Shareholder Disputes FAQs

Please note that the questions and answers on this page are for general information only and must not be used as a substitute for legal advice. You should always take legal advice which is tailored to your specific circumstances.

 What is an Unfair Prejudice Petition?

Section 994 of the Companies Act 2006 permits a shareholder of a company to petition (meaning apply to) the Court for relief on the ground that the company’s affairs are being, or have been, conducted in a manner that causes unfair prejudice to the interests of some/all of the shareholders (including at least them).

The conduct complained of must:

  1. Relate to how the company is being run, and may include management decisions (whether or not decisions of the board of directors) and attempts by other shareholders to exert control where this harms the proper functioning of the company;
  2. Relate to the shareholders' interests as shareholders (not, for example, as a director or creditor of the company);
  3. Be real (i.e. not hypothetical); and
  4.  Be unfair - the Court takes a broad but objective approach as to what constitutes unfairness

The Court has a broad range of remedies available, the most common being an order that the shares of the petitioning shareholder(s) be purchased at a fair value.  

If you think you have grounds to present an unfair prejudice petition, or if you have been threatened with an unfair prejudice petition, our experienced litigation team can advise you on how to proceed.

 

What is a Just and Equitable Winding-Up Petition?

Section 122(1)(g) of the Insolvency Act 1986 allows a shareholder to petition (meaning apply to) the Court to wind up the company on the basis that it would be just and equitable (i.e. right and fair) to do so. It is also possible for such a petition to be presented by the company itself, its directors, and/or contingent creditors of the company. Typical reasons for seeking a just and equitable winding up include deadlock, mismanagement, or simply that the purpose of the company has been achieved.

The petitioner must be the only shareholder of the company, or an original shareholder of the company or a registered shareholder of the company for at least six of the 18 months before the petition is presented.

If the company is insolvent a just and equitable petition will often be struck out (i.e. rejected) by the Court.

The just and equitable winding-up remedy may often be available in cases where the company is a quasi-partnership, because the Court may be willing to apply special considerations arising from the shareholders’ rights, expectations and obligations.

Importantly, unfairly prejudicial conduct will also usually constitute just and equitable grounds for winding up a company. As such, petitioners may often present petitions for unfair prejudice and for winding up on just and equitable grounds together.

If you think you have grounds to present a just and equitable winding-up petition, or if a company you are involved in has been threatened with a just and equitable winding-up petition, our experienced litigation team can advise you on how to proceed.

 

My company is a ‘quasi-partnership’ and I am in dispute with my fellow shareholder-director, what should I do?
(includes an example of a typical quasi-partnership dispute)

A company may be considered to be a quasi-partnership if it involves one or more of the following features:

  • A special relationship of mutual confidence between the shareholders;
  • An understanding that all or some of the shareholders will participate in the management of the business; or
  • Restrictions on shareholders transferring their shares to outside parties.

Where such features are present, the Court may consider that the company operates like a partnership, and will more readily accept that its shareholders have rights and obligations which might not be set out in the company’s Articles of Association (“Articles”) and/or any Shareholders’ Agreement.

Quasi-partnership disputes can often be complex, and given the nature of the relationship between the parties, can become heated and bitter. Our experienced litigation team can advise you on how to proceed.

Example of a typical quasi-partnership dispute

Ahmed (“A”) and Beth (“B”) are the founders and directors of XYZ Ltd (“XYZ”), a construction company, having worked together for many years previously. A is the managing director; B is the chief operating officer. They have a relationship of mutual trust and confidence, and both dedicate the majority of their time to managing the business. A had 51% of the shares initially, but subsequently transferred 2% to his civil partner (“C”) for tax reasons. B has 49%. XYZ’s Articles are standard Model Articles, save for a provision preventing the shareholders from selling or transferring their shares to anybody other than the existing shareholders or their family members. C was recently appointed as a third director to assist with the administration of the business, because B needed to spend some more time looking after her elderly parents. Last year the business had a net asset value of £2m.

