The Hypothetical Scenario
Imagine a scenario where two friends, Jane and Joe, establish a consultancy business. They each hold 50% of the shares and both serve as directors and employees of the company, being paid a salary while reinvesting profits into the business. There has always been a clear understanding that both will participate equally in management and share in the company’s success.
The relationship deteriorates down the line when Jane becomes dissatisfied with Joe’s views on the future of the business and starts excluding him from management decisions. Jane wants to remove Joe as Managing Director. She cannot do this with just a 50% shareholding; however, she nevertheless removes Joe’s access to company systems and terminates his employment without a process. Jane then appoints her partner as a director and starts paying him a salary, leaving Joe with neither a salary nor any meaningful involvement in the day-to-day running of the company despite retaining his 50% shareholding.
Joe may have two separate but closely related causes of action arising from the same set of facts. As an employee with the requisite qualifying service, he may bring a claim for unfair dismissal on the basis that he was dismissed without a fair process. At the same time, as a shareholder in what is arguably a quasi-partnership company, he may petition for unfair prejudice on the basis that his exclusion from management and diversion of economic benefits to Jane’s partner unfairly prejudices his interests as a member.
The overlap between unfair dismissal and unfair prejudice can be overlooked as they each protect different interests; one arises from employment rights and the other from membership (shareholding) rights in the company. Both interests can emerge from the same breakdown in relationship within the owner-managed business, particularly businesses that arguably operate as a quasi-partnership.
Options for Redress
The rights of shareholders arise from the corporate structure, the articles of association, a shareholders agreement (if any), and the statutory framework governing companies. Where a shareholder also works in the business under a contract of employment, both contractual rights and statutory rights under employment legislation, such as the right not to be unfairly dismissed, will govern their employment.
Typically, a shareholder would rely on the protection of company law, with employment law considerations typically considered as a secondary measure, particularly where no circumstances existed giving rise to a discrimination or whistleblowing claim. Under company law, remedies available to shareholders in cases of oppression or unfair treatment include the ability of a shareholder to petition the court under section 994 of the Companies Act 2006 (“CA 06”) where they feel the company’s affairs have been conducted in a manner unfairly prejudicial to their interests as a shareholder. If their unfair prejudice petition is successful, the court has a wide discretion as to the order it can make and, this would often be a more attractive and lucrative route for redress in circumstances similar to those in the scenario outlined above.
With the introduction of the Employment Rights Act 2025, in particular its reforms to unfair dismissal, this landscape is set to shift, compelling parties to rethink how shareholder disputes are strategically navigated.
Current Position: Unfair Prejudice vs Unfair Dismissal
The remedies are not mutually exclusive, and it is possible to pursue both claims. However, the costs of pursuing both may be prohibitive, and so claimants may need to decide which approach better suits their objectives, and their wallet.
Under section 994 of the CA 06, shareholders commonly petition the court on grounds such as exclusion from management, failure to declare dividends, and the diversion of business opportunities by those controlling the company. Typically, the petitioner will seek an order for the shares to be purchased at a fair market value by the respondent which may be adjusted to take account of? diverted business or other losses, ensuring a substantial payment being made to secure a clean exit from the business.
By contrast, in unfair dismissal claims, compensation is currently capped at one year’s pay or, an amount set out in statute (currently £123,543) (whichever is lower) under the Employment Rights Act 1996.
Additionally, unfair dismissal claims are currently subject to a two-year qualifying period of service, which may rule out certain claims, particularly where the wronged individual has not been in employment for at least two years.
However, these two key features of unfair dismissal claims are set to change significantly under the Employment Rights Act 2025.
The Employment Rights Act 2025 (“ERA 2025”)
As of 1 January 2027, the qualifying period for an individual to bring an unfair dismissal claim will decrease from two years to six months. Additionally, the statutory cap on the compensation that may be awarded for unfair dismissal referred to above, will be removed entirely.
With no cap on compensation and a shorter qualifying period, employment law claims potentially become an equally attractive, if not more attractive option than company law remedies. This is particularly so given that unfair dismissal claims can account for projected future losses, whereas remedies for unfair prejudice petitions may, in some cases, be limited to the current market value of the shares at the relevant time.
Where Company Law and Employment Law May Overlap
From January 2027, in disputes involving shareholders who are also directors, a key strategic consideration will be whether to pursue concurrent claims in both the Employment Tribunal and the High Court, thereby enhancing the individual’s prospects of success / recovery under at least one set of proceedings and increasing settlement leverage.
Another example of how company law and employment law can be engaged simultaneously – which is currently the case and not necessarily impacted by the upcoming changes – is in the context of whistleblowing. Where a minority shareholder-director raises concerns internally that amount to protected disclosures and is subsequently excluded from management and dismissed because the majority shareholders have sought to remove the minority shareholder-director on the basis that the disclosures are, for example, deemed to be disruptive or contrary to the company’s interests. This may give rise to a whistleblowing detriment or an automatic unfair dismissal claim, as well as an unfair prejudice claim.
Practical Takeaways
- Adopt a dual-track approach from the outset: If you are a shareholder-director and your relationship with co-shareholders or the business has broken down, it is important to seek advice promptly. The factual circumstances of your situation may give rise to claims under both employment law and company law simultaneously, and early strategic assessment of both avenues can significantly strengthen your position and maximise the remedies available to you.
- Review existing shareholder agreements and articles of association: With the ERA 2025 changes coming into force on 1 January 2027, businesses should review their constitutional documents proactively. Well-drafted shareholders’ agreements, for example, can include mechanisms and provisions to reduce exposure to parallel claims and provide greater certainty.
- Consider the full range of remedies available: The changes introduced by the ERA 2025 mean that employment law claims are becoming an increasingly powerful tool for shareholder-directors. Depending on your circumstances, you may be entitled to pursue high-value claims in both the Employment Tribunal and the High Court, and understanding the interaction between those remedies is key to achieving the best possible outcome
- Obtain legal advice at an early stage: Understanding your legal position and options early is critically important in helping you decide your desired outcome and in devising the best strategy to achieve that. Our Employment and Dispute Resolution teams work closely together and have significant experience advising shareholder-directors in exactly these situations. If you would like to discuss your position, please do not hesitate to get in touch.
