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March 9, 2018
Shareholder disputes – FAQs

Shareholder disputes – FAQs

I’m a minority shareholder in a company. It is being run in a way that is unfair to me. Perhaps I’ve been excluded from management. Maybe business has been diverted to another company. Or my co-director is receiving an excessive salary. What are my shareholder’s rights?  

These are the kind of problems that often arise within “quasi-partnership companies”. These are small, unlisted companies that are like partnerships, with few members and few directors. Our team of commercial barristers have a wealth of experience in dealing with these kinds of issues and can help if you feel you have been a victim of unfair dealings.   

What is the process and who can apply 

Unfair prejudice is assessed using an objective test. A staring point is whether the Articles of Association and any shareholder agreement have been complied with. The procedure is that the member files a petition to the court under section 996 of the Companies Act 2006 and a detailed witness statement which includes all the necessary formal information about the company as well as full evidence about the unfairly prejudicial acts. The Companies (Unfair Prejudice Applications) Proceedings Rules 2009 can be found here and the form the petition takes is shown in the Schedule. Formal information about the company can often be found free of charge at Companies House.   

When it comes to dealing with a claim of unfair prejudice, Section 994 of the Companies Act 2006 gives a special remedy to: 

[1] a “member”, that is, a shareholder who has been usually, not always, registered, 

[2] of a company  being run, or will be run, in a way that is “unfairly prejudicial 

[3] to the interests of himself or herself [and perhaps other members too]. 

So to be clear, this procedure cannot be used by a director who is not a shareholder.  

What resolutions are available?  

This process is time consuming. A court fee, currently £280, is payable in the High Court. At this point, before or after the first hearing, the legal proceedings are often adjourned to give the parties an opportunity to resolve their differences. This is usually achieved by mediation or another method of ADR [Alternative Dispute Resolution]. Everyone has an incentive to sort out the dispute by consent because an actual trial of a petition involves a great deal of preparatory legal work including service of points of claim and points of defence. It is time consuming and expensive. If a trial cannot be avoided, the judge has the widest discretion to impose a suitable solution, which is often (if the prejudice is substantial and there is deadlock) achieved by the compulsory buy-out of the minority shareholding according to a prescribed valuation process. If the company is profitable it is in no-one’s interest to wind it up. 

I would like to begin the process – how do I start?  

The best place to start is usually to have a conference with one of our barristers in which we can discuss what has gone wrong and what the solutions might be. That might be followed up with a letter drafted by the barrister to the majority shareholder explaining what they need to do if a petition is to be avoided. If court proceedings are unavoidable we can draft all the documents and represent you in court. 

To instruct a member of our experienced legal team, first read our simple step-by-step guide, then get in touch with the clerks in our central Brighton office who will be able to advise you on what to do next. 

By Paul Ashwell | Contracts and Debt Recovery