When a business is sold, the transaction can take different forms: a share sale (selling the ownership of the company) or an asset sale (selling the business’s assets while the company itself remains). For shareholders, particularly minority ones, asset sales can raise serious concerns, as they directly impact the company’s value and, by extension, the shareholders’ interests. But can an asset sale amount to unfair prejudice under English law? In this blog we’ll look at unfair prejudice law and the sale of assets and business as a going concern.
Unfair Prejudice Explained
Under section 994 of the Companies Act 2006, a shareholder can bring a claim if the company’s affairs are being conducted in a way that is unfairly prejudicial to their interests. This could include:
- Exclusion from management in quasi-partnership companies.
- Mismanagement of company finances.
- Breaches of shareholder agreements or articles of association.
The key words here are unfair and prejudicial. It’s not enough to simply show that something was unfair or detrimental; the conduct must be both.
The sale of business assets is a common flashpoint for disputes, especially in private companies where trust and mutual understanding among shareholders are key. The question in these cases is whether the sale of assets was unfairly handled or resulted in prejudice to a shareholder’s legitimate interests.
As a point, the fact that one minority shareholder doesn’t agree to the sale of the business does not make it unfairly prejudicial.
The actual wording of Section 994 says:
(1)A member of a company may apply to the court by petition for an order under this Part on the ground—(a)that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or(b)that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.
How Might a Sale of the Business Trigger a Claim?
The sale of a business or a major asset is a significant event and can affect shareholders in various ways. Common scenarios that might lead to unfair prejudice claims include:
- Sale Without Proper Consultation
Shareholders, especially minority ones, might feel unfairly treated if the majority pushes through a sale without consulting them. This is particularly relevant in companies where decisions are usually made collaboratively. - Undervaluing the Business
If the company is sold for less than it’s worth (perhaps due to a conflict of interest or negligence), minority shareholders may claim their interests were prejudiced - Self-dealing by Majority Shareholders
If majority shareholders orchestrate a sale to a connected party at a low price to benefit themselves, this could be a classic example of unfair prejudice. - Ignoring Minority Interests in Distribution of Proceeds
If the proceeds of the sale are not distributed fairly or are diverted, minority shareholders may have grounds for a claim.
Legal Principles and Key Cases
The courts have laid down guidance in several cases regarding unfair prejudice and the sale of a business. Let’s take a look at a couple of examples:
- Re Bird Precision Bellows Ltd [1984] Ch 419
This case highlighted the principle that shareholders in small companies often expect mutual trust and confidence – much like partners in a partnership. Ignoring the views of minority shareholders during a major decision, such as a sale, can breach this trust. - O’Neill v Phillips [1999] 1 WLR 1092
In this landmark case, the House of Lords explained that unfair prejudice involves conduct that breaches the “understanding” between shareholders, even if this understanding isn’t formalised. If the sale of a business contradicts how shareholders expected decisions to be made, a claim might arise. - Re London School of Electronics Ltd [1986] Ch 211
The court here reinforced that conduct must be both unfair and prejudicial. If a sale benefits the company and all shareholders but one shareholder simply dislikes the decision, this may not amount to unfair prejudice. - Re 36 Bourne Street Ltd, Brierley v Howe [2024] EWHC 2789 (Ch), the High Court considered an application to strike out parts of a s 994 CA 2006 petition concerning an alleged share transfer agreement. The judgment demonstrates the importance of focusing on the requirements of s 994 (and in this case, the need for the unfair prejudice to concern the ‘conduct of the company’s affairs’ or ‘an act or omission of the company’).
Does Every Sale Lead to Unfair Prejudice?
No, not at all. In fact, I would say most sales will not be unfairly prejudicial to a minority shareholder. The courts will consider the context:
- Was the decision to sell made in good faith and with the company’s best interests in mind?
- Were minority shareholders treated fairly and transparently?
- Were any agreements or company rules breached during the process?
Even a breach of the articles of association doesn’t necessarily make it unfairly prejudicial. Both prejudice and unfairness need to be suffered for their to be a claim.
How Can Companies Avoid Disputes Over Asset Sales?
For majority shareholders and directors, transparency and fair dealing are key to avoiding claims. Some tips include:
- Follow Proper Processes: Ensure board and shareholder approvals are obtained where required.
- Document Everything: Record how the sale price was determined and why the transaction is in the company’s best interests.
- Engage Minority Shareholders: Even if their consent isn’t legally required, involving them in discussions can reduce the risk of disputes.
What Can Shareholders Do?
If you believe an asset sale has unfairly prejudiced your interests, here are some practical steps:
- Review Company Documents
Check the articles of association and any shareholder agreements. Are there clauses governing asset sales or requiring shareholder approval? - Request Information
You are entitled to certain records, such as board meeting minutes, under section 116 of the Companies Act 2006. - Seek Legal Advice
An experienced solicitor can review the transaction and assess whether you have grounds for a claim. - Apply to the Court
If you pursue an unfair prejudice petition, the court can order remedies such as reversing the sale, buying out your shares, or compensating you for the loss.
What Remedies Are Available?
If an asset sale amounts to unfair prejudice, the court can provide several remedies under section 996 of the Companies Act 2006, including:
- Buy-Out of Shares: The most common remedy, where majority shareholders are ordered to buy out the minority’s shares at a fair value, often calculated before the unfair act occurred. So, if the asset is ‘the business as a going concern’ effectively that would restore the company to its full value.
- Reversing the Sale: The court may set aside the asset sale, especially if it involves undervaluation or self-dealing.
- Compensation: Damages may be awarded to cover financial losses caused by the sale.
- Regulating Company Affairs: The court can impose rules to ensure fairness going forward, such as requiring consultation on major decisions.
- Winding Up the Company: A last resort where relationships have broken down entirely.
Remedies aim to restore fairness while keeping the company operational where possible. If you’re concerned about an unfair asset sale, seeking expert legal advice is crucial.
Conclusion
Unfair prejudice claims can provide effective solutions for shareholders who have been wronged, but achieving a fair outcome requires careful handling. Remedies such as a buy-out, compensation, or even reversing the asset sale can help restore fairness.
If you’re considering an unfair prejudice claim or need guidance on protecting your interests, Steven Mather Solicitor can help. Get in touch today for tailored advice and support—let’s find the remedy that works best for you!