When people own a company between them and the relationship sours, the one who feels frozen out often assumes the law will step in and force a fair buy-out. The main tool for this step is an "unfair prejudice" petition, although a recent High Court decision is a useful reminder that the bar is higher than many shareholders might expect. In essence, falling out and disagreeing about how the business is run is not the same as being treated unfairly in law.

What is an "unfair prejudice" petition?

Section 994 of the Companies Act 2006 allows a shareholder to ask the Court for a remedy where the company's affairs are being run in a way that is "unfairly prejudicial" to their interests. The usual remedy is an order that the usual remedy is an order that the claimant's shares be bought at a fair value. A reasonable offer to purchase the claimant's shares at fair value can however defeat or undermine a petition.

The operative word in such matters is unfairly. The conduct complained of will usually involve conduct that departs from the agreed terms or the understandings on which the company was run, though it is not limited to breaches. Ordinary commercial decisions a shareholder simply dislikes, or the growing friction within a relationship that has broken down, will not prove sufficient in and of themselves.

The case in point concerned an IT consultancy that was originally set up in 2014 as an equally distributed joint venture, placing consultants with clients for a margin. One side petitioned, alleging the other had mismanaged the company, that they were denied access to its financial records, had made improper payments to himself, and had ultimately destroyed the business by diverting its work elsewhere.

His Honour Judge Paul Matthews dismissed the petition. Examining each allegation, he found that the payments had been made with knowledge and consent; that leaving no margin in the company had actually been agreed between the parties; and that the payments to an outside firm were essentially for services genuinely provided. Crucially, when one side began redirecting the work, the Judge held that he was acting honestly to protect the company's assets, while the other principal was in personal financial difficulties and was threatening the company's funds. Restricting his access in those circumstances was a justified, protective step, rather than unfair prejudice.

Doesn't a director have a right to see the books?

Yes, but a narrower one than people assume, and the judgement is a helpful statement of it.

A director has a common-law right to inspect company records to discharge their duties. However, the High Court clarified that this information right is for the company's benefit, not personal leverage. Crucially, holding a directorship or having information rights does not grant an automatic, unreviewable right to unilaterally manage company bank accounts or block corporate transactions. However, in a quasi-partnership, being shut out of information and management can itself support a petition.

Implications:

The broad lesson is that an unfair prejudice petition is not a general remedy for an unhappy business relationship. To succeed, a shareholder must point to conduct that is genuinely unfair, a breach of what was agreed or of the basis on which the company was run, not merely to decisions they would have taken differently, or to the fact that trust has gone. However, honesty and consent to the arrangements will weigh heavily against a petition.

The case also serves as a warning about exit valuations. The Court preferred a net-asset valuation over an earnings-based structure because the IT consultancy relied completely on its founders' networks and lacked long-term contracts or transferable goodwill.

• Petitions are long, document-heavy and expensive, and a shareholder who brings one on the strength of a broken relationship rather than unfair conduct risks losing and paying for it.
• A falling out is insufficient to prove unfair prejudice, and a petition is not a general remedy for a broken relationship. Disagreeing with decisions, or losing trust, does not by itself make treatment unfair.
• Any conduct must be genuinely unfair. The test is objective. Conduct that departs from what the shareholders agreed, or from the understandings on which the company was run, will usually be needed, though it is not limited to technical breaches.
• Consent and agreement count against a petitioner. Here the Judge found that the payments were made with knowledge and consent and that the arrangements complained of had been agreed.
• Protective steps can be justified. Restricting a co-owner's access to the company's money, where there is a genuine risk to company funds, was held not to be unfair prejudice on these facts.
• A director's right to inspect records is limited. It exists for the company's benefit and to enable the director to do their job, not as personal leverage, and it does not give a right to run the bank account alone. In a quasi-partnership, however, being shut out of information and management can itself support a petition.
• A reasonable buy-out offer can undermine a petition.
• Prevention is better than cure. Record how the company is to be run in a proper shareholders' agreement while relations are good, keep evidence of what was agreed and consented to, and take early advice before launching a petition.

The lessons of the judgement are familiar – record how the company is to be run, and any changes to that, in a proper shareholders' agreement while relations are good; keep evidence of what was agreed and consented to; and take early advice on whether conduct is genuinely unfair before launching a petition, as disliking a decision, and being unfairly prejudiced by it, are two very different things.

Disclaimer: This simplified summary of a UK legal case is for general information only. It is not legal advice, may omit important detail, and may not reflect later developments or appeals. Please read the full judgement and seek professional legal advice before acting.