A encounters personal financial difficulties having made a bad investment in overseas property. A asks B if she will agree to increase his remuneration substantially, on the basis that he is the managing director and his current salary does not reflect market rates. B rejects the request because it was always understood that they would be remunerated primarily via dividends and would only take a small salary to help keep overheads down. A and B subsequently fall out over the running of the business – A claims B has become disengaged and is a liability to the business, and accuses her of moonlighting on personal projects. A calls a shareholders’ meeting to remove B as a director, and is able to do so with the support of his civil partner’s votes. A says that B should now transfer her shareholding to him for £300,000, as that is what the shareholding is worth in light of current trading conditions.

B issues an Unfair Prejudice Petition against A and C. In the petition, B alleges that her removal as a director has prejudiced her interest as a shareholder, as she had a legitimate expectation to be included in the management of the business and that such removal was unfair because it was motivated by her refusal to agree to a pay rise for A, rather than anything she did or did not do. As such, she asks the Court to make an order that A buy her shares for a price in the region of £1m.

The Court finds that XYZ is a quasi-partnership and that A’s removal of B as a director prejudiced her interest as a shareholder, because B had a legitimate expectation of being involved in the management of the company. While there was some evidence that B had become disengaged from the business in recent years, it did not justify her removal, and there was no credible evidence of moonlighting. As such, her removal as a director was also unfair. The Court orders A and C to acquire B’s shares for £800,000 (giving a slight reduction on the net asset value per share in recognition of the fact that B’s shareholding is a minority shareholding and therefore less marketable.

 

What difference does it make if my company is a quasi-partnership?

If “quasi-partners” fall out and one party submits an Unfair Prejudice Petition or a petition to wind-up the company on the basis that it is just and equitable (i.e. right and fair) to do so, the Court may give special weight to the acts or omissions of the parties which are inconsistent with the parties' relationship, understandings and general agreements, even if those acts/omissions are expressly permitted by the company's constitution.

The difficulty in such cases is that each party’s view of the nature of the relationship, understandings and agreements tends to differ, and it can be difficult to determine in absence of any written evidence what the true position is. Using the above example, “A” may have believed he was well within his rights as the de facto majority shareholder to remove “B” as a director at a shareholders meeting, as this was permitted by the XYZ’s Articles. However, the Court found that A had unfairly prejudiced B by removing her as a director, because of the nature of the relationship between A and B that gave rise to legitimate expectations on the part of B.

 

What should I do if my ‘quasi-partner’ is in the wrong?

If you believe that your quasi-partner is in the wrong, for example they are preventing you from taking an active role in your business or seeking to dilute your shareholding, the first thing to do is to check the provisions of the company’s Articles and any Shareholders’ Agreement to see if they are permitted to take such actions under the company’s constitution. While not necessarily conclusive in a quasi-partnership dispute, if your quasi-partner has not followed the procedures set out in the company’s constitution, this will be important evidence in your favour.

Even if your quasi-partner is able to take actions to which you object under the company’s constitution, you may still be able to present an Unfair Prejudice Petition to the Court on the basis that your company is a quasi-partnership and, as such, you had a legitimate expectation of being involved in the management of the business and/or not to have your shareholding diluted.

If your quasi-partner’s actions create a situation where there is no realistic solution to the dispute, you could petition the Court to wind-up the company on the basis that it is just and equitable (i.e. right and fair) to do so.

Quasi-partnership disputes are often complex, and given the nature of the relationship between the parties, can become heated and bitter. Our experienced litigation team can advise you on how to proceed.

 

What if my ‘quasi-partner’ accuses me of being in the wrong?

