Shareholder Disputes: what happens when shareholders fall out?

Disputes between company owners are not uncommon and can range from disagreements about strategy and management through to allegations of breach of fiduciary duties and breach of trust. These disputes can have serious ramifications which may threaten the financial security of your business.

The legal framework for addressing shareholder disputes in England and Wales is primarily governed by the Companies Act 2006 alongside the company’s articles of association and any Shareholder Agreement.

There are three main remedies available to you as a shareholder of a company if you think that your rights as a member have been compromised, whether that is because of money being taken such as by paying unauthorised dividends or paying excessive salary or other breaches of company duties or company mismanagement. The principal remedies are:

• Presenting an unfair prejudice petition
• Bringing a derivative claim, or
• Presenting a petition for the winding up of a company on just and equitable grounds.

• A shareholder of a company can ask the court to provide a remedy if the affairs of the company are being conducted in a manner that is unfairly prejudicial to their interests as a member: This is an ‘unfair prejudice petition.’ If the court is satisfied that the petition is well founded, it may make an order to give relief: the most common order is for the wrongdoing member to purchase the minority shareholding of the petitioner.

• A derivative claim is a claim brought by the shareholders in their own name, but on behalf of the company to seek remedy against any directors who is committing a wrongdoing against the company, such as negligence, default, breach of duty or breach of trust. This provides shareholders with a means of holding directors to account for their actions.
• A petition to wind up a company on just and equitable grounds can be brought by a shareholder or director of a company and is very much a remedy of last resort and exceptional in the context of shareholder disputes. The Court will not make a winding up order if it believes that there is some other remedy available to the petitioner.

All of the above remedies come at a cost. Shareholder disputes can not only be expensive in terms of legal fees, they can also damage the reputation and value of the company. In the first instance shareholders are encouraged to engage in direct discussions to find a mutually acceptable agreement. If this is not possible then alternative dispute resolution including mediation should be considered. It may be that a Shareholder Agreement is in place which provides a dispute resolution mechanism.

If you require advice on any of the issues raised in this article please contact Akeel Hussain, Associate, Litigation at Ware & Kay on York 01904 716000, Wetherby 01937 583210 or Malton 01653 692247 or email akeel.hussain@warekay.co.uk.