While most shareholders and lawyers are aware of derivative actions and liquidation of a company as shareholder remedies, these remedies are not always appropriate or available to shareholders:

• A derivative action is not available to a majority shareholder.
• A derivative action cannot be used by a shareholder seeking to protect their own rights, a derivative action can only be filed to address a wrong committed against the company. (See Qi Zhen Cai v Qinwen He, Xiao Hong Yu & another [2017] eKLR the court held that when a shareholder files an unfair prejudice petition they do so their capacity as member, to project their own interests).
• Liquidation is a remedy of last resort and is therefore only available where there are no other remedies available. (See Re Al Marshidy Enterprises Limited [2019] eKLR the court declined to liquidate a company as there were other remedies available to address the shareholder’s grievances).

Section 780 provides for another shareholder remedy, the unfair prejudice petition which is often forgotten but is very useful.

Who Can File an Unfair Prejudice Petition?

1. Any member of a company regardless of their shareholding;
2. Non-members to whom shares in the company have been transferred or transmitted by law. This is useful in small companies where directors of the company may exercise powers under the company’s articles of association to refuse to register a person as a member; and
3. The Attorney General who may file an unfair prejudice petition where he believes the affairs of the company are being conducted in a manner that is prejudicial to members following:

• • The receipt of an inspectors report after a court grants an application to investigate the affairs of a company;
  • The production of documents by officers of the company after a court grants an application by the Attorney General to compel officers of the company to produce the documents; or
  •  The receipt of a report by the Capital Markets Authority after an inquiry is conducted into the affairs of a company that the Capital Markets Authority regulates.

How Can You File An Unfair Prejudice Petition?

Section 780 of the Act does not set out the form the application should take. However, Tuiyott J in John Muturi Nyaga v Graham Alexander Walsh & 3 Others [2017] eKLR held that the application should be by way of a petition as provided under section 994(1) of the English Companies Act 2006. This is because it allows and provides for the substantive interrogation of the applicant’s grievances.

The filing of a plaint would also be appropriate. What an applicant should not do is to file a miscellaneous application as this does not allow for the substantive interrogation of the applicant’s grievances.

What issues Can The Remedy Address?

The remedy protects equitable expectations of shareholders. An equitable expectation is an expectation that deserves legal recognition and protection by the courts. These equitable expectations are to be found not only in the articles of association and shareholder agreements but also in informal arrangements between shareholders that are not reduced into writing. In Velani & 6 others v Naran & 2 others [2021] KEHC 75 (KLR)

“The words “oppressive “or “unfairly“ enables the court to consider wider equitable considerations and recognizes that the member have rights and expectations which are not necessarily included in the Articles of Association. For example, a member’s interest may arise out of an agreement that some or all members should participate in the management of the Company. A member’s interest is not therefore, limited to his strict legal rights, but can extend to legitimate expectations arising from the nature of the Company and agreements and understandings between the parties.”

The authors in Gower’s Principles of Modern Company Law at page 663 state as follows with regard to what conduct can amount to unfair prejudice:

“This statutory remedy is capable of ranging very widely over the conduct of corporate affairs; it can address control of both shareholders’ voting powers, director’s powers, as well as more subtle forms of unfairly prejudicial management.”

It is impossible to provide a conclusive list of all the conduct that may be unfairly prejudicial to shareholders. What must be demonstrated is that the conduct complained of is contrary to the equitable expectations of the shareholders.
Some examples of cases where an unfair prejudice petitions have been filed include:

1. Disputes over representation of shareholders on the board of directors of a company and participation in the management of the company.
2. Disputes over compensation of directors.
3. Disputes over declaration of dividends.
4. Disputes over the dealings between the company and its parent company or subsidiary.
5. Disputes over the dilution of a shareholder. (See Ruo v Muthaiga Travel Limited & 4 others [2024] KEHC 14558 (KLR)
6. Disputes over the actions of directors. (N.B. This would however require clever drafting as directors’ duties are owed to the company and not individual shareholders).

N.B. 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.

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 (See Velani & 6 others v Naran & 2 others [2021] KEHC 75 (KLR))

What Orders Can The Court Grant?

Section 782 (1) of the Act provides that the court “may make such orders in respect of the company as it considers appropriate for giving relief in respect of the matters complained of.”

The Court may make orders to:

1. Regulate the conduct of the affairs of the company.
2. 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.
3. Authorize 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.
4. Require the company not to make any, or any specified, alterations in its articles without the leave of the Court.
5. 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.

The above list is not exhaustive. The courts have wide powers to grant orders tailored to address the issues raised in the court papers.

Conclusion

Unfair prejudice petitions are a useful remedy. The wide powers of the courts to grant orders to address different issues speak further to their utility.

For further discussion on this alert or any other litigation concern, please contact us below.

Leon Ndekei

Corporate and Commercial Litigation

leon@tarraagility.com
partners@tarragility.com