Unfair prejudice and derivative claims explained

Many companies start as collaborative ventures, with shareholders actively involved in management. Over time, relationships can break down, priorities can shift, or control can become concentrated among a few. When a minority shareholder is sidelined, tension, mistrust, and formal disputes — including unfair prejudice and derivative claims — can arise.

Understanding the difference between these claims is an important starting point when a shareholder dispute arises. While both can be used to challenge how a company is run, they serve different purposes and are brought for different reasons. Choosing the wrong route can add time, cost, and complexity to a dispute, so it is important to understand which type of claim best reflects the issue you are facing before taking action.

If you are unsure which option is right for you, our solicitors can provide clear, practical advice to protect your interests and navigate the dispute effectively.

What are unfair prejudice claims?

Unfair prejudice claims allow a minority shareholder to act personally when the company is run in a way that unfairly harms them, such as being excluded from decisions or profits. No court permission is required, and remedies can include a forced buyout or, in extreme cases, winding up the company.

Example: Being pushed out of the business, denied a say in important decisions, or seeing company profits used only for others’ benefit.

Case example – Ebrahimi v Westbourne Galleries Ltd

Background: A family-run business founded by two partners based on mutual trust. One partner’s son joined as a director and shareholder, leading to tension. The majority shareholders removed the other partner as a director.

Outcome: Although legally valid, the removed partner lost influence over the company. The court held that relying solely on legal rights would be unfair, confirming that courts may intervene where a business operates more like a partnership.

Key takeaways for business owners

• Issues often arise in small, family-run companies or quasi-partnerships.
   
• Legal compliance alone doesn’t prevent claims of unfairness.
   
• Courts may view even technically valid decisions, like removing a director, as unfairly prejudicial.
   
• Remedies include buyouts or, in extreme cases, winding up on just and equitable grounds.
   
• Managing relationships, documenting expectations, and clarifying rights in shareholder agreements is crucial.

What are derivative claims?

Derivative claims allow a shareholder to act on behalf of the company when directors’ negligence, breaches of duty, or wrongdoing cause company losses. Court permission is required to ensure the action is in the company’s best interests.

Example: A director awards themselves excessive bonuses, enters a disadvantageous contract with a relative, or otherwise harms the company financially.

Case example – Eldington Holdings Ltd

Background: A minority shareholder brought a derivative claim on behalf of Kerrington Limited against its directors and Eldington Holdings Ltd, controlled by a director. The dispute arose over large, interest-free loans benefiting the director’s company rather than Kerrington.

Outcome: Court permission was granted, allowing a full review of whether the directors’ conduct harmed the company and breached their duties.

Key takeaways for business owners

• Derivative claims let minority shareholders hold directors accountable for harming the company.
   
• Directors must act in the company’s best interests, not for personal gain.
   
• Even legally compliant actions can be challenged if they disadvantage the company.
   
• Strong governance and early oversight help prevent disputes.

Comparing unfair prejudice and derivative claims

While both claims arise in shareholder disputes, they serve different purposes and are used in very different circumstances.

• Derivative claims: Address harm caused to the company by directors’ actions, require court permission, and are used to hold directors accountable for breaches of duty or wrongdoing.
   
• Unfair prejudice claims: Protect the individual shareholder’s interests, can be pursued without court permission, and are designed to challenge unfair treatment in the management or operation of the company.

FAQs

The following FAQs address some of the most common questions raised by minority shareholders when disputes arise.

1. What are my rights as a minority shareholder in a dispute?

   As a minority shareholder, you have the right to request information, such as company accounts and meeting minutes, and can call for a special audit if concerns remain. You also have voting rights and can challenge unfair actions, fraud, or mismanagement. In the case of a merger or takeover, dissenting shareholders may exercise appraisal rights, requiring the purchase of their shares at fair value.

2. How can I remove another shareholder from the company?

   If a voluntary buyout cannot be negotiated, the articles of association and shareholder agreement may include specific provisions for removing shareholders, such as forfeiture or compulsory sale clauses. During takeovers, majority shareholders can sometimes compel minority shareholders to sell their shares. Additionally, claims of unfair prejudice, derivative actions, fraud, or mismanagement can lead to the removal of a shareholder.

3. What is an unfair prejudice claim?

   If a company has conducted itself in a way that adversely impacts shareholders, or some shareholders more than others, without fair justification an unfair prejudice claim can be brought by the suffering under section 994 of the Companies Act 2006.

4. What are Pre-Emption Rights?

   The shareholder agreement may contain restrictions on the disposal of shares in a private limited company, notably “pre-emption rights”. Pre-emption rights typically specify that shares must first be offered to existing shareholders at a “fair value”. If the shareholder agreement does not provide a valuation mechanism, independent auditors may be required to determine “fair value”.

Preventing disputes with early legal advice

Early legal advice can prevent uncertainty from escalating into costly and disruptive shareholder disputes.

Bhavini Kalaria, head of commercial litigation, says:

“Contracts are often seen as a cost rather than an investment in preventing long-term risk. In a recent case, a client had to start legal proceedings because they had no shareholder agreement, and it was unclear whether they owned the shares they thought they had paid for.

“Well-drafted shareholder agreements and early legal advice can clarify ownership, decision-making, and dispute resolution, protecting both shareholders and the company’s stability.”

Our litigation team specialises in shareholder disputes, helping SME’s and family-owned businesses navigate challenging situations. Whether you are a minority shareholder concerned about being excluded from decisions, a family business facing internal disagreements, or a company needing to enforce or challenge directors’ actions, we provide clear, practical advice to safeguard your rights and the long-term stability of your business.

Get in touch with our solicitors to discuss how we can support your business today.