Section 994 Unfair Prejudice Petitions: A Guide for Shareholders
Prepared by Benjamin Rose, Solicitor, on behalf of Acumen Law's Dispute Resolution Team
Last Reviewed: 17 November 2025
Summary
Section 994 of the Companies Act 2006 (the ‘2006 Act’) provides a statutory remedy where a company's affairs are conducted in a way that is unfairly prejudicial to shareholders' interests. It is the primary mechanism for resolving serious disputes in private companies, particularly quasi-partnerships and owner-managed businesses.
The court asks not only whether conduct harms the minority, but whether it is unfair given the company's constitution and the parties' legitimate expectations. The usual remedy is a buy-out order requiring the majority to purchase the minority's shares at fair value - often without a minority discount in quasi-partnership cases.
For both sides, three questions matter: when does conduct cross into unfair prejudice; how does Section 994 interact with articles of association, shareholder agreements and fiduciary duties; and what are the commercial realities of a remedy that is flexible, high-stakes and expensive to litigate.
Legal Framework
Section 994(1)(a) of the 2006 Act enables a shareholder to petition the court where:
‘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).’
Standing
Only a "member" can bring an unfair prejudice petition under Section 994. This includes registered shareholders and certain persons to whom shares have been transmitted by operation of law or who are entitled to be registered (some personal representatives or transferees, for example).
Creditors, employees and other stakeholders cannot petition unless they also qualify as members. The complaint must relate to the petitioner's interests as a shareholder, not in some other capacity.
The Two-Limb Test
Two elements must be satisfied:
Prejudice. The conduct must harm the petitioner's interests as a member. This is often financial - reduced dividends, dilution, loss of value - but can be non-financial, such as exclusion from management in a quasi-partnership or loss of information rights.
Unfairness. The conduct must be unfair, not merely disadvantageous. The court applies equitable standards of fairness, taking into account the company's constitution and the basis on which the parties agreed to do business.
Not all prejudicial conduct is unfair. A decision that harms the minority but is taken in accordance with the articles, shareholders' agreements and proper board process may be prejudicial but not unfair. Equally, conduct that technically complies with the articles can still be unfair if it breaches legitimate expectations arising from the parties' understanding and dealings.
Contractual Rights vs Legitimate Expectations
The starting point is the contractual bargain: the articles of association form a statutory contract between the company and its members, supplemented by any shareholders' agreement.
In O'Neill v Phillips [1999] UKHL 24, the House of Lords held that unfairness typically arises where there is a breach of those contractual rights or a breach of equitable constraints that the parties can fairly be taken to have accepted - their legitimate expectations.
Legitimate expectations are not vague appeals to fairness. They arise from clear understandings, promises or practices - that certain shareholders will participate in management, receive a particular proportion of profits, or have veto rights over major decisions - particularly where the company operates as a quasi-partnership.
The court is slow to recognise expectations that contradict the agreed contractual structure. A minority cannot rely on legitimate expectations to rewrite a bargain it freely agreed, absent clear evidence that the parties treated the written terms as incomplete or subject to a different, shared understanding.
Quasi-Partnerships
A quasi-partnership exists where there is a relationship of mutual trust and confidence between a small number of participants, all or some shareholders are involved in management, and restrictions on share transfers make exit difficult.
In such companies, the court more readily treats the relationship as having a fiduciary or partnership-like character. Exclusion from management, diversion of business opportunities, or withholding of dividends may be unfair where they conflict with the parties' shared understanding of how the company would be run, even if technically permitted by the articles.
Fiduciary duties in company law are owed primarily by directors to the company, not to individual shareholders. Breach of directors' duties often gives rise to a derivative claim (brought on behalf of the company) rather than, or in addition to, an unfair prejudice petition. The question for Section 994 is whether the conduct also prejudices the petitioner in their capacity as a member and does so unfairly.
Common Scenarios
Exclusion from Management
A director removed from the board without justification faces particular prejudice in quasi-partnerships where management participation was expected. The distinction is between legal right - the articles may permit removal - and fairness. Where the company was established on the basis that all shareholders would participate in management, exclusion will usually be unfair even if the articles technically allow it.
Diversion of Business Opportunities
Majority shareholders taking corporate opportunities for themselves, setting up competing businesses, or directing business away from the company breach fiduciary duties and often constitute unfair prejudice. The key is whether the conduct both harms the company and prejudices the minority's position as a shareholder.
Excessive Remuneration and Self-Dealing
Directors awarding themselves unjustified salaries or bonuses, entering into related party transactions at undervalue, or causing dilution of minority shareholding through preferential share issues raise both fiduciary duty concerns and potential unfair prejudice. The court will scrutinise whether remuneration is commercially justifiable and whether the minority's economic interest has been eroded.
Dividend Policy Manipulation
Refusing to declare dividends while paying high salaries to director-shareholders is a classic unfair prejudice scenario. Where the minority has no participation in management and relies on dividends for a return, systematic retention of profits to squeeze out the minority will be unfair. The court distinguishes between legitimate business reasons for retaining profits and manipulation designed to prejudice the minority.
Information Denial
Refusing to provide financial information or company records, or keeping minority shareholders in the dark about company affairs, can constitute unfair prejudice, particularly in quasi-partnerships. While the articles and the 2006 Act define formal information rights, the court may find that legitimate expectations extend beyond those minimum requirements.
