Shareholder disputes - the information you need

Shareholder disputes can severely impact business operations and relationships, especially in small businesses which are owner-managed with just a few shareholders. Negotiated settlements in shareholder disputes are usually preferable because they're faster and cheaper than court proceedings, allow creative solutions that courts can't order, and let parties maintain control over the outcome.

A company's articles and any shareholders' agreements should always be the starting point if a dispute arises, as these will establish what rights shareholders have, how decisions get made and ideally, a dispute resolution mechanism. Directors control day-to-day operations subject to shareholders' rights to challenge decisions.

Shareholder disputes often arise because majority shareholders can control the company through their voting power, potentially ignoring minority interests in decision-making, dividend payments, or management. Minority shareholders have very limited rights under company law and director duties are governed by guiding principles only which can result in many grey areas. In 50:50 shareholder situations, neither party can push through decisions without agreement, leading to business paralysis when shareholders fundamentally disagree.

Both scenarios can make it impossible for dissatisfied shareholders to exercise legal rights and/or exit easily since there's no ready market for minority shares or resolution mechanism for deadlock.

Underlying causes

The underlying cause of a shareholder dispute significantly influences how courts approach remedies because they distinguish between genuine unfair prejudice to minority shareholders versus legitimate commercial disagreements about business direction.

Key areas include disagreements over business growth, markets to pursue, or investment priorities. Financial Issues can include dividend policy disputes, allegations of conflict of interest or the majority shareholder not acting fairly. Another common area for shareholder/director disputes is information access denials and/or exclusion from decisions.

Legal remedies and court applications

The prospect of having to fund litigation, disclose sensitive company information, and face uncertain outcomes often motivates parties to negotiate. Additionally, courts expect parties to attempt settlement and may penalise unreasonable refusal to mediate through costs orders. This combination of financial pressure and judicial expectation often brings parties to the negotiating table. Litigation options and remedies include :-

• Unfair Prejudice (Section 994 Companies Act) - the most common and flexible remedy, requiring careful preparation and evidence:

• Just and Equitable Winding Up - a drastic remedy that courts grant sparingly, requiring evidence that working relationships are beyond repair and where there is a deadlock situation the company cannot function effectively

• Derivative Actions - highly complex and risky court application seeking court approval, firstly, to allow shareholders to pursue claims on thee company's behalf. Proof of serious wrongdoing causing company loss is required

• Injunction - application for urgent court intervention to prevent immediate harm based on clear evidence of imminent damage. Significant cost risks and liability if unsuccessful.

• A buyout - often the cleanest solution to shareholder disputes as it provides a complete break - one party exits while the other continues the business. The key issues are usually agreeing the share valuation method (particularly whether to apply a minority discount), payment terms (immediate vs instalments), and any ongoing restrictions (like non-compete clauses). While courts can order buyouts in unfair prejudice claims, parties often reach negotiated buyout agreements to avoid the cost and uncertainty of litigation.

• Negotiated enhanced protections for aggrieved minority shareholder - an alternative to a buyout is strengthening minority shareholder rights through changes to the articles or shareholders' agreement, combined with undertakings (legally binding promises) from majority shareholders about future conduct. This might include guaranteeing board representation, requiring certain decisions to need unanimous approval, ensuring information rights, or setting clear dividend policies. This can work well where the underlying business relationship is salvageable and the minority shareholder wants to stay involved rather than exit, though careful drafting is essential to make the new arrangements enforceable.

Expert evidence needed in shareholder dispute?

Expert evidence is often crucial in shareholder disputes, primarily for share valuation - an independent expert can determine fair market value, applying appropriate discounts and considering factors like loss of value from unfair conduct. Experts might also be needed for specific industry issues, accounting disputes, or assessing loss from alleged mismanagement. However, expert evidence significantly increases costs, so the scope should be carefully defined and where possible, parties should try to agree on a single joint expert.

Contact us to discuss how we can help resolve your shareholder dispute effectively.