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Shareholder disputes

When the business relationship has broken down.

People rarely go into business together expecting to end up in a dispute.

By the time advice is sought, trust may already have disappeared. There may be arguments over money, control, access to information, directors' decisions, dividends, the value of shares or what one shareholder is entitled to do next.

My starting point is not automatically to threaten proceedings. It is to understand the company documents, what has actually happened, where the leverage lies and what outcome the client really wants.

Where problems arise

Common issues include:

  • one shareholder being excluded from management;
  • disagreements over dividends or company money;
  • alleged breaches of directors' duties;
  • failures to provide information;
  • breaches of a shareholders' agreement;
  • disputes under the articles of association;
  • dilution of a shareholding;
  • diversion of business or opportunities;
  • deadlock;
  • disagreements about whether somebody should leave;
  • disputes over the value of shares; and
  • the complete breakdown of the relationship between business owners.

The documents I want to see

I would usually start with the shareholders' agreement, articles of association and Companies House records, together with the documents showing what actually happened — board papers, accounts, management information, investment agreements, emails, messages and any documents recording what the parties originally agreed.

Possible routes

The right route depends on the facts.

It may involve negotiation, mediation, an agreed buyout or exit, valuation of the shares, enforcement of contractual rights or a formal legal remedy.

In appropriate cases the legal issues may include unfair prejudice under section 994 of the Companies Act 2006, directors' duties, derivative claims or winding-up remedies.

RWS does not conduct litigation. Where court proceedings or another reserved legal step is required, that work must be undertaken by the client where permitted or by an appropriately authorised practitioner. Any proposed work alongside an existing legal team must be assessed before it begins.

Before confronting the other shareholder

It is usually sensible to preserve the documents and understand the company's contractual and constitutional position first.

An allegation made too early can harden positions, disclose a strategy before the evidence has been considered or create a further dispute.

Questions I am often asked about shareholder disputes

  • My first instinct would usually be not to send an angry letter.

    Before anybody commits to a position, I want to understand the ownership structure, the articles of association, any shareholders’ agreement and what has actually happened in practice.

    I would usually want the relevant Companies House material, board or shareholder documents, recent financial information and the important emails, WhatsApp messages or other communications.

    I would also want to know what the client actually wants. Keeping the shares, leaving the business, buying the other shareholder out, being bought out, recovering money and restoring a working relationship all require different strategies.

    The legal rights matter, but so does the commercial end point.

  • Section 994 of the Companies Act 2006 allows a member of a company to ask the court for relief where the company’s affairs are being conducted, or an act or proposed act is taking place, in a way which is unfairly prejudicial to members’ interests.

    That sounds broad, but not every disagreement between shareholders amounts to unfair prejudice.

    The court will look closely at the company’s constitutional documents, any shareholders’ agreement, the parties’ relationship and the conduct complained of.

    Examples which may require investigation include exclusion from management in an appropriate case, misuse of company assets, diversion of business, breaches of a shareholders’ agreement or directors’ duties, improper dilution and financial conduct which disadvantages one shareholder.

    A successful petition can lead to a range of remedies. A purchase of one shareholder’s shares is a common outcome, but it should never be assumed at the outset that a particular remedy or valuation will follow.

  • There is no automatic right simply because a shareholder wants to leave.

    There may be contractual rights in the articles or shareholders’ agreement. The parties may also negotiate a voluntary purchase.

    Where unfair prejudice is established, the court has wide powers under the Companies Act 2006 and a share purchase is a common form of relief.

    The important point is not to assume that the argument ends once somebody says ‘buy me out’. The basis of the claim, the valuation date, the valuation methodology and the terms on which an exit occurs can become major disputes in their own right.

  • There is no single formula which can safely be applied to every shareholder dispute.

    The company itself needs to be valued, but there may then be arguments about the appropriate valuation date, the financial information to be used, whether particular transactions affected value and whether any discount should apply.

    Expert valuation evidence may ultimately be required.

    For that reason I would usually avoid negotiating an exit figure in isolation from the legal and factual position. The basis on which the shares are being bought and sold can be just as important as the headline number.

  • The first step is to establish the evidence rather than make an allegation which cannot yet be proved.

    I would want to understand the transactions, who authorised them, what the company records show, what explanation has been given and whether the conduct potentially engages directors’ duties or other rights.

    In some situations a derivative claim may be relevant. A derivative claim is different from a personal shareholder claim because it concerns a cause of action belonging to the company and relief sought on its behalf.

    If assets are genuinely at immediate risk, urgent protective action may also need to be considered. Any reserved court application would need to be handled by the client where permitted or by an appropriately authorised practitioner.

  • Sometimes that is sensible. Sometimes it is exactly the wrong first move.

    Before a confrontation I normally want to know what the documents say, what evidence already exists and whether taking a particular position may trigger contractual rights, a board response, a transfer mechanism or litigation.

    There is also a practical point. Once serious allegations are exchanged it becomes much harder to move backwards.

    A short period spent understanding the position can be more valuable than sending the first aggressive letter.

  • Yes, and many are.

    A negotiated sale or purchase of shares, changes to management arrangements, an agreed valuation process, mediation or a wider commercial settlement may resolve the underlying problem without a final court determination.

    That does not mean being soft on the legal position. Good settlement negotiations usually work best when each party understands the strength of its legal and evidential position.

    I would normally consider both routes in parallel: what leverage exists if the matter has to be fought, and whether there is a sensible route to an agreed commercial outcome.

  • Yes.

    There are cases where a client does not want to change legal teams but wants another experienced person to review the documents, test the strategy, look at the evidence or consider whether a proposed course is proportionate.

    RWS can be instructed for that defined purpose.

    The objective is not to criticise an existing legal team for the sake of it. Sometimes an independent review confirms that the existing approach is right. Sometimes it identifies another issue worth considering.

Legal framework: Companies Act 2006, section 260 and sections 994–996.

Is RWS the right fit for a shareholder dispute?

RWS may be a good fit where you want an experienced independent view of the dispute before deciding what to do next.

That can include reviewing the shareholders’ agreement and articles, analysing the evidence, working through possible exit or settlement options, helping formulate a strategy, preparing non-reserved correspondence or providing a second opinion on a matter which is already being handled by solicitors.

It can also make sense where you want Ryan involved personally rather than instructing another full litigation team simply to carry out a defined piece of work.

When another legal provider will be needed

If you need somebody to issue and conduct court proceedings on your behalf, go on the court record, exercise rights of audience or undertake another reserved legal activity, RWS cannot provide that service.

A shareholder dispute may also require urgent court relief. If, for example, there is a genuine need for an injunction or another reserved court application, an appropriately authorised practitioner will need to handle that step.

RWS can still assist with appropriate non-reserved analysis and preparation alongside that team.

If you are not sure which category your problem falls into, send me a short outline. I can tell you whether the work is something RWS can properly assist with.

Regulatory Information

Related reading

Discuss the dispute

If the relationship between shareholders has reached the point where it is difficult to see the way forward, send me a short outline of what has happened, the ownership structure and what outcome you are trying to achieve.

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