Fair's fair: Inner House strikes out subjectivity in unfair prejudice claims

A recent decision of the Inner House of the Court of Session in Davidson v Pinz Bowling Ltd [2025] CSIH 6 serves as an important reminder to companies and their members that the courts apply a defined test when addressing issues of unfair prejudice.

Statutory position

The Companies Act 2006 (the "Act") provides protection for shareholders who consider they have been unfairly prejudiced by how the affairs of a company are managed. Under s994 of the Act, shareholders are entitled to petition the court if they consider that the company's conduct unfairly prejudices some or all of its members.

The test for unfair prejudice covers a variety of acts or omissions. Crucially, the act or omission must meet two criteria:

• Unfair: The court must adopt an objective approach, which usually starts with considering the company's articles of association and any agreements between the shareholders, as these set the expectations on which the petitioner agreed to become a member of the company.

• Prejudicial: This does not need to concern economic detriment, although a common example is conduct that has diminished (or threatens to diminish) the economic value of the petitioner's shares.

Although the test must focus on a specific act or omission, it is not necessary for it to have occurred; even proposed acts or omissions may be sufficient.

If an act or omission is found to be unfairly prejudicial, the court has a wide discretion under s996 on the remedies available.

The Decision

The case related to Angus Park Limited ("APL"), a company owned by Pinz Bowling Limited ("Pinz"), Allan Davidson and Sarah Davidson. The directors of APL were Darren Margach ("DM") and Ross Anderson ("RA") (who were the sole shareholders and directors of Pinz) and each of the Davidsons. APL operated a business trading under the "Innoflate" brand owned by Pinz, with Pinz also providing management services to APL.

The Davidsons owned Argyle Asset Management Limited ("AAML") which had held shares in APL prior to a re-organisation. Together, the Davidsons and AAML (the "petitioners") alleged that they had been unfairly prejudiced by the actions of Pinz, DM and RA (the "respondents"). This largely related to the withdrawal by Pinz of management services and APL's right to trade under the Innoflate brand. In April 2023, a dispute arose in relation to whether such withdrawal meant that the statutory accounts of APL had to be prepared with a reservation that APL would not continue as a going concern. The dispute in relation to the accounts resulted in a filing deadline being missed which led to APL being unable to renew its premises insurance. This ultimately resulted in APL's business having to close for three weeks.

As relationships between the shareholders deteriorated, the petitioners sought relief under s996 of the Act, alleging that these changes and the manner in which they were carried out unfairly prejudiced their position. The court considered:

At first instance, the Lord Ordinary held that the petitioners had failed to demonstrate unfairly prejudicial conduct.

On appeal, the Inner House considered that DM and RA had breached the directors' fiduciary duties they owed to APL in two clear respects, by: (i) threats to withdraw Pinz's services at short notice; and (ii) insisting that the accounts include a going concern reservation without having carried out a proper analysis of whether such a reservation was justified.

The Inner House found that both courses of actions were objectively unfair and prejudicial to the Company and its shareholders. The Lord Ordinary had erred in adopting a subjective approach by placing undue emphasis on whether the respondents properly understood the measures which were being taken to remove the Davidsons from the Company. The Inner House reiterated that the correct test was an objective one: the court should consider whether a reasonable person would consider the action to be unfair, as opposed to whether the person in question considered the action to be unfair.

After having established unfair prejudice, the court granted a remedy under s996 of the Act, requiring Pinz to buy back the Davidsons' whole shareholding in APL.

Implications for companies and shareholders

This decision reaffirms the importance of adhering to objectively fair practices in managing company affairs. Companies, directors, and shareholders should note the following key points:

• actions perceived as unfair, even if they have not yet occurred, can be grounds for petition under s994;

• a departure from previously agreed arrangements or legitimate expectations may constitute unfair prejudice; and

• courts will not excuse objectively unfair conduct merely because affected parties initially tolerate it or delay in taking action.

Companies and directors should ensure transparency, clearly document decision-making processes, and regularly review shareholder agreements and articles of association.

Should a dispute arise, companies and shareholders are advised to:

• seek early legal advice to clarify their legal positions and obligations;

• attempt prompt and open communication to resolve disagreements informally, ideally through structured negotiation or if needs be mediation; and

• carefully document interactions, decisions, and any attempts at dispute resolution to demonstrate fairness, reasonableness, and good faith should the matter progress to litigation.

Conclusion

This judgement resoundingly confirms that the test for unfairness is objective, and this needs to be satisfied separately from the additional requirement of the action being considered prejudicial.

While there is no "one size fits all" set of actions considered unfairly prejudicial, shareholders and companies should be aware of their rights and obligations to ensure that they stay on the right side of the legal argument.

For tailored advice or further information regarding unfair prejudice claims, please contact one of our corporate lawyers or one of our commercial disputes lawyers.