Unfair prejudice typically refers to situations where the actions of a company, its directors, or its majority shareholders are detrimental to the interests of a minority shareholder. If a shareholder considers it is being unfairly prejudiced, they can turn to sections 994-996 of the Companies Act 2006 and initiate an unfair prejudice petition.
Common remedies include ordering the majority shareholders to purchase the minority shareholder’s shares or other appropriate relief which could, if appropriate and in the best interests of the affected shareholder(s), involve asking the Court to wind up the company.
Recent case law of unfair prejudice
In the recent case of Garofalo v Crisp and others [2024], Mr Garofalo issued an unfair prejudice petition in the High Court. As part of his petition, Mr Garofalo sought the immediate removal of Mr Crisp as a director. Mr Garofalo’s petition was successful, and the High Court granted relief after finding that Mr Crisp had knowingly caused the company to breach sanctions imposed by The Russian (Sanctions) (EU Exit) Regulations 2019 by exporting products to Russia.
Background
Both Mr Garofalo and Mr Crisp were shareholders in a number of companies that were part of a wider group of companies engaged in the manufacture, distribution and sale of perfume.
Following the Russian invasion of Ukraine the two parties agreed to cease the supply of perfume products to Russia. However, in June 2023 Mr Garofalo became aware that products were still being sold.
Prior to issuing the petition, Mr Garofalo sought an ex parte injunction seeking to remove Mr Crisp as a director and the installation of new directors chosen by Mr Garofalo. Whilst the courts are usually reluctant to intervene and provide interim relief where an issue arises regarding the internal management of a company, the High Court on this occasion found that the actions of Mr Crisp were sufficiently serious to warrant interim injunctive relief removing him as a director.
The decision
The High Court ordered that the change of management should remain in place until trial or further order. The Court held that its powers to remove a director from the board arises under s.37 of the Senior Courts Act 1981.
The Court was satisfied that, at trial, a judge would likely order:
1) The removal of Mr Crisp from the board;
2) His replacement by directors selected by Mr Garofalo; and
3) The sale of Mr Crisp’s interests in the companies to Mr Garofalo.
What does this case mean?
This case highlights the Court’s powers to remove directors by way of interim relief in exceptional circumstances. It also serves as a critical reminder of the high standards directors must meet to ensure they are at all times acting in the best interests of the company and its shareholders.
If you wish to discuss anything covered in this article, please contact our Commercial Dispute Resolution team.
This article was written by Richard Slater, partner and Christopher Jackson, paralegal, in our Commercial Dispute Resolution team.