Shareholder Disputes Solicitors

In short — yes, but only in limited circumstances.

You cannot legally force a shareholder to sell their shares without specific clauses within the articles of association or in a shareholder agreement. Usually the sale of shares takes place by negotiation between a buyer and seller. However, companies often insert clauses within the Articles or shareholders agreement which come into effect:

• At the conclusion of a directorship or employment (where the director/employee also holds shares)
• When a shareholder dies or suffers some incapacity
• In the event of a shareholder becoming bankrupt
• In the event of a divorce where there has been some spousal share transfer for tax purposes, or where a company has been set up by a married couple

These are by no means the only reasons that one may have a compulsory transfer provision within the Articles or a shareholder agreement, but the common thread is generally to protect the company from falling under the control of parties not connected with it. This can be achieved by compulsory transfer provisions, pre-emption rights, cross option agreements, leaver provisions, or share buyback provisions.

Drag-along clause

Drag-along rights allow majority shareholders to force minority shareholders to sell their shares if the company is being sold. The inclusion of a drag-along clause prevents a minority shareholder from blocking a sale by refusing to sell — protecting the majority from that leverage.

Across all these options, early advice is critical to ensure the correct strategic steps are taken.

An unfair prejudice claim is a claim brought by a shareholder under section 994 of the Companies Act 2006 — usually a minority shareholder. To bring a claim, the member must have suffered treatment from the other shareholders that is both prejudicial to their interests in the company and unfair when considered against the relationship with other shareholders.

Examples of conduct that has succeeded in unfair prejudice claims include:

• Excessive or unauthorised remuneration paid to directors
• Misappropriation of company funds
• Diversion of business away from the company
• Breach of shareholders agreements
• Unauthorised dilution of shareholding
• Failure to pay dividends

In a successful claim, the Court has wide discretion in respect of the orders granted. The usual outcome is an order requiring the majority shareholders to purchase the shares of the petitioner at a value determined by the Court, usually with the assistance of experts.

Claims of this nature require strategic thinking and early advice. Whilst there is no statutory limitation period for commencing a claim for unfair prejudice, delay can severely affect the prospects of success.

Just as a claim for unfair prejudice can be brought, such claims can equally be defended.

Receiving a claim of this nature can be a serious threat to any company. However, such claims can be successfully defended — usually by challenging the nature of the claim, or relying on the petitioner’s own conduct, which may itself have been improper.

Defences are often fact-specific. What is critical is an early analysis of the strategic and financial position to determine what steps should be taken to protect the company’s position. If a claim has been issued, there will be strict timelines for responses and defences to be filed.

It is a common situation: friends, business colleagues, or couples agree to set up a company together with equal shares. This works well in the early stages. But it is often when the business starts to turn profitable that disputes arise — differences in direction, one party feeling let down by another, or simply the stress of shared ownership taking its toll.

When such differences arise and each member is an equal shareholder and director, the company can find itself unable to make decisions. By definition, one cannot outvote the other. The company becomes deadlocked.

Such deadlock does not mean the business has to stop trading, but it will almost unquestionably slow growth, prevent new opportunities, and create harm over time.

What steps can be taken?

Initially, review the Articles of Association or any shareholders agreement for a deadlock clause. In the absence of a contractual mechanism, options include:

• One party agreeing to sell their shares to the other
• Inviting a non-executive voting director to join the board, allowing a majority to form
• Mediation — the appointment of an external mediator or arbitrator
• Court action — the court can order a share transfer or the winding up of the company
• The voluntary winding up of the company — a last resort if all other options are exhausted

We have mediated many deadlocked situations to a successful conclusion and can assist in clarifying the right steps forward in a timely and cost-effective manner.

No. Court action is very much viewed as a last resort. Most disputes are concluded by negotiation between the parties — either informally or through the formal appointment of a mediator.

In mediation, the parties prepare disclosure and a position statement. The mediation usually takes place with parties in separate rooms, and the mediator travels between them as a neutral presence seeking resolution.

If agreement is reached, a Settlement Agreement is drawn up setting out the terms, which becomes an enforceable contract.

Mediation is strongly encouraged by the courts, and the court can — and will — impose penalties if any party unreasonably declines an invitation to mediate.

Yes, but this is limited to certain statutory documents.

Under the Companies Act 2006 you have a statutory right to see:

• Annual accounts and reports
• Directors’ reports of general meetings
• Auditor reports
• Register of members
• Register of directors and secretaries
• Minutes and resolutions
• Board minutes
• Internal management accounts
• Operational records

Note: many of these documents, along with company filings, are publicly available via Companies House and free to download.

The Companies Act does not provide a general right to access:

Company articles or a shareholders agreement may give rights to access information at a more operational level, but such information is not automatically disclosable under any statutory right.