Minority shareholders have limited, or no control of the company and their contractual rights may not adequately protect their interests against the unfair decisions made by the majority shareholders. In the event of a dispute, minority shareholders can rely on statutory protections which include the right to seek relief from unfair prejudice. Under section 994 of the Companies Act 2006, a shareholder may petition the court for an order on the ground that:

“the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of the members generally or of some part of its members (including at least [the petitioner]) or that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.”

Due to the controlling powers of the majority shareholders and other rights and remedies available to them, it is very rare for majority shareholders to have suffered prejudice. Nevertheless, there have been exceptional cases where majority shareholders have successfully pursued a claim for unfair prejudice.  

The first hurdle for the petitioner is to satisfy the test set out in section 994. Even if the unfairly prejudicial conduct is conceded or proved, there is no absolute entitlement to a remedy. The court will grant relief only if it is fair and appropriate to do so, taking into account all the relevant facts (such as the conduct of the litigants and the interests of all affected parties) as at the date of the order. In exercising its wide discretion, the court may make such order as it sees fit including an order other than that sought by the petitioner. 

In appropriate cases, the court is likely to give parties a clean break by requiring one party to purchase the other party’s shares at a fair value. It is usually the majority shareholder(s) who is required to buy out the minority shareholder so as to avoid a change of control and minimise any impact on the business. In determining the purchase price, the court may rely on expert valuation evidence, give directions as to the appropriate valuation methodology and adjust the market value of the shares and/or the date of valuation. An important consideration for the court is whether a discount – also known as minority discount – should be imposed to reflect the minority status of the shares that it orders to be purchased.  

Grounds for minority discount

The valuation of shares in privately owned companies is a difficult and uncertain exercise due to the absence of a public market, such as a stock exchange, for the shares. As a starting point the value of such shares are calculated on a pro-rata basis, representing a proportion of the total value of the company. This approach might be used to determine the price per share in an equity financing or investment round. Although that price may be a relevant consideration for the valuation, it is not considered to be the fair value of the minority shares. In the context of an unfair prejudice claim, it is only the minority shares that are being sold, not the company or its business and the buyer will not necessarily acquire the control of the company. Also the marketplace for such shares is limited to the other shareholders – the lower the level of demand, the lower the price. 

Grounds against minority discount

In exercising its unlimited powers, the court seeks to grant a remedy that is fair and proportionate in the circumstances. A remedy that is punitive or unjustly enriches one party is not considered fair or appropriate.   

If a minority discount is imposed, the minority shareholder effectively relinquishes the value that it would have received, had the company or its business been sold to a third party at some point in the future. This value is then added to the existing shareholding of the buyer, unjustly rewarding, and enriching it for its own unfairly prejudicial conduct. It is also unfair to allow such shareholder to pay a discounted price for minority shares that entitle it to receive dividends and capital distribution on a pro-rata basis. 

Furthermore, minority shares may be more valuable to an existing shareholder than to a third-party buyer as the existing shareholder may acquire full or more control following the transfer of minority shares to it. 

General approach and quantum

There is no rule of universal application for minority discounts. Each case is decided according to its own set of facts with the overriding objective to reach a valuation that is fair as between the parties. Mark Anderson QC confirmed this approach in Re C F Booth Ltd [2017] EWHC 457 (Ch), stating that “The task is to find a fair price. That may require no discount, it may require the full discount which would be expected in an arm’s length sale, or it may require something in between.”

The level of the discount to be imposed is also a matter for the court to decide on a case-by-case basis, having regard to any expert opinion and relevant factors such as any voting rights or directorship rights attached to the minority shares. 

Share valuation is generally a contentious topic. For more information on different valuation methods, please read our article on fair value in unfair prejudice claims: share valuation and minority discounts.

Our lawyers have extensive experience in advising and representing parties in unfair prejudice claims. For more information about how our team can help, get in touch or visit us at our office in Mayfair.