Shareholder disputes – what are your options?

A difficult economic climate can often lead to greater scrutiny by shareholders of company performance, and this may result in disputes between shareholders. This article considers the options available to individual shareholders, and in particular minority shareholders, who are unhappy with the performance of those running privately owned companies.

To identify the options available to shareholders, the parties should check the company’s articles of association and shareholders’ agreement (if there is one). Otherwise, the main remedies and options are outlined below.

Unfair prejudice petition under s 994 of the Companies Act 2006

A shareholder can petition the court for relief from unfair prejudice under s 994 where the company’s affairs are being conducted in a manner which is unfairly prejudicial to their interests.

Examples of conduct which may be unfairly prejudicial include:

• Exclusion from participation e.g., a failure to hold, or to permit participation in, meetings.
• Misappropriation of funds, assets or business opportunities, usually as a result of the directors breaching their duties to the company.
• Payment of excessive renumeration to the directors.
• Dividend issues e.g., a failure to pay dividends, or wrongful or inadequate dividends.
• Dilution of the minority’s shareholding unfairly or without commercial rationale.

If the court is satisfied that a petition under s 994 is well founded, it will make an order to remedy the unfair prejudice. Although the court can make a wide range of orders, the usual order will be to require the majority to purchase the minority’s shares for fair market value. The court, guided by expert accountancy evidence, will determine the fair market value of the shares.

Derivative claim under s 260 of the Companies Act 2006

The proper claimant where wrongs are committed against a company is the company itself. The ability to decide whether or not to sue is generally vested in the board of directors. However, where certain types of wrong are committed by the directors, e.g., a breach of the duties owed by the directors to the company, the court may permit a shareholder to pursue a derivative claim, in the company’s name, against the directors or a third party.

Petition for ‘just and equitable winding up’ under s 122(1)(g) of the Insolvency Act 1986

A shareholder may, in certain circumstances, petition the court to wind up the company on the grounds that it is just and equitable to make such an order.

Petitions will usually cite one or more of the following reasons:

• The main objects in the company’s memorandum of association cannot be achieved.
• There is deadlock in the conduct or management of the company.
• There has been mismanagement of the company.
• The shareholder has been excluded from the management of the company.

Winding up a company as a means of resolving a shareholder dispute is a draconian step. In view of this, the courts will not usually grant this remedy where there is a realistic alternative.

Injunctive relief

Occasionally, urgent action may be required to protect a shareholder’s interests. An injunction is a court order which requires a party to do something (or to stop doing something). Injunctions cannot be acquired in insolation – they are ancillary to the main claim (e.g., an unfair prejudice petition) which must be brought at the same time. They are usually a temporary measure designed to protect the shareholder pending the outcome of the main claim and are only appropriate where there is likely to be irreparable harm to the interests of the shareholder.

Out of court settlement

Like any other dispute, shareholder disputes can be resolved without the need for litigation (which can be costly and time consuming). Mediation facilitated by a third party mediator or other forms of alternative dispute resolution can be used to achieve an out of court settlement. Creative solutions which are not always available through the courts can be reached. It is also possible for business relationships to continue following a settlement – the same can rarely be said of disputes which end up in court and proceed to trial.

Key takeaways

It is always advisable to ‘fix the roof while the sun is shining’ and companies should consider from time to time whether their articles of association and shareholders’ agreement remain fit for purpose, or if there is no shareholders’ agreement, whether one should be drafted. In particular, a shareholders’ agreement should set out a dispute resolution process which the parties can follow when conflicts arise. If tensions threaten to escalate, early legal advice can help to resolve a dispute before the parties’ positions become entrenched.

Our Commercial Dispute Resolution Team has extensive experience in representing shareholders, members, directors, and companies of all sizes in relation to shareholder disputes. Please contact a member of the team if you would like to discuss any issues.