Petition of Zedra Trust Company (Jersey) Limited under section 994 of the Companies Act 2006

A minority shareholder may seek relief from the courts where the affairs of the company are being conducted in a manner that is ‘unfairly prejudicial’ to that member’s interests, or where a proposed act or omission of the company would be so prejudicial (section 994, Companies Act 2006).

The most common remedy sought is for the shares of the petitioning shareholder to be bought by other members of the company or even by the company itself.

Allotting further shares in the company for the improper purpose of diluting a minority shareholder’s shareholding is an obvious example of unfair prejudice. However, this recent England and Wales Court of Appeal decision serves as a useful reminder that such a dilution will only be 'unfair' (and thus capable of amounting to unfairly prejudicial conduct) if bad faith or an improper purpose can be ascribed to the decision to make the share issue.

In this case, the Court remarked that it was "immediately striking…that no challenge is made to the commercial legitimacy of any of the share issues" and that "in the absence of any challenge to the commercial purpose or the terms of the share issues or to the choice of allottees, it is difficult to ascribe bad faith or an improper purpose to the decision to make the share issues".

The Court held that the petitioner's allegations of bad faith and improper purpose in relation to share issues were insufficient and its complaints in that regard were struck out.

Minority shareholders considering reliance on a dilution of their shares in order to allege unfair prejudicial conduct ought to bear in mind the important distinction between a decrease in proportion of shareholding and a decrease in value of shareholding. The former does not always result in the latter.

If there is no legitimate reason to complain about the sale price, the identity of the buyer and/or the commercial objective (or absence of one), allegations of unfair prejudice in relation to a share sale are unlikely to succeed.

For more information on shareholders rights and remedies, contract Ryan Openshaw or your usual Brodies contact.