Shareholder disputes – what are your options?

As with most things, there are numerous ways in which a dispute can arise. A shareholder dispute would ideally be resolved via shareholders meetings and in accordance with a well-drafted shareholders agreement and/or articles of association. However, where resolution is not possible, it is important to understand what your options are and to act in a manner which benefits your chosen course of action.

There are two types of shareholders:

• Minority shareholders (members holding less than 50% of the shares in a company with voting rights); and
• Majority shareholders (members holding more than 50% of the shares in a company with voting rights).

Unfair prejudice proceedings

Where a minority shareholder alleges that the affairs of the company have or are being conducted in a manner which is said to cause their interests to be unfairly prejudiced, that shareholder is able to pursue a petition under section 994 of the Companies Act 2006 (CA). The usual remedy is for the court to order that the majority shareholders purchase the minority shareholders shareholding at market value, adjusted to take into account any wrongdoing/deductions. To ascertain the market value, the parties are likely to require the assistance of a forensic accountant. Where a market value is not agreed, the court has the power to determine the same based upon the evidence disclosed during the proceedings.

Derivative proceedings

It is possible for shareholders to pursue a derivative claim under section 260 of the CA on behalf of the company itself. This will require the relevant shareholder(s) to “step into the shoes” of the company and the court’s permission will be required in this regard. Claims of this nature are often pursued in relation to allegations that a director of the company has breached its fiduciary duties, e.g. to act in good faith and in the best interests of the company. A court is not likely to permit any claim under section 260 to proceed where it is not in the best interests of the company.

Winding up petition

It is possible to present a winding up petition on just and equitable grounds pursuant to section 122(1)(g) of the Insolvency Act 1986. The circumstances, although not exhaustive, which mean such a petition could be presented include:

• Loss of substratum rendering the purpose for which the company was incorporated impossible
• Justifiable loss of confidence due to serious mismanagement
• Functional deadlocks which were not contemplated at incorporation
• Irretrievable breakdown in trust and confidence
• Exclusion from management in the context of a quasi-partnership.

A successful petition will result in the company being wound up however, a court will only grant relief of this nature if there is a tangible benefit to the petitioner and where the petitioner has not unreasonably refused an alternative remedy.

Alternative dispute resolution (ADR)

Parties can engage in ADR in an attempt to settle any dispute and this is encouraged by the Civil Procedure Rules which governs civil proceedings in England and Wales. ADR is often more cost effective, proportionate and expeditious however, in order to be in a position to properly negotiate any settlement, the parties will likely require the assistance of a forensic accountant to value the shareholding in the first instance.