Shareholder disputes: key issues, remedies and funding options

Shareholder disputes can be highly disruptive, particularly in owner-managed businesses where personal relationships, management control and financial interests are closely connected. Damian Carter outlines the common issues that can give rise to disputes, the legal remedies that may be available and how litigation funding can be used effectively in such disputes.

Common causes of shareholder disputes

Exclusion from decision making

A majority shareholder may exclude a minority shareholder from important decisions about the direction of the business, including by failing to hold formal board meetings or provide proper management accounts and financial information.

Dilution of shareholding

New shares may be issued in a way that dilutes a minority shareholder’s interest or alters the balance of control within the company.

Dividend payments, director remuneration and expenses 

Disputes can arise where dividends are not paid, or where directors and majority shareholders approve remuneration or expenses that appear disproportionate to market norms, company performance or the parties’ agreed expectations.

Breaches of fiduciary and directors’ duties or conflicts of interest

Concerns may arise where a director is alleged to have misappropriated company assets, diverted business opportunities or acted in the interests of a competing business in which they have a financial interest.

Deadlock

Where shares are held on a 50:50 basis, disagreements between shareholders can lead to deadlock in decision-making and may significantly damage shareholder value.

How can shareholder disputes be resolved?

Business separation and exit strategies

A negotiated shareholder exit, share sale or share buy-back may preserve business value and avoid the cost and disruption of litigation. Where agreement cannot be reached, formal legal remedies may need to be considered.

Unfair prejudice petitions 

If a shareholder has been treated unfairly, they may have an unfair prejudice claim against the company and the other shareholders. These claims are governed by section 994 of the Companies Act 2006, which allows a member of a company to apply to the court where the company’s affairs are being, or have been, conducted in a manner that is unfairly prejudicial to the interests of members generally or some of them. If the dispute is not resolved before trial, the court may order the majority shareholder to buy out the minority shareholder’s shares, usually based on a fair independent valuation.

Derivative actions

In certain circumstances, minority shareholders may seek permission from the court to bring a claim on behalf of the company against a director who has breached their duties, with the aim of recovering losses suffered by the company.

Just and equitable winding up 

Where the relationship between the owners of the business has irretrievably broken down and there is no realistic prospect of a buy-out or other commercial solution, a shareholder may petition the court for the company to be wound up on just and equitable grounds. This is generally a remedy of last resort because it may destroy business value.

Mediation 

Mediation can be an effective way to resolve shareholder disputes and may be used either before proceedings are issued or alongside a court process. It can help parties explore commercial solutions, including share transfers, management changes or revised governance arrangements.

Practical steps to consider

• Review the company’s articles of association, any shareholders’ agreement and relevant board or shareholder minutes.

• Preserve financial records, management information, correspondence and evidence of key decisions.

• Consider whether urgent steps are needed to protect company assets or prevent further prejudice.

• Explore negotiation or mediation at an early stage where a commercial outcome may be achievable.

• Take advice before issuing proceedings, particularly where valuation, funding and adverse costs exposure may be relevant.

How can litigation funding help?

If a lack of funding is preventing you from exploring a potential unfair prejudice claim, third-party litigation funding may provide a way to finance a claim using funds provided by an external funder. Funding is typically non-recourse, meaning the funder is repaid only if the claim succeeds, usually by receiving an agreed return from the proceeds recovered.

“Enable” is a bespoke all-in-one litigation funding product developed by Weightmans in conjunction with a broker, funder and insurer. It is designed to help mitigate the cost risks of litigation for commercial claims requiring both litigation funding and adverse costs cover.