An Assessment of the Effectiveness of the Unfair Prejudice Remedy in UK Company Law: How can we Guarantee Appropriate Judicial Discretion?
| Pages | 72-102 |
| Date | 01 October 2022 |
| Published date | 01 October 2022 |
| Author | Ziyuan Li |
72
Cambridge Law Review (2022) Vol VII, Issue 2
Cambridge Law Review (2022) Vol VII, Issue 2, 72–102
An Assessment of the Effectiveness of the
Unfair Prejudice Remedy in UK Company
Law: How can we Guarantee Appropriate
Judicial Discretion?
ZIYUAN LI
ABSTRACT
In the UK, members of a company can petition the court for a remedy in respect
of conduct by other members that unfairly prejudices their interests under section
994 of the Companies Act 2006. Indeed, the breadth of interpretive judicial
discretion concerning the core wording of s 994 (for example, the reference to
‘unfairly prejudicial’ and ‘interest’) determines the extent to which the section can
act as a shield for shareholders. Since minority shareholders are vulnerable to
oppression by the majority in private companies, the courts tend t o show a pro-
minority attitude when hearing unfair prejudice cases. Therefore, the s 994
petitions are popular with the minority shareholders. Notably, while the court’s
open-ended interpretation of s 994 provides a reliable safeguard for t he minority
shareholders’ interests, it may indirectly encourage their opportunistic behaviour
of abusing unfair prejudice actions. In practice, the rapidly growing number of s
994 petitions have led to this type of proceeding becoming more burdensome,
thereby increasing the financial and time burden on both the petitioner and the
court. Moreover, the expansive discretion has resulted in an overlap in jurisdiction
between s 994 petitions, which traditionally represent personal relief, and
derivative claims, which represent corporate relief. This probably opens the
floodgates for minority shareholders to bring malicious claims to interfere with the
affairs of the company. In this sense, the unfair prejudice remedy regime may run
counter to the objectives of ‘efficiency’ and ‘fairness’ in the area of shareholder
LLM (University of Bristol). This article corresponds to the dissertation presented for the degree o f LLM,
supervised by Dr Basil Salman. I am grateful to him and the anonymous reviewers for their helpful comments and
feedback on earlier drafts. Any errors that remain are my own. E-mail address: lzy6 04109768@163.com
An Assessment of the Effectiveness of the Unfair Prejudice Remedy
73
remedies law. Consequently, this article will attempt to explore the promising
direction for improving the effectiveness of the s 994 petitions. Taking into account
the legislative basis of the section, a guiding framework on the construction of
appropriate judicial discretion will be proposed to better balance shareholder
protection and corporate autonomy.
Keywords: unfair prejudice; interest; efficiency; fairness; judicial discretion
I. INTRODUCTION
Minority shareholder remedies are one of the hottest topics in UK company law,
as a robust minority shareholder protection regime helps to build investors’
confidence in their companies and the overall stock market, thus creating
investment incentives.
1
In particular, the unfair prejudice remedy regime under
section 994 of the Companies Act 2006 (CA 2006)
2
has been subject to considerable
academic scrutiny due to its frequent use. In reality, the main target of protection
under this legislation is the minority in private companies.
3
At present, the vast
majority of companies registered under company law in the UK are private
companies (also commonly referred to as small businesses).
4
It can therefore be
argued that the unfair prejudice remedy plays an essential role in the area of
shareholder remedies law in the UK.
Courts examining s 994 petitions are often mindful of the mixed
commercial and personal attributes of private companies. At the inception of a
private company, there is generally a tacit arrangement among the members that
they will not only enjoy the profits of the company in proportion to their respective
shareholdings, but will also manage the company jointly as directors.
5
Nonetheless,
disagreements inevitably arise during the company operation, because
shareholders usually looking out only for their own interests.
6
In such
circumstances, the majority shareholders tend to vote to remove the minority from
the board of directors in order to eliminate dissenting voices in the management
1
Law Commission, ‘Shareholder Remedies Consultation’ (1996) Law Com No 142, para 1.13 < https://s3-eu-west-
2.amazonaws.com/lawcom-prod-storage-
11jsxou24uy7q/uploads/2015/03/cp142_Shareholder_Remedies_Consultation.pdf> accessed 1 Septemb er 2021.
2
Companies Act 2006, s 994.
3
Law Commission, (n 1) para 14.5.
4
Department for Business, Energy and Industrial Strategy, ‘Business population estimates f or the UK and regions
2020: statistical release’ (8 October 2020) -population-
estimates-2020/business-population-estimates-for-the-uk-and-regions-2020-statistical-release-htm l> accessed 27
August 2021.
5
MA Iqbal, ‘The Effectiveness of Shareholder Dispute Resolution in Private Compan ies under UK Companies
Legislation: An Evaluation’ (PhD, Nottingham Trent University 2008), 32-33.
6
DD Prentice, ‘Protecting Minority Shareholders’ Interests’ in D. Feldman and F. Meisel (eds), Corporate and
Commercial Law: Modern Developments (Informa UK Ltd, 1996), 80.
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