Directors' concerns: unfair prejudice and rights issues

Directors are responsible for managing the business of their company and among the difficult problems that directors face in doing so is finding a path between diverse and sometimes conflicting interests that affect the company and the people interested in it.

When exercising their powers to manage the business of the company, directors must do so in good faith in the best interests of the company and for no other purpose. In exercising their powers directors must also, however, treat fairly other persons who are affected by them. If shareholders are not treated fairly, the law gives them the remedy to apply to the court for an order that the company’s affairs are being conducted in a way that is unfairly prejudicial to the shareholders or a particular group of shareholders.

In order to demonstrate unfair prejudice, a shareholder must be able to show that the effect of the matters complained about was both unfair and caused prejudice to it. It is necessary for these purposes that there is both prejudice and unfairness: an action, such as a rights issue, may cause some damage to the interests of a shareholder or group of shareholders for example, by diluting their interest in the company but that does not justify an action for unfair prejudice unless the action was also unfair. What constitutes unfairness for these purposes is an objective test: would a reasonable observer seeing the consequences of the conduct regard it as prejudicing unfairly the interests of the person making the complaint. Correspondingly, even if there was unfairness, to justify a complaint there must also be some damage to the interests of the person making the complaint…

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