Shareholder Disputes
Our team has specialist litigation expertise and a successful track record when it comes to shareholder disputes.
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Resolving shareholder disputes
Our experts are here to help you resolve shareholder disputes successfully.
Legal disputes can be time-consuming and expensive — proving detrimental for all concerned. That's why it's in your best interests to ensure that any disputes are dealt with expediently and effectively.
There are going to be disagreements between shareholders and directors from time to time — it’s only natural. This can be a good thing for a business, as respectful and adult discussions about differences of opinion can make for a healthy, constructive debate — providing solutions to commercial problems.
However, there are occasions where disputes go much further and it becomes difficult to salvage any ongoing working relationship between shareholders. These situations can be incredibly stressful for those concerned and become extremely strategic battles where it's essential to plan carefully if a shareholder is to protect and realise the value of their shareholding.
There are laws aimed at protecting minority shareholders, which are particularly important in companies that the law regards as ‘quasi-partnerships’ (see more below).
Should it become necessary to contemplate or take court action, there are a range of court orders available to protect your interests. Alongside a knowledge of the law in this area, an appreciation of the main practicalities is essential.
Our team has specialist expertise and a successful track record when it comes to shareholder disputes. We can work with you to resolve matters as quickly and efficiently as possible.
How can I fund a shareholder dispute?
It’s always possible to find a way to fund a worthwhile case. There are a range of available funding options to support minority shareholders who have limited funds or even no funds at all.
You may think that majority shareholders who control the company (and its finances) are at a substantial advantage when facing disputes with other shareholders, as they’ll typically try to use company funds to pay their legal and professional fees.
However, in most genuine shareholder disputes, the courts won’t allow company money to be used to fund what’s essentially a personal battle. Courts recognise that companies don’t exist to solely serve majority shareholders and pay their personal costs. That’s why they’ll be willing to prevent any attempt to use company funds in a shareholder dispute — granting an injunction if necessary.
We have a strong track record in successfully supporting shareholders with a wide range of funding options. Talk to our team to find out more.
How should I prepare for a shareholder dispute?
There are a number of vital steps that you should take when entering a shareholder dispute.
Firstly, you need to secure company assets and protect them from other shareholders. This may mean double checking (or changing) the company bank mandate, for example. You should also carry out checks to ensure that company monies haven't been paid to lawyers to fund the battle ahead.
It’s key to secure access to any information or documentation that could prove vital to proving your case. Documents and files that hold this information have a habit of mysteriously ‘going missing’. You may also need to consider regulating access to the company premises to secure the information needed.
It may prove difficult to take these steps without holding a controlling majority shareholding. The real power to take these steps lies with those who control the Board of directors — so securing control of the Board will be key to taking care of the practicalities.
At the outset of a shareholder dispute, there’s often confusion over precisely which rules govern the company in question. There may also be arguments about what has gone on in the company's past. Many of the answers to these matters will be found in the company's articles of association and statutory books and records.
For director shareholders who feel aggrieved or excluded by the actions of their fellow directors, one common mistake is that they resign their directorship prematurely. While there are occasions where resignation as a director may be appropriate, in most cases it can be a serious tactical error — not least since non-directors only have limited access to company records and information.
Our team knows how to help shareholders take care of these practicalities and protect themselves and their interests whether in an expected or unexpected dispute.
How can minority shareholders win a dispute?
While there are mechanisms to protect minority shareholders in disputes, strict criteria apply — so you need to know how they work to make informed decisions. If a dispute arises between shareholders, the key factors that can decide the outcome are the articles of association and section 994 of the Companies Act.
The most relevant part of this provision states:
“A member of a company may apply to the court... for an order... 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 its members generally or of some part of its members...”
You may have trouble in understanding the legalistic manner of this provision — many lawyers do — but essentially it seeks to protect minority shareholders from wrongdoing. This applies to those with a shareholding in a company of 50% or less, in situations where the controlling stakeholders seek to act in a way that’s 'unfairly prejudicial' to their interests.
In general terms, section 994 allows minority shareholders a ‘right to complain’ to the court if majority shareholders run the company in a way that damages their position or the value of their shareholding — something that’s often done deliberately by misapplying or misusing company assets. You should know that a complaint of ‘unfairly prejudicial’ behaviour must stand up to objective analysis and can’t be ‘vague’ (for example, 'they're managing the business badly') or ‘trivial’ (for example, ‘the accounts were sent to me one day late’). Examples of 'unfairly prejudicial' conduct might include using company assets or money for the personal benefit of a shareholder, or the majority shareholders paying themselves far more than people in their position could objectively justify.
Can I challenge poor business decision-making by company directors?
It can be difficult to challenge what amounts to poor decision making by a company director. The courts are conscious that judges lack experience in running companies and often have no industry- or sector-specific knowledge relevant to the company. This means that courts are reluctant to second-guess business decisions.
However, careful analysis of poor business decisions can often reveal areas of wrongdoing where the courts will interfere and provide assistance. These areas may include, for example, illegality involved in ‘cutting corners’ or unlawful business practices, such as engaging in or encouraging bribery.
Quasi-partnership companies
Many small companies are regarded as 'quasi-partnerships' by UK law. This means that while they operate as limited companies, in practical terms they’re run as if they were a partnership between those individuals at the helm.
Generally, a quasi-partnership exists where there is at least one of the following:
- a relationship of trust and confidence between the shareholders
- an expectation that at least some will be involved in the management of the company
- restrictions on the transfer of shares.
Are additional protections available to minority shareholders in quasi-partnership companies?
Generally speaking, the courts are more willing to give certain additional rights and protections to minority shareholders in companies that qualify as quasi-partnerships.
A minority shareholder in a quasi-partnership who has been involved in the running of the business can often claim protection from being ousted or excluded without any good reason from the ongoing management of the business.
We can help you to deal with issues related to quasi-partnerships and make informed decisions when it matters most, so that you can resolve disputes as quickly and effectively as possible.
What happens when unfair prejudice can be established?
The Companies Act 2006 states that where ‘unfair prejudice' can be established, the court “may make such order as it thinks fit” — meaning that the court has wide powers to make almost any order.
As a shareholder, it’s important to know that any complaint which alleges that a minority shareholder has been 'unfairly prejudiced' is classed as a lawsuit against the other shareholders in their personal capacities. This isn’t a claim brought against the company itself. You should be aware of this when deciding to become a shareholder.
However, in the majority of cases, the court will issue an order which states that one or more of the shareholders should purchase the shareholding of the other shareholder(s). These are commonly known as ‘buy out’ orders.
Typically, the court will order the majority shareholders to purchase the shareholding of the minority shareholder(s) at a ‘fair value’.
Should a shareholder dispute go to court, you need to know what you’re facing and how these cases typically work to ensure that you can protect your commercial interests.
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