Unfair prejudice petition

10 May 2011

In a recent petition brought under section 994 of the Companies Act 2006, Lord Menzies has upheld a complaint of unfair prejudice against two directors and shareholders.  The essence of the case was that they had devised a three-stage plan to exclude their co-director and shareholder from the company.  First, they dismissed him as an employee on a pretext of misconduct.  Secondly, they attempted (but failed) to remove him as a director.  The purpose of doing so was to invoke leaver provisions in the company's Articles which would have allowed them to acquire his shares cheaply. 

One striking feature of the case is that despite the 60/20/20 equity split among the shareholders, Lord Menzies held that the three corporators were bound to an informal agreement to divide the profits of the company equally.  In reality, they had operated the company as a quasi-partnership.  This led to the petitioner's seeking an unusual remedy.  Instead of seeking purchase of one party's shares by the other, he sought a variation in the company's Articles to enshrine the informal agreement. 

A second unusual feature of the case is that the proof was restricted to the question of the existence and extent of unfair prejudice.  Questions of remedy were reserved until this matter had been determined. 

The case is instructive for company advisers.  The respondents' solicitors appear to have advised on a number of aspects of the three-stage plan.  However, despite the respondents' apparent concern to act lawfully, that in itself was not enough to avoid acting in a way which was unfairly prejudicial to the petitioner.  That important matter appears to have been missed by the solicitors.  

Chris Wilson of Axiom appeared for the petitioner as junior counsel to Michael Howlin QC and David Johnston QC also of Axiom Advocates appeared for the respondents.