News & Insights

Business owner disputes over limited companies

Bill Dixon considers what legal remedies company shareholders may have if they have fallen out with each other.

Disputes between business owners come in many shapes and sizes.

A common scenario is where the owners of a business have operated through a limited company in which they all have shares. Some or all of them may be directors as well.  What happens if the individuals concerned fall out or can no longer agree on the future direction of the business? Indeed, fallout from the financial or other operational pressures resulting from COVID-19 or Brexit may well have exacerbated pre-existing tensions in the course of the last few months. If those involved are family members as well then the situation can become even more difficult.

The law provides a number of potential remedies:

  1. Shareholder agreements

Sometimes problems will have been anticipated or dealt with in a shareholders’ agreement (or in the company articles). It may then be possible to enforce those rights as a matter of contract law.

2. Unfair prejudice

Under section 994 Companies Act 2006 a minority shareholder can petition the court if their interests have been “unfairly prejudiced” by the other shareholders. Typically this may include wrongful exclusion from management, excessive remuneration by way of salary or bonuses at the shareholder’s expense or other breaches of the rules governing how a company should be run. Among other remedies the court can order that the majority shareholders should “buy out” the minority.

3. Derivative actions

If a company has suffered from the wrongdoing of others, normally it is the board that decides on what legal action should be taken by the company. But what if the wrongdoers control the board? In that situation a special form of legal action (called a derivative action) can be brought.

4. Employment claims

 Sometimes a claimant is an employee as well as a shareholder. In that situation there may also be potential employment claims.

Claims such as the above can be complicated. They may also have a devastating impact on a business already weakened by other factors. Careful and early advice (including as to the likely value of any shareholding) is essential in order to plan a strategy that allows a client to best achieve his or her objectives.

Bill Dixon is a partner in FSP’s commercial litigation team and has considerable experience in unfair prejudice petitions and other forms of dispute between business owners. If you require our assistance please contact: [email protected]/ 0118 951 6328.