Company and deals · 8 min read · 29 September 2026

Unfair prejudice: what to do before anyone mentions a section 994 petition

A minority shareholder frozen out of a private company has one statutory route with teeth, and it is expensive to run to the end. The useful work happens earlier: establishing the conduct, articulating the prejudice, and making or provoking the offer that ends it.

What section 994 provides

Section 994(1) of the Companies Act 2006 allows a member of a company to apply to the court by petition 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 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 is or would be so prejudicial. Section 994(2) extends the right to a person to whom shares have been transferred or transmitted by operation of law, which brings in executors and trustees in bankruptcy.

The two words carry separate weight. Prejudice is harm to the member's interests as a member, usually financial: the value of the shareholding, or the income from it. Unfairness is measured against what the parties agreed, in the articles, in any shareholders' agreement, and in the equitable expectations that arise in a quasi partnership company where people went into business together on the basis of mutual trust and participation. The House of Lords in O'Neill v Phillips [1999] UKHL 24 confirmed that unfairness means a breach of the terms on which the member agreed the affairs of the company would be conducted, or the use of the rules in a manner which equity would regard as contrary to good faith. A member who is simply outvoted on a matter the articles leave to the majority has not been treated unfairly.

The conduct that usually qualifies

Exclusion from management in a company where participation was the basis of the investment. Excessive remuneration to the directors who remain, so that profit reaches the majority as salary and never reaches the minority as dividend. Diversion of business or assets to another company owned by the majority. Failure to hold meetings, provide accounts or observe the articles. A rights issue designed to dilute a member who cannot afford to take it up. Each of these is documented in the same way: the agreement or expectation, the departure from it, and the financial effect on the minority.

The remedy is almost always a buyout

Section 996(1) allows the court, if satisfied that the petition is well founded, to make such order as it thinks fit for giving relief in respect of the matters complained of. Section 996(2) lists examples: regulating the future conduct of the company's affairs, requiring the company to do or refrain from an act, authorising civil proceedings in the company's name, restricting alterations to the articles, and providing for the purchase of the shares of any members by other members or by the company itself. In practice the last is the order sought in the overwhelming majority of petitions. The petitioner wants out at a fair price, and the court's role is to fix the price and the terms.

Two valuation points recur. In a quasi partnership the shares are normally valued pro rata without a minority discount, because the member is being bought out of a business they were promised a share in, not selling a parcel of shares on the open market. And the valuation date can be argued; where the unfair conduct has depressed the value, the court can take an earlier date or adjust for the conduct.

The offer that ends the case: O'Neill v Phillips

The single most important practical rule comes from the same case. Lord Hoffmann set out the terms of an offer which, if made by the majority, will normally make it unfair for the minority to continue with a petition and will expose them to costs if they do. The offer is to buy the shares at fair value, ordinarily without a minority discount in a quasi partnership; the value to be determined by an independent expert if not agreed; both sides to have equal access to the company's information; the expert's determination to be reached by a fair process; and the offer to make reasonable provision for the minority's costs, at least where the majority's conduct has already put them to expense.

This works in both directions. A majority facing a threatened petition can neutralise it by making that offer in the right form, and a minority receiving an offer that meets those terms must engage with it seriously, because refusing it and issuing anyway is the fastest route to an adverse costs order. The letter before action should therefore be written with the O'Neill offer in mind, either making it, or inviting it in terms the other side cannot afford to ignore.

The letter before action

A section 994 letter does four things. It sets out the basis on which the member joined and the terms, express and equitable, on which the company was to be run. It evidences the conduct, with dates and documents rather than characterisations. It states the prejudice in money: the dividends not paid, the value diverted, the remuneration taken. And it states the remedy sought and a deadline, which is nearly always a purchase of the shares at a fair value fixed by an agreed process. A letter that reads as a grievance is ignored. A letter that reads as the first draft of the petition, and that shows the other side what a court would see, is answered.

What to do while the letter is being written

Preserve the record. Board minutes, management accounts, bank statements you are entitled to see, emails about remuneration and the treatment of other shareholders. Exercise the rights the Companies Act gives every member: the right to receive the annual accounts, to inspect the register of members and to requisition a general meeting where the threshold is met. Refusals to comply with those rights are themselves conduct that goes into the letter. Do not resign as a director in anger; removal by the others by ordinary resolution under section 168, for which section 168(2) requires special notice given in the manner section 312 sets out, is evidence of exclusion, whereas resignation is not.

Where the petition goes if it has to be issued

An unfair prejudice petition is court litigation, usually in the Insolvency and Companies List. Conduct of that litigation and advocacy at the hearing are reserved legal activities that we do not carry out. Our role runs to the point at which the offer is made or refused: the assessment, the letter, the negotiation of the buyout and the settlement agreement that records it. Where a petition becomes necessary we hand the file to an authorised litigation team, with the letter, the evidence and the offer history already in the shape the court will need.

Three mistakes that cost minorities money

Issuing before making or inviting an O'Neill offer, and paying the majority's costs for it. Pleading every disagreement of the last five years rather than the three episodes that prove exclusion and diversion. And walking away from the register: a member who stops asking for accounts and stops attending meetings makes the majority's case that they had lost interest before they were excluded.