Shareholder conflicts are common and are experienced by all kinds of business sizes – no matter how big or small.

Understanding the frequent causes of disagreements, recognising the necessary procedures to take when conflicts emerge and putting prevention measures in place may help maintain peace and protect the company’s interest.

Common Causes of Shareholder Disputes
  • Breach of Shareholder Agreements: Disputes can develop when parties consider that the provisions of a shareholder agreement, such as those regulating share sales or company activities, have been violated.
  • Breach of Directors’ obligations and Fraud: Shareholders may file a dispute if they feel directors have violated their fiduciary obligations, such as their responsibility to act according to the best interests of the business, or have been involved in misconduct. This includes allegations of fraud.
  • Conflicting Goals: Shareholders may have differing perspectives on the company’s future.
  • Financial & Management Disagreements: Conflicts surrounding dividends, compensation, or the use of corporate cash and differences of view on how the business should be handled.
  • Unfair Prejudice – Minority Shareholder: Disputes over dividend policy and access to information are due to minority shareholders believing that their rights are being neglected or exploited by the majority. They may also believe that their interests are being disregarded.
Measures to Prevent Shareholder Disputes
  • Regularly update/review policies to reflect the current situation of dynamics
  • Clear shareholder agreements and detailed articles should be kept in one place
  • Maintain clear and open communication with other shareholders
  • Ensure minority shareholders have their interests protected
Resolving Shareholder Disputes
When a problem arises, the shareholders would usually use informal and direct communication with the intention of coming to an open agreement. However, in some instances, the situation remains unresolved and a third-party is required to provide some mutual assistance.
  • Alternative Dispute Resolution: A third party who helps to reach a mutually agreeable resolution.
  • Arbitration is when a third party makes official decisions for the shareholders.
  • Litigation: When no other options are available, court action may be required.
Remedies for Shareholder Disputes
The legal framework for addressing shareholder disputes in England and Wales is primarily governed by the Companies Act 2006, along with common law principles and the unique articles of association of a company. The key remedies accessible to shareholders include:
  • One shareholder buys out the other share.
  • Court orders preventing a party from conducting detrimental activities.
  • Compensation due to losses caused by damage, breach of contract or mismanagement.
  • Section 994 of the Companies Act 2006 allows shareholders to seek remedy if the company’s activities are being managed in an unreasonably detrimental way to the interests of shareholders as a whole or of one or more shareholders, including minorities.
  • Last resorts include; shareholders can start a petition for a company to be wound up on just and equitable grounds, selling or dissolving the company.
Potential Dispute Scenarios:
A Minority Shareholder Wants to Remove a Majority Shareholder?
A minority shareholder cannot remove a majority shareholder first hand due to their minority position. However, if the majority shareholder engages in unduly damaging conduct to the interests of minority shareholders or the corporation, legal remedies are possible. These include the following:

Derivative Action: A minority shareholder may be entitled to file a derivative claim on its behalf if the majority shareholder’s actions injure the corporation.

Unfair Prejudice Petition: Section 994 of the Companies Act 2006 allows a minority shareholder to petition the court for remedy if they believe the company’s activities are being conducted unfairly to their interests.

A Majority Shareholder Wants to Force a Minority Shareholder to Sell Shares?
Yes, it is possible for a majority shareholder to compel a minority shareholder to sell their shares. However, this is only possible under the company’s articles of association or a shareholders’ agreement. These include:

Buyout Clauses: Provisions may allow the majority shareholders to buy out minority shares under certain conditions. These are included in the articles of organisation or a shareholders’ agreement.

Drag-Along Rights: If the majority shareholders sell their shares, majority shareholders can force minority owners to sell their own, guaranteeing that the buyer acquires 100% of the firm.
Statutory Provisions: Statutory provisions under the Companies Act 2006 can be used to support the coerced sale of shares in some circumstances.
For more information regarding shareholder disputes or if you would like to speak to a member of our team about drafting a shareholders agreement, please contact us on [email protected]