Deadlock
In 50/50 shareholdings where the relationship has broken down, the company may be unable to function but have no mechanism to break deadlock. While deadlock alone is not unfair prejudice, the conduct of one party in causing or exacerbating the deadlock can be. Courts will examine who is acting reasonably and whether one party has made offers to resolve the situation.
Remedies
The court has wide discretion under Section 996 of the 2006 Act to grant such relief as it thinks fit if unfair prejudice is established.
Buy-Out Orders
The most common remedy is an order that one party buys the other's shares.
Who buys whom
Typically the majority buys out the minority, but the reverse is possible in appropriate cases.
Valuation date
Usually the date of the order, but the court can select an earlier date - before the prejudicial conduct depressed value, for instance.
Minority discount
In true quasi-partnership cases, the court usually orders a buy-out at fair value without a minority discount, reflecting that the petitioner expected ongoing participation in a joint venture rather than a tradable minority stake. In more conventional corporate settings, a minority discount may be appropriate.
Adjustments
The court can adjust for misapplied assets, excessive remuneration, or other wrongs when calculating the buy-out price.
Other Remedies
Beyond buy-outs, the court can regulate how the company is run going forward, set aside or vary specific transactions or resolutions, require changes to the articles of association, or order payment of compensation.
These remedies are less common. Once trust has broken down, ongoing co-existence is rarely realistic, and the court tends to favour a clean break via buy-out.
Just and Equitable Winding Up
In extreme cases, the court can order a "just and equitable winding up" under Section 122(1)(g) Insolvency Act 1986. This is separate jurisdiction but often considered alongside unfair prejudice.
Winding up is a blunt tool: it ends the business and realises assets, usually at a discount. The court will be reluctant to wind up a profitable company if a Section 994 remedy can achieve a fair outcome while preserving the business. But the possibility of winding up can affect settlement dynamics and the court's assessment of what is fair.
Relationship with Derivative Claims
Where the primary complaint is that directors breached their fiduciary duties - by misappropriating assets or diverting business, for example - the proper remedy may be a derivative claim under ss.260-264 of the 2006 Act, brought in the company's name.
Unfair prejudice petitions and derivative claims can overlap. If the wrong to the company also causes personal prejudice to the petitioner as a member, a Section 994 petition may be appropriate. The court will be careful to avoid double recovery, ensuring that any relief reflects both the company's loss and the petitioner's position as a shareholder.
Practical Considerations
Evidence and Documentation
Documentary evidence determines outcomes. The court will scrutinize board minutes, shareholder resolutions, financial statements, management accounts, and - crucially - early correspondence showing what the parties actually expected when they went into business together. Vague recollections of oral understandings carry little weight without contemporaneous documentation.
The Impact of Reasonable Offers
Following O'Neill v Phillips, if the majority makes a genuinely fair offer to buy the minority's shares - at fair value determined by an independent expert, with reasonable assumptions and no unfair minority discount where a quasi-partnership exists - the court may conclude that any ongoing unfairness has been cured. Refusing such an offer can have serious consequences for costs and relief.
This creates tactical dynamics: majorities facing petitions should consider early, credible offers structured to meet the O'Neill standard. Minorities should be realistic about whether continued litigation will improve on a fair offer already made.
Cost and Risk
Unfair prejudice litigation is expensive and fact-heavy. Outcomes are discretionary. Even a successful petitioner may not recover all costs, and an adverse costs order is possible if the petition is weak or continued unreasonably. The commercial question is often whether the likely remedy justifies the cost and risk of proceedings.
For Majority Shareholders and Directors
Many unfair prejudice claims arise not from the outcome but from how decisions are taken. Following proper board procedures, recording decisions, ensuring compliance with articles and shareholders' agreements, and considering whether conduct - although technically permitted - conflicts with established understandings in a quasi-partnership reduces risk.
Where relationships deteriorate, sudden exclusion from management, unexplained cessation of dividends, or opaque related-party transactions strengthen claims of unfairness. Open communication and structured negotiations often avoid litigation.
Structuring Transactions
For new investments, particularly where there will be a minority investor, clear documentation of participation rights, vetoes, exit mechanisms and valuation mechanics reduces later disputes. Aligning the articles and shareholders' agreements, defining when and how management roles can change, and establishing robust, transparent valuation mechanics for buy-outs narrows the space for arguments about legitimate expectations.
The contractual structure should reflect the commercial deal. If a minority investor will have ongoing management involvement, the documentation should say so explicitly. If dividends are the primary return mechanism, dividend policy should be addressed. Silence invites litigation.
The best unfair prejudice petitions are the ones never filed. Early advice, realistic assessment of the facts, and structured negotiation often deliver better commercial outcomes than court-imposed remedies following two years of expensive litigation. Where litigation is unavoidable, both sides should understand that the court's wide discretion cuts both ways: it can deliver creative, fair solutions, but it can also produce unexpected results that satisfy neither party fully.
About the author
Benjamin Rose, Solicitor
Commercial Litigation | Acumen Law
Brighton & Hove
Benjamin advises minority and majority shareholders on unfair prejudice petitions, quasi-partnership disputes and shareholder deadlock. He acts for both petitioners and respondents in Section 994 proceedings in the High Court and County Court.
For an initial assessment: 01273 447 065 | benjamin.rose@acumenlaw.co.uk | Book consultation
