Most shareholder relationships are structured around formal documents – articles of association and shareholders’ agreements – which define the parties’ rights and obligations. However, in certain circumstances, the courts may recognise that the legitimate expectations of a shareholder may qualify the strict exercise of those rights. 

This typically arises in the context of small private companies operating on the basis of informal understandings that are not fully captured in writing, often built on close family, personal or social relationships. Such companies are frequently run in a manner akin to partnerships – commonly referred to as quasi-partnerships. In such circumstances, the court may look beyond strict legal rights and consider whether the conduct of the majority is unfairly prejudicial by frustrating the legitimate expectations of a minority shareholder. 

Legitimate expectations in unfair prejudice claims

The concept of legitimate expectations is central to many unfair prejudice claims, particularly in the context of quasi-partnership companies. The court’s task is to determine what is fair between the parties, having regard not only to their strict legal rights but also to equitable considerations arising from the parties’ relationship, including the understandings on which they entered into the venture.  

In such cases, the court may recognise equitable constraints arising from a relationship of mutual trust and confidence, even if that understanding is not reflected in the company’s formal constitutional documents. 

When legitimate expectations are frustrated

A common example of conduct giving rise to unfair prejudice is exclusion from management. A shareholder who invested on the understanding that they would be involved in running the business may find themselves removed as a director or sidelined from decision-making. Even if the company’s articles technically permit such action, it may still amount to unfair prejudice if it breaches the basis on which the parties agreed to work together. 

Similarly, expectations may arise in relation to access to information, participation in key decisions, or the distribution of profits. Where those expectations are fundamental to the relationship, their frustration may give rise to a claim. The focus is therefore on whether the conduct complained of is unfairly prejudicial, assessed by reference to both the company’s constitution and any equitable constraints arising from the parties’ relationship, rather than on a purely formal application of legal rights. 

Which expectations are not protected?

Importantly, not every expectation will be protected. The court will distinguish between mere subjective hopes or aspirations and those expectations which are sufficiently clear, mutually understood and form part of the basis upon which the parties agreed that the affairs of the company should be conducted. The court will not uphold alleged expectations which lack sufficient clarity, are not mutually understood, or are inconsistent with the parties’ formal agreements. 

Impact on remedies

The existence of legitimate expectations can have a direct impact on the remedy granted by the court. In particular, where the relationship resembles a quasi-partnership and a shareholder has been excluded from management, the court will often order a buy-out of the petitioner’s shares without applying a minority discount. 

This reflects the principle that a shareholder should not be forced out of a relationship of trust and confidence at a discounted value as a result of the majority’s conduct. 

Managing the risk

For majority shareholders and directors, the key risk lies in assuming that compliance with the company’s formal documents is sufficient. In practice, the court will look more broadly at how the relationship has operated over time. 

For minority shareholders, understanding the scope of legitimate expectations – and the point at which they have been frustrated – can be critical in identifying whether a claim may arise. 

Legitimate expectations provide a mechanism through which the court can ensure that shareholders are treated fairly, even where the strict legal position suggests otherwise. However, clear documentation remains essential and should be supported by consistent conduct and transparent communication. Where expectations evolve, they should, where possible, be formalised to reduce the risk of dispute. 

At Maybrook Law, we advise on all aspects of shareholder disputes, including unfair prejudice petitions, working closely with valuation experts to ensure that legal strategy and financial analysis are aligned to achieve outcomes that protect value and withstand scrutiny. If you are dealing with a shareholder dispute – or anticipating one – or would like to discuss any of the issues raised in this article, we would be pleased to advise on your position. 

Our insights, articles and guides do not, and are not intended to, constitute legal advice or be an exhaustive review of all legal developments. Although every effort is made to ensure that the information provided in this article is accurate as of the publication date, please be aware that this is area of law may be subject to change. Please seek legal advice before applying the information provided to any specific circumstances, transactions or legal issues.