If your quasi-partner accuses you of acting in breach of the understandings and agreements underpinning your commercial relationship, e.g. they say you have not dedicated enough time to the business and/or you have spent too much time on a different venture, you should check the provisions of the company’s Articles and any Shareholders’ Agreement (and potentially any employment agreement, if relevant) to see if you have done anything in breach of those documents/agreements. If you have, this may well be evidence in support of your quasi-partner’s case. If you have not, you should still consider whether you have agreed, formally or informally, or acted in such a way as to give rise to a common understanding, that you would dedicate a certain amount of time to the business/ not engage in other ventures. If there is evidence to suggest you have, this again may support your quasi-partner’s case. If there is no evidence, you should ask you quasi-partner to explain the basis upon which they make their accusation against you. If you disagree with their version of events, you should explain why, and provide any evidence to support your position.

If your quasi-partner proceeds to present an Unfair Prejudice Petition or a petition to wind up the company on just and equitable (i.e. right and fair) grounds, the Court will require evidence to support the petition.

Quasi-partnership disputes are often complex, and given the nature of the relationship between the parties, can become heated and bitter. Our experienced litigation team can advise you on how to proceed.

 

I am a minority shareholder and I am being excluded from the management of the company. What should I do?

In large companies, minority shareholders do not usually expect to have an active role in the management of the company, absent a parallel employment relationship or position on the board of directors. However, in smaller companies, being involved in the management of the company may have been one of the key reasons that the minority shareholder invested money in the first place. Such companies are often deemed to be quasi-partnerships.

If you have been excluded from management of a quasi-partnership, in the first instance you should seek to resolve your differences through dialogue.

If further escalation is unavoidable, the first thing you should do is check the provisions of the company’s Articles and any Shareholders’ Agreement to see what actions are and are not permitted under the company’s constitution. If your quasi-partner(s) have not followed proper procedures this may be important evidence in your favour.

Even if proper procedure has been followed, you may still be able to present an Unfair Prejudice Petition to the Court on the basis that you had a legitimate expectation of being involved in the management of the business, or a petition to wind up the company on the basis that it is just and equitable (i.e. right and fair) to do so.  

If you consider that you have been unfairly excluded from the management of your company, our experienced litigation team can provide expert advice on your rights.

 

What claims and remedies are available if directors or shareholders act in a way that prejudices me or causes me loss?

If a shareholder has suffered prejudice or loss as a result of the actions of the directors or other shareholders of the company, they may be able to bring claims in various ways, for example by way of derivative action, unfair prejudice petition and/or petition for just and equitable winding up

If you have invested in a company on the basis of an investment agreement, share purchase agreement, or even a shareholders agreement, such agreements may have granted you specific rights, or subjected the company’s directors and/or other shareholders to certain restrictions.

If the prejudice or loss you have suffered arises as a result of the directors’/shareholders’ breach of agreement, you may be able to bring a claim for breach of contract against the relevant individuals, or even seek an injunction requiring action to be taken or to prevent a further breach from occurring.

If you have invested in a company and have also entered into a binding agreement such as those mentioned above in relation to that investment, you should check the precise terms of your agreement to ascertain your rights. If you cannot resolve your dispute through discussion with the relevant parties concerned, our litigation team can advise you upon how to proceed.

 

I and my fellow shareholders have fallen out and cannot agree on the way forward. What should we do?

The scale of disagreements between shareholders can range from fairly trivial (e.g. failure to provide certain information) to extremely serious (e.g. suspected fraud). Shareholder disputes can sometimes result in the company becoming deadlocked, for example because a certain shareholder or shareholders refuse to attend shareholders’ meetings and/or vote on important resolutions. Deadlock in these circumstances can be catastrophic in hindering a company’s ability to carry out business.

The ability to resolve a shareholder dispute will often come down to the relative strength of the parties (in terms of voting rights) or alternatively the other rights of the parties according to the company’s constitution. If you find yourself in this situation and cannot resolve matters, our experienced litigation team can advise you on how to proceed.

