Minority Shareholder Remedies: Unfair Prejudice vs Derivative Action

Eimear must show two elements. First, she must be a member of the company (she is a 30% shareholder). Second, she must establish that the company's affairs are being conducted in a manner that is unfairly prejudicial to the interests of members generally or to her specifically. The test is objective: the conduct must be both unfair and prejudicial. Unfairness can arise from breach of the articles, breach of fiduciary duty, or from conduct that equity would regard as contrary to good faith, especially in a quasi-partnership company. Here, the excessive salary (40% above market) may amount to extracting value to the exclusion of Eimear. The refusal to declare dividends despite €1.5 million accumulated profits, combined with the diversion of a major contract to Dermot's other company, is classic unfair prejudice. The refusal to provide management accounts may also be a breach of the statutory right to inspect records or of the duty of good faith. Eimear does not need to show that Dermot acted in bad faith; the effect on her interests is key. The court will consider the reasonable expectations of the parties, particularly in a small private company where Eimear might expect a return on her investment and to be treated fairly.

Under s.996 UK CA 2006 (Irish s.212(2)), the court has broad discretion to make any order it thinks fit to remedy the unfair prejudice. Remedies include: (i) regulating the company's affairs in the future; (ii) requiring the company to refrain from doing or continuing an act; (iii) authorising civil proceedings to be brought in the company's name (a derivative action); (iv) requiring the company to purchase the petitioner's shares; (v) requiring the majority shareholder to purchase the petitioner's shares; (vi) ordering the company to pay compensation; or (vii) ordering an account of profits. The most common remedy in a small private company is a buy-out order requiring Dermot to purchase Eimear's 30% stake at fair value. Fair value is typically determined on a pro rata basis without a minority discount, especially where the unfair prejudice has depressed the value or where the company is a quasi-partnership. The valuation date is usually the date of the petition or the date of the unfair prejudice, whichever is fairer. Eimear's concern about destroying value can be addressed by a buy-out, which allows her to exit while Dermot continues the business. Alternatively, the court could order Dermot to repay excessive salary, declare dividends, or return the diverted contract. A buy-out is likely the most appropriate given the breakdown in relations.

A derivative action is a claim brought by a shareholder on behalf of the company against a wrongdoer, typically a director, for breach of duty. Any recovery belongs to the company, not the shareholder personally. Under UK CA 2006 s.260 (Irish s.245), leave of the court is required, and the court considers factors such as whether the shareholder is acting in good faith and whether the company has decided not to pursue the claim. An unfair prejudice petition is a personal remedy for the shareholder, seeking to protect their own interests as a member; relief is personal, such as a buy-out or compensation to the petitioner. Eimear could potentially pursue both, but not simultaneously for the same loss. A derivative action could target Dermot's diversion of the contract and excessive salary as breaches of duty owed to Crystal Clear Glass. However, the derivative procedure is costly and requires court permission. The unfair prejudice petition is more flexible and can address the overall conduct. In practice, Eimear might include a derivative claim in the alternative, but the court may stay one to avoid duplication. The unfair prejudice route is usually preferred because it offers a wider range of remedies and a personal exit. Eimear should also consider a just and equitable winding-up petition under s.122(1)(g) UK Insolvency Act 1986 (Irish s.569), but that is a last resort.