Shareholder disputes will almost always involve minority shareholders. A minority shareholder is a member of the company who owns less than 51% of the company’s shares so disputes, may arise as they generally do not have control over the company’s decisions or the power to resolve issues. There are a number of options available to shareholders in this position which are discussed below:

Unfair prejudice petitions

Under section 994 of the Companies Act 2006 (‘CA 2006’), a member of a company has the right to petition for relief against unfair prejudice where either:

• The affairs of the company are being, or have been, conducted in a way that is unfairly prejudicial to the interests of members generally, or part of a company’s members, in their capacity as a member; or
• An actual or proposed act or omission of the company is or would be prejudicial.

The unfairly prejudicial conduct must be conduct in respect of “the company’s affairs” and a petition may be presented on the basis of a single act or omission and in respect of proposed acts or omissions.

Prejudice and unfairness must both be demonstrated for relief to be granted. If the economic value of a member’s shares has significantly decreased or been put at risk of decreasing by the conduct complained of, this will clearly show prejudice, but prejudice is not confined to these circumstances. Unfairness will be approached objectively by the court, with the starting point being the basis upon which the member who is petitioning agreed to become a member of the company.

As suggested by the name, an unfair prejudice petition may be an appropriate route for a shareholder to follow where they have suffered unfairly prejudicial conduct. Examples of this may include:

• Breaches of fiduciary duty by the directors of the company;
• Serious mismanagement with regards to the scale of financial loss suffered and the frequency and duration of the relevant acts and omissions;
• Improper failures to pay dividends;
• Improper payments of excessive remuneration; and
• Breaches of the company’s articles of association or shareholders’ agreements.

In terms of possible remedies for the shareholder, if the court finds that the conduct complained of was unfairly prejudicial, under section 996(2) CA 2006 the court may:

• Regulate the conduct of the company’s affairs in the future;
• Require the company to refrain from an act complained of;
• Prohibit changes to the company’s articles without permission from the court;
• Provide for the purchase of the shares of a member of the company by other members or by the company itself; and/or
• Authorise civil proceedings to be brought in the name and on behalf of the company (even where the requirements for bringing a derivative claim cannot be met).

Statutory derivative claims (SDCs)

An SDC may be brought by a member of a company in their own name on behalf of the company under Part 11 CA 2006, in respect of certain specified types of wrong committed by company directors. SDCs may also be brought pursuant to an order of the court in unfair prejudice proceedings.

SDCs may only be brought in respect of a cause of action arising from an actual or proposed act or omission involving a director of the company doing any of the following listed in section 260(3) CA 2006:

• Negligence;
• Default- a failure to conduct oneself properly as a company director in discharge their of Companies Act obligations;
• Breach of duty- likely extends to a breach of duty pursuant to a contract as well as to breach of a fiduciary duty or tortious duty; or
• Breach of trust.

Permission from the court is not required to bring an SDC but will be required to continue an SDC.

It may be appropriate to bring a derivative claim where a director has breached one of the director’s duties. Alternatively, an SDC may be brought in pursuance of an order of the court in unfair prejudice proceedings.

Overlap between unfair prejudice petitions and SDCs

The need to obtain leave of the court to continue an SDC can sometimes make an SDC a less attractive route for shareholders when compared to an unfair prejudice petition. Furthermore, an unfair prejudice claim can, in some circumstances, give a result in favour of the shareholder and/or the company. This kind of unfair prejudice claim should only be made in rare and exceptional circumstances (Re Chime Corp Ltd (2004)). However, some shareholders may try to bring unfair prejudice petitions for matters that should really be dealt with as derivative claims.

As discussed in our January case digest (Unfair prejudice petitions: compensation for shareholders and companies?), the case of Ntzegkoutanis v Kimionis [2023] clarified when a shareholder bringing an unfair prejudice claim may also claim relief for loss suffered by the company in the same proceedings.

The court held that where the relief sought in an unfair prejudice petition is exclusively in favour of the company and where there is no mention of a genuine claim for relief in favour of the shareholder, the petition will likely be struck out as an abuse of process. In these circumstances, the appropriate remedy is a derivative claim.

Presentation of a petition for the winding up of the company on the just and equitable ground

Petitioning to wind up a company on the just and equitable ground is exceptional in the context of shareholder’s disputes and should be a remedy of last resort. The court will not order for a company to be wound up if they are of the belief that an alternative remedy is available to the shareholder.

Under section 122(1)(g) Insolvency Act 1986, members of a company may petition for the compulsory winding up of the company on the ground that it would be just and equitable to do so.

Some common grounds that petitions of this kind rely upon include (but are not restricted to):

• Loss of substratum, meaning that the main purpose of the company has been fully achieved or may no longer be pursued;
• Breakdown or trust and confidence leading to deadlock;
• Justifiable loss of confidence due to mismanagement;
• Irretrievable breakdown in trust and confidence at a quasi partnership company; and
• Exclusion from management of a quasi partnership company

The court will not order the winding up of a company unless the petitioning shareholder can demonstrate that a tangible benefit will be derived from the winding up. For example, a shareholder could demonstrate that there will be a surplus or some other tangible benefit and the onus will be on them to show this.

If the shareholder fails to show any tangible benefit that will be derived from the winding up, the petition will usually be struck out. This is unless this inability to show a tangible benefit is the result of:

• The company’s failure to provide accounts to which all shareholders are entitled; or
• In a quasi-partnership company, a petitioner being denied further information about the company’s affairs.

An emerging cause of action?

The recent Privy Council decision in Tianrui (International) Holding Co Ltd v China Shanshui Cement Group Ltd (14 November 2024) discussed the possibility of a shareholder bringing a personal claim against a company.

This case was a Privy Council decision in the Cayman Islands, which despite not being binding in English and Welsh Law, is still persuasive and may be welcomed by shareholders facing majority oppression and unfair prejudice in England and Wales.

The Privy Council confirmed that where shares have been allotted for an improper purpose, a shareholder whose personal rights are adversely affected can bring a personal claim against the company (notwithstanding the fact that directors’ fiduciary duties are owed to the company).

The Court also confirmed that the right to bring a personal claim exists irrespective of whether the shareholder has a minority or majority shareholding, and that the shareholder may also have redress by a derivative action.

The Cayman Islands is an unusual common law jurisdiction as there is no statutory remedy for unfair prejudice or oppression, so shareholder disputes there are usually resolved by winding up on just and equitable grounds or by derivative actions.

It will be interesting to see how this case could potentially impact decisions outside of the Cayman Islands.

Conclusion

Legal disputes are usually very stressful, particularly with the added complication of that dispute being with a fellow shareholder. However, as outlined in this guide, shareholders, whether minority or majority, have several options open to them should they find themselves involved in a dispute.

If you are a shareholder and find yourself in such a situation, you should always seek independent professional advice as soon as possible to protect your position. If you have any queries regarding a possible or ongoing dispute, do not hesitate to reach out to Geldards’ expert dispute resolution teams.