 

Rights and deadlock breaking provisions in the Articles of Association and/or the Shareholders’ Agreement

If you are a shareholder faced with a deadlocked company, the first place to look for a solution is the company’s Articles of Association (“Articles”). The Articles may contain simple deadlock breaking provisions, for example providing that a single shareholder could form a quorum in order to pass a valid resolution at an adjourned shareholders’ meeting, if the necessary number of shareholders fail to attend the original meeting. Alternatively, the Articles may contain provisions giving enhanced voting rights to particular shareholders on certain issues, or that certain shareholders can require that their shares be valued and sold upon the presentation of a notice of transfer. 

The next place to check for a solution would be in any Shareholders’ Agreement to see if you have any special rights which might enable you to break the deadlock. For example, an investor may have the ability to appoint a director to the board, or the ability to prevent certain resolutions from being passed without their approval (notwithstanding they would not ordinarily have the voting rights to prevent the resolution from passing).

 

Court action due to deadlock

If the Articles or Shareholders’ Agreement do not contain any helpful provisions, in certain circumstances it may be possible to apply to Court for an order that a shareholders meeting be constituted in such a way and on such terms as the Court thinks fit for the purpose of passing a particular resolution or resolutions. However, the Court will probably not make such an order if, in doing so, it would harm the rights of a minority shareholder.

If a shareholder creates deadlock in order to prevent the company from doing business, thereby causing it loss, this might be sufficient grounds to seek an order for the just and equitable winding-up of the company. This may also be grounds to present an unfair prejudice petition against that shareholder.

The above procedures are complex and should be commenced with caution. If you cannot resolve your differences through dialogue, our experienced litigation team can advise you on how to proceed.

 

I hold shares in a company that I think may be insolvent. What should I do?

If a company appears to be insolvent, the directors must take all steps to protect the interests of creditors, which often means that the company must cease trading in order to stop incurring further liabilities and enter into a formal insolvency process. Provided that you have not guaranteed any of the company’s debts or agreed to contribute to the company’s assets on insolvency, and you are not a director or otherwise involved in the company’s management, you are unlikely to be held liable to pay creditors upon the company’s insolvency.

However, you are likely to want to try to recover at least some of your investment if the company goes into insolvency. If you have reason to believe that the directors are not acting/have not acted as they should, for example, you may have evidence that directors are continuing to trade, or more worryingly that they are selling off the company’s assets at an undervalue or just simply helping themselves to the company’s cash before it enters liquidation, you may want to take steps against the directors.

 

I am a shareholder concerned about the actions of certain directors in the lead up to insolvency. What can I do?

It typically falls to a company’s liquidator to investigate and take action against directors who are found to have acted, at best, in breach of their statutory duties, or at worst, criminally, in the run up to insolvency. You should inform the liquidator of your concerns and provide them with any evidence you have.

 

What steps can I take as a shareholder to scrutinise a company’s affairs?

If you are unsure whether the company is insolvent, but suspect that it is (or that it is heading that way) you could use your shareholder rights to put the directors under pressure to take a particular course of action. For example, if you hold more than 5% of the company’s voting shares, you could require the company to circulate written resolutions or call a general meeting for the purpose of voting to appoint a new director to the board to scrutinise the company’s affairs. Alternatively, if you hold more than 10% of the voting rights you could require that the company be audited.

If you find that the directors have caused the company’s insolvency due to their own gross mismanagement or even fraud, you may be able to bring an unfair prejudice petition against them.

If you are concerned that the company in which you hold shares is insolvent, our litigation team can help you decide whether you should take action, and if so, what action to take.

 

Can I have the company put into liquidation?

A shareholder may wish to put the company in which they hold shares into liquidation for a variety of reasons: They may be a creditor and have good grounds to believe that the company cannot repay them; the company may be deadlocked or may have achieved all that it was intended to achieve; or the company may simply no longer trade. There are three main ways that a shareholder can put a company into liquidation:

  1. Members’ voluntary liquidation;
  2. Compulsory winding up;
  3. Just and equitable winding-up.

However, if your objective is to have a defunct company removed from the register of companies, it may not always be necessary to put a company into liquidation.

