A shareholder dispute typically begins with a deterioration in relations between the parties before it becomes a dispute in the strict legal sense. The position taken in the early stages – when the parties are still communicating and before any formal step has been taken – often has a disproportionate effect on the eventual outcome.
A measured, evidence-led approach in those early stages preserves the broadest range of commercial and legal options. A reactive or escalatory approach narrows them.
In this article, Lauryn Wheat sets out the principal considerations for shareholders and directors who find themselves in dispute, and the procedural framework that applies in England and Wales.
The constitutional documents
The first step in any shareholder dispute is a careful review of the company’s constitutional documents. The articles of association set out the rules governing the management of the company, including the procedure for board meetings, general meetings, share transfers, dividend policy and the rights attaching to different classes of share. A shareholders’ agreement, where one is in place, supplements the articles and typically contains additional provisions on matters reserved to shareholders, deadlock resolution, transfer restrictions, drag-along and tag-along rights and pre-emption provisions on the issue or transfer of shares.
The constitutional position is the starting point for any analysis of the dispute. A shareholder may have rights under the articles or the shareholders’ agreement that materially change the parties’ relative positions, and which may dictate the procedure that must be followed before any external remedy is pursued.
Statutory rights
In addition to the contractual rights set out in the articles and the shareholders’ agreement, shareholders have a number of statutory rights under the Companies Act 2006. Shareholders are entitled to inspect the register of members under section 116, to receive notice of and attend general meetings, and to call a general meeting in certain circumstances under section 303. Holders of at least 5 per cent of the company’s voting rights may require the company to circulate a written statement under section 314.
The Act also imposes statutory duties on directors, including the duty to act within powers (section 171), to promote the success of the company (section 172), to exercise independent judgement (section 173), and to avoid conflicts of interest (section 175). Breach of those duties may give rise to a derivative claim brought on behalf of the company against the directors concerned, under sections 260 to 264.
Unfair prejudice
The principal statutory remedy available to a minority shareholder who considers that the company’s affairs are being conducted in a manner unfairly prejudicial to their interests is the unfair prejudice petition under section 994 of the Companies Act 2006. The court has broad discretion to make such order as it thinks fit, including ordering the purchase of the petitioner’s shares by the other shareholders or the company.
The conduct relied on as unfairly prejudicial varies considerably. It may include the exclusion of a shareholder from the management of a quasi-partnership company, the diversion of business opportunities away from the company, the payment of excessive remuneration to controlling shareholders, or the failure to pay dividends in circumstances where the company has sufficient distributable reserves.
Just and equitable winding up
In a narrower range of circumstances, a shareholder may petition for the winding up of the company on the just and equitable ground under section 122(1)(g) of the Insolvency Act 1986. The remedy is most often available where the relationship between the shareholders has broken down irretrievably in a quasi-partnership context, where the substratum of the company has gone, or where the conduct of the controlling shareholders is such that the company cannot continue. Just and equitable winding up is typically pursued as an alternative to an unfair prejudice petition.
The early-stage decisions
In the period before any formal step is taken, the shareholder in dispute should consider their objectives carefully. A buyout at a fair valuation, a change in the company’s governance, the removal of a director, or the exit of the other shareholder are all potential outcomes, and each engages a different set of legal and commercial considerations. Without prejudice communications, early-stage negotiation, and mediation often resolve disputes that would otherwise have proceeded to a petition, and at considerably lower cost and disruption.
Documentary preservation also matters from an early stage. Board minutes, financial records, email correspondence, and contemporaneous notes of meetings and conversations may all become evidence at a later point, and a structured approach to record-keeping is established from the outset.
Speak to Ai Law
Ai Law acts for shareholders, directors, and companies in the resolution of shareholder and partnership disputes. Our dispute resolution team advises on the constitutional position, the statutory remedies available, and the negotiation and procedural strategies appropriate to each case.
Our starting point, wherever possible, is a pragmatic one. Shareholder disputes are often resolved by a sensible conversation between the parties, and a resolution reached early can save considerable time, cost and personal strain on all sides. We look first for a practical, commercial solution, and advise on the formal remedies where that proves necessary.
To discuss a shareholder dispute, please contact a member of our team.
This does not consist of legal advice and cannot be relied upon. If you need advice please contact us and we will be happy to help.