Unfair prejudice, Section 994 Petitions and forensic accountants

What is Unfair Prejudice and a Section 994 Petition

Unfair prejudice occurs when the rights of shareholders in a company are violated or when their interests are harmed. This could include instances where minority shareholders are treated unfairly, excluded from decisions, denied information, or where the majority shareholders act in a manner that undermines the rights of minority shareholders.

A Section 994 petition is a legal recourse available to shareholders who believe they have suffered unfair prejudice. This provision empowers shareholders, typically minority shareholders, to petition the Court for relief if they feel that the company's affairs have been conducted in a manner that is unfairly prejudicial to their interests.

The Role of a Forensic Accountant

The most common remedy of a successful Section 994 Petition is for the Court to order that the majority shareholders buy the Petitioners' shares in the company. Furthermore, if the conduct complained of has adversely impacted the value of the company, the Court may order that the minority shareholding is purchased at a price that reflects the value of the company had the conduct complained of not occurred.

Therefore, instructing a forensic accountant to consider the company's value is imperative. A forensic accountant will contribute in the following ways:

1. Investigative Role

While a skeleton claim detailing the conduct complained of may have been put together before the instruction of a forensic accountant, forensic accountants delve into the company's financial records and identify anomalies/discrepancies that may have previously gone unnoticed. These issues may significantly impact the potential settlement of a case and/or the company’s value.

2. Valuation Impact

Often, the conduct complained of will impact the company's value. For example, if company funds have illegitimately been used to meet personal expenditure. However, there are also times when the conduct complained of will not impact the company's value. For example, suppose the company funds used to meet the personal expenditure are recorded in a director's loan account as owed to the company. In that case, there will be no impact on the company’s value.

Therefore, a forensic accountant will consider the conduct complained of and assess their impact on the company’s value.

3. Value the business

Forensic Accountants prepare a detailed CPR-compliant valuation report, including considerations of the conduct complained of. Further consideration will be given as to the appropriate discount that should be applied to the minority shareholding, including whether, in their eyes, the company demonstrates many of the attributes of a quasi-partnership.

Other factors will also play a part in an appropriate discount, such as the spread of shares between the remaining shareholders, the shareholders' management power, and the shareholding the majority shareholder will have once the minority shareholding is purchased.

If you would like to discuss an unfair prejudice matter/S994 Petition, George Horley and Jeremy Rowe, directors of Pierce Forensic Limited, are experienced forensic accountants here to assist. Please contact on 01254 688 100.