwan, Martin. "Should There Be a Limitation Period for Section 214 of the Securities and

Futures Ordinance." Hong Kong LJ 48 (2018): 883.

Latimer Holdings Ltd v SEA Holdings New Zealand Ltd [2004] NZCA 226

Leigh, L. H. "Companies Act 1967." The Modern Law Review 31, no. 2 (1968): 183-193.

McVea, Harry. "Section 994 of the Companies Act 2006 and the Primacy of Contract." The

Modern Law Review 75, no. 6 (2012): 1123-1136.

Milman, David. "Revisiting shareholder litigation in private companies." Sweet and Maxwell's

Company Law Newsletter 421 (2020): 1-4.

Paterson, Paul. "A criticism of the contractual approach to unfair prejudice." Company

Lawyer 27, no. 7 (2006): 204.

Perera, Shenara. "Reconceptualising Shareholder Remedies to Mitigate the Problems Caused by

the Overlap between Section 994 and Part 11 Companies Act 2006." UCLJLJ 8 (2019):

1.

Phoenix Office Supplies Ltd. & Ors v Larvin | [2003] 1 BCLC 76

Poon, Winston, and Christine Loh. "Section 168A of the Companies Ordinance-A Blunt

Sword." Hong Kong LJ 10 (1980): 292.

Raymond v Cook - [1998] QCA 336

Spotorno, Agustin Ricardo. "Why Is the Rule in Foss v. Harbottle Such an Important

One?." Business Law Review 39, no. 6 (2018).

Thomas v HW Thomas Ltd (1984) 2 ACLC 610p