 

What is Members’ Voluntary Liquidation?

In order for a company to be put into Members’ Voluntary Liquidation, the company must be solvent and the directors must be able to support that by making a declaration of solvency (i.e. swear that the company is solvent and set out a ‘statement of affairs’ detailing its financial position). A members’ meeting will be called to pass a special resolution (i.e. a resolution supported by at least 75% of voting shareholders) to wind up the company. As such, a Members’ Voluntary Liquidation is not typically available where a large number of shareholders would be opposed to the liquidation. Where there is a broad consensus however, a liquidator may be appointed.

The liquidator will proceed to gather in assets and discharge liabilities of the company. Once all of the company’s affairs have been dealt with, the company will be dissolved. If it transpires that the company is, in fact, insolvent then the liquidator may convert the liquidation into a Creditors’ Voluntary Liquidation, and the creditors are then able to control the process.

 

What is Compulsory Liquidation?

Compulsory liquidation (or winding up) is a court-based procedure under which the assets of a company (if any) are realised by a liquidator and distributed to the company's creditors. The procedure is started by the filing (or "presenting") of a petition at court. The petition can be presented by a company director or creditor.

The judge then decides at a court hearing whether it is appropriate to make a winding-up order. The most common reason for a winding-up order is that the company is insolvent. At the end of the liquidation, the company is dissolved.

The procedure is set out in the Insolvency Act 1986 (IA 1986) and the Insolvency (England and Wales) Rules 2016 (SI 2016/1024) (IR 2016).

 

I am concerned with how the company I invested in is being run / I think it might be a scam. What should I do?

Shareholders may often have concerns about the way the company they have invested in is being run. For the most part, such concerns can be resolved by straightforward means: The directors can provide information (or a dividend) to ease concerns; an unpopular director may resign; or the shareholder may simply sell their shares and move on.

However, sometimes it falls to the shareholder to take action in order to have their concerns properly addressed, or to tackle a problem head on. This is particularly so where it appears that the company you have invested in may be a scam. In more extreme situations, you may be able to seek powerful interim remedies from the court, such as worldwide freezing orders or search orders against the company’s directors and managers.

In certain circumstances (usually where there is sufficient public interest and/or evidence of harm that cannot be addressed by civil proceedings alone) state entities such as the police, Financial Conduct Authority, Serious Fraud Office and HMRC may also be willing to investigate the company and seek to prosecute its controlling parties, employees and/or agents.

If you have concerns about the way a company you have invested in is being run or believe that it may be a scam, our experienced dispute resolution team can guide and advise you in relation to your rights and the remedies that may be available to you.

 

How can I use my shares to force the company into action?

‘Activist shareholders’ are shareholders that use their shareholder rights proactively to put pressure on the board of directors to take certain actions. Your ability to influence how the company is being run will primarily depend upon the size of your shareholding, but you may find that you have the support of other shareholders and/or the benefit of additional rights granted under a Shareholders’ Agreement or contained in the company’s Articles of Association (“Articles”).

As a shareholder you have basic rights, no matter how large your shareholding. These include the right to inspect certain company information and to attend shareholder meetings. If you (or a likeminded group of shareholders) hold more than 5% of the voting shares you can circulate a written resolution or call a general meeting of the company for the purpose of voting upon a resolution of your choosing – and can have a written statement circulated in relation to that resolution.

If you (or your group) hold 10% or more of the voting rights you can, for example, require that the company be audited. If you hold 25% or more of the voting rights, you can block special resolutions from being passed (e.g. resolutions to amend the company’s Articles or resolutions disapplying pre-emption rights). If you (or your group) hold more than 50% of the voting shares, you can pass ordinary resolutions, for example you may have sufficient power to appoint or remove directors from the board of directors.

 

 

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