Shareholder disputes in private companies can take many forms. Disagreements may arise over management decisions, financial control, dividend policy or the direction of the business. When disputes cannot be resolved internally, shareholders may consider legal remedies.
Three remedies are often discussed in this context:
- unfair prejudice petitions
- derivative claims
- just and equitable winding up petitions.
Although these remedies can arise from similar circumstances, they serve different purposes and lead to different outcomes. Understanding the distinction between them is important when deciding how best to resolve a shareholder dispute.
Why do shareholder disputes require different legal remedies?
Company law recognises that not all disputes affect shareholders in the same way. Some disputes primarily harm the company itself, while others affect the rights and interests of individual shareholders.
For this reason the law provides different legal mechanisms depending on the nature of the harm and the remedy sought.
Choosing the correct legal route is important because each remedy involves different procedures, legal tests and potential outcomes.
What is an unfair prejudice petition under section 994?
An unfair prejudice petition is brought under section 994 of the Companies Act 2006. It allows a shareholder to ask the court to intervene where the company’s affairs are conducted in a way that is unfairly prejudicial to the interests of members.
This remedy is commonly used in disputes between majority and minority shareholders in private companies.
Typical examples of conduct giving rise to unfair prejudice claims include:
- exclusion from management in a company where participation was expected
- diversion of company business or assets
- excessive remuneration paid to majority shareholders
- manipulation of dividend policy
- dilution of shareholdings through new share issues.
The most common remedy ordered by the court is a share purchase order, requiring one shareholder to buy the shares of another at a fair value. This allows the minority shareholder to exit the company.
Because the court has broad discretion under section 996, unfair prejudice petitions are often considered the most flexible remedy for shareholder disputes.
What is a derivative claim and when is it used?
A derivative claim is different because it is brought on behalf of the company rather than for the benefit of an individual shareholder.
Derivative claims are governed by sections 260 to 264 of the Companies Act 2006. They allow shareholders to pursue legal action against directors or other parties where the company itself has suffered harm, usually through breaches of duty.
Examples might include:
- misuse of company assets
- diversion of corporate opportunities
- negligent management causing financial loss.
In these situations the company is technically the injured party. However, because directors typically control the company, they may refuse to bring proceedings themselves. A derivative claim allows a shareholder to pursue the claim in the company’s name.
Any damages recovered usually belong to the company rather than the shareholder personally.
Derivative claims also require court permission before proceeding, which acts as an important safeguard against unmeritorious litigation.
What is a just and equitable winding up petition?
A third remedy sometimes considered in shareholder disputes is a petition to wind up the company on just and equitable grounds.
This remedy is available under section 122(1)(g) of the Insolvency Act 1986.
A just & equitable winding up is usually sought where the relationship between shareholders has broken down so completely that the company can no longer function effectively. This may occur in situations such as:
- deadlock between equal shareholders
- loss of trust in quasi-partnership companies
- irretrievable breakdown of the business relationship.
If the court orders winding up, the company will be placed into liquidation and its assets will be distributed among creditors and shareholders.
Because winding up can destroy the underlying business, courts often treat it as a remedy of last resort where no practical alternative exists.
How do shareholders decide which remedy is appropriate?
The choice between unfair prejudice petitions, derivative claims and winding up petitions depends on the objective of the shareholder bringing the claim.
- If the shareholder wishes to exit the company and obtain fair value for their shares, an unfair prejudice petition may be the most appropriate route.
- If the primary harm has been suffered by the company and the shareholder wants the company to recover its losses, a derivative claim may be more suitable.
- If the business relationship has broken down entirely and there is no viable way for the company to continue operating, winding up may be considered.
In practice these remedies are often considered together when assessing how best to resolve a shareholder dispute. Legal advice can help determine which option is most likely to achieve the desired outcome.
Key takeaway
Although unfair prejudice petitions, derivative claims and winding up petitions may arise from similar disputes, they address different types of harm.
Understanding the distinction between these remedies helps shareholders identify the most effective legal strategy for resolving disputes within private companies.
