UNFAIR PREJUDICE

1.1  Introduction

In the event of a dispute between a company and its shareholder(s), the shareholder(s) may approach the court with an unfair prejudice claim to protect their interests.

The legal framework for the Unfair Prejudice remedy is the Companies Act, CAP 486, Part XXIX titled ‘Protection of Members against Oppressive Conduct and Unfair Prejudice’. Section 780 titled ‘Application to Court by Company member for order under section 796’ provides;

  (1) A member of a company may apply to the Court by application for an order under section 782 on the ground—

            (a) that the company’s affairs are being or have been conducted in a manner that is oppressive or is unfairly prejudicial to the interests of members generally or of some part of its members (including the applicant); 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 oppressive or so prejudicial.

The provision goes on to provide that;

(2)       In this section, “member”, in relation to a company, includes a person who is not a member of the company but is a person to whom shares of the company—

             (a)       have been transferred; or

            (b)       have been transmitted by operation of law.

We cannot look at unfair prejudice without taking into consideration the renowned case of Velani & 6 others versus Naran & 2 others [2021] KEHC 75 (KLR) [2021] KEHC 75 (KLR). In the said case, Justice Mativo pronounced himself on the unfair prejudice as follows;

“There are two elements to the requirement of unfair prejudice, and both must be present to succeed in a claim:

            (a)        the conduct must be prejudicial in the sense of causing prejudice or harm to the relevant interest of the members or some part of the members of the company (i.e. shareholders), and,

            (b)       it must be unfair.

Fairness is judged in the context of a commercial relationship, the contractual terms of which are, in the main, set out in the Articles of Association of the company and in any shareholders’ agreement. The starting point is therefore to ask whether the conduct of which the shareholder complains is in accordance with the Articles and the powers which the shareholders have entrusted to the board. The best protection for a shareholder is appropriate protection in the articles themselves. Therefore, if the conduct is in accordance with the Articles, to which the shareholder has agreed, it will be more difficult to succeed with an unfair prejudice petition.”(Emphasis Added)

From the preceding, in considering whether to bring a claim of unfair prejudice, one should consider if the conduct complained of deviates from the Articles of Association.

Before delving into how to make an unfair prejudice claim, we will consider examples of actions that may be termed as unfair prejudice and as outlined in the case mentioned above of

Velani & 6 others versus Naran & 2 others [2021] KEHC 75 (KLR) [2021] KEHC 75 (KLR).

      “The categories of conduct which may amount to unfairly prejudicial conduct are not closed. However, common examples of what may constitute unfairly prejudicial     conduct are:

• exclusion from management in circumstances where there is a (legitimate) expectation of participation;

• the diversion of business to another company in which the majority shareholder holds an interest;

• the awarding by the majority shareholder to himself of excessive financial benefits; and

• abuses of power and breaches of the Articles of Association. For example, the passing of a special resolution to alter the Company’s Articles may be unfairly prejudicial conduct if such alterations would affect the Petitioner’s legitimate expectation that he would participate in the management of the Company. Also, repeated failures to hold AGMs; delaying accounts, and depriving the members of their right to know the state of the Company’s affairs may all be unfairly prejudicial to a member’s interests.”

We shall now consider the following;

1.2. Who may bring an unfair prejudice claim;

An unfair prejudice claim may be brought by;

•  A member of a Company;
•  A non-member within the meaning of section 780(2) outlined above;
•  The Attorney General as per section 781 of the Companies Act.

1.3 What are the remedies available;

On filing an unfair prejudice claim in court, should it be deemed that there is unfair prejudice, the court may make orders for the protection of members as per section 782 and enumerated as follows:

• If, on the hearing of an application made in relation to a company under section 780 or 781, the Court finds the grounds on which the application is made to be substantiated, it may make such orders in respect of the company as it consider appropriate for giving relief in respect of the matters complained of.

•  In making such an order, the Court may do all or any of the following:

• regulate the conduct of the affairs of the company in the future;

• require the company—
• to refrain from doing or continuing an act complained of; or
• to do an act that the applicant has complained it has omitted to do;

• authorise civil proceedings to be brought in the name and on behalf of the company by such person or persons and on such terms as the Court directs;

• require the company not to make any, or any specified, alterations in its articles without the leave of the Court;

• provide for the purchase of the shares of any members of the company by other members or by the company itself and, in the case of a purchase by the company itself, the reduction of the company’s capital accordingly.

1.4. Conclusion

Unfair prejudice is one of the legal remedies that a shareholder may invoke to protect their rights noting that the scope of actions on what constitutes unfair prejudice is wide. In addition, the remedies that are available upon filing of the suit are diverse.