Legal Question in Business Law in United Kingdom

Unfair Prejudice under section 459 Companies Act 1985

Problem:

A company has 5 directors, each with an equal shareholding and each initially contributing the same loan to the company. A Board meeting is held at which the following occurs:

1. Two of the Directors are removed from the board;

2. Share capital increased from �1000 to �10,000. 6000 new shares have since been issued at �20 each. The two kicked off the board cannot afford, so new shares distributed to other 3, 2000 shares each.

so basically now directors 1,2,3 have 2,200 shares, the removed directors have 200 shares.

There is an exit route - a buy out, but it is based on the above division rather than the original 200 x 5 shares allotments.

While procedurally the 3 could issue new shares, is it a ground for equitable unfair prejudice? I.e. is the offer unreasonable as the 2 directors have diluted share values?

Central point therefore: what are the limits to a claim of unfair prejudice on equitable grounds (as established by Ebrahimi case)?


Asked on 5/22/03, 11:28 am

1 Answer from Attorneys
Richard Howard Richard Howard & CO

Re: Unfair Prejudice under section 459 Companies Act 1985

The question whether a "rights issues" amounts to conduct unfairly prejudicial to those who cannot afford to take up the rights is one of fact in each case.

If it can be demonstrated objectively that the issue and dilution are for a purposes beyond raising finance that the company needs, in circumstances where the majority are excluding a minority, a petition for the minority shares to be bought at an undiluted fair value would have a reasonable prospect of success.

Without the full details of the facts it is difficult to say if a petition would definitely succeed.

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Answered on 5/22/03, 12:42 pm


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