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Shareholder disputes can severely impact business operations and relationships, especially in small businesses which are owner-managed with just a few shareholders. Negotiated settlements in shareholder disputes are usually preferable because they're faster and cheaper than court proceedings, allow creative solutions that courts can't order, and let parties maintain control over the outcome.
A company's articles and any shareholders' agreements should always be the starting point if a dispute arises, as these will establish :-
what rights shareholders have
who has decision making rights and rights to information
whether there is a dispute resolution mechanism.
In general, the starting point is that directors control day-to-day operations subject to shareholders' rights to challenge decisions.
Shareholder disputes often arise because majority shareholders can control the company through their voting power, potentially ignoring minority interests in decision-making, dividend payments, or management. Minority shareholders have very limited rights under company law and director duties are governed by guiding principles only which can result in many grey areas. The main types of disputes we see are :-
Deadlock Situations - Deadlock occurs when shareholders, often in a 50:50 structure, cannot agree on key decisions. This can paralyse the business, create operational uncertainty, and prevent shareholders from exercising rights or exiting. Without a pre-agreed deadlock resolution mechanism, parties may face costly litigation or business stagnation.
Disagreements over strategy and finances - business growth, markets, or investment priorities, financial disputes, including dividend policy or alleged conflicts of interest which favour the majority shareholder.
Denial of information or exclusion from key decisions – such as access to bank accounts or the company’s accountants.
Litigation can be expensive and expose sensitive company information. Courts expect parties to attempt settlement and may penalise unreasonable refusal to mediate. Key legal remedies include:
Unfair Prejudice (Section 994) application – Lets a minority shareholder challenge conduct that is unfairly prejudicial to their interests, often resulting in a court-ordered buyout.
Just and Equitable Winding Up – A last-resort remedy for companies that cannot function due to deadlock or irreparable disputes.
Derivative Actions – Shareholders can pursue claims on behalf of the company for director wrongdoing, with court permission required.
Injunctions - urgent court orders to prevent immediate harm. These carry significant cost and risk if unsuccessful.
Most shareholder disputes never reach court. The risks — financial, strategic and reputational, are simply too high. For many companies, litigating a dispute is far more damaging than resolving it through negotiation or structured settlement. Common outcomes are :-
A Buyout - often the cleanest solution to shareholder disputes as it provides a complete break, one party exits while the other continues the business. The key issues are usually agreeing the share valuation method (particularly whether to apply a minority discount), payment terms (immediate vs instalments), and any ongoing restrictions (like non-compete clauses). While courts can order buyouts in unfair prejudice claims, parties often reach negotiated buyout agreements to avoid the cost and uncertainty of litigation.
Enhanced Protections for Minority Shareholders - where relationships can be preserved, minority rights can be strengthened through changes to articles or shareholders’ agreements, combined with legally binding undertakings from majority shareholders. Examples include board representation guarantees, requiring unanimous approval for key decisions and clear dividend policies and information rights.
Expert evidence is often crucial in shareholder disputes, primarily for share valuation - an independent expert can determine fair market value, applying appropriate discounts and considering factors like loss of value from unfair conduct. Experts might also be needed for specific industry issues, accounting disputes, or assessing loss from alleged mismanagement. However, expert evidence significantly increases costs, so the scope should be carefully defined and where possible, parties should try to agree on a single joint expert.
Contact us to discuss how we can help resolve your shareholder dispute effectively.
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If you would like to speak with a member of the team you can contact us on:
Partner & Head of Commercial Litigation
