Family businesses play a significant role in the UK economy. Many are formed by relatives who work together in close partnership and often combine family relationships with commercial decision-making.
While these arrangements can work successfully for many years, disputes can arise when expectations about management, ownership or profit distribution change. When conflicts escalate and minority shareholders believe they have been treated unfairly, the dispute may fall within the scope of section 994 of the Companies Act 2006.
Unfair prejudice petitions are particularly common in family businesses disputes because these companies often operate more like partnerships than traditional corporate structures.
Why do family businesses often give rise to unfair prejudice claims?
In many family businesses the formal constitutional documents do not fully reflect how the company is actually run.
For example, shareholders may assume that:
- all family members involved in the business will participate in management
- profits will be shared fairly between relatives
- major decisions will be made collectively.
These expectations are sometimes informal and based on long-standing family arrangements rather than written agreements.
Problems arise when one group of family shareholders begins exercising strict legal control over the company in a way that contradicts these informal understandings. When this happens, minority shareholders may argue that the conduct is unfairly prejudicial to their interests.
What is a quasi-partnership company in shareholder disputes?
Courts often describe family businesses as quasi-partnerships. This term refers to companies that operate in a way that resembles a partnership, even though they are legally incorporated.
Several features may indicate that a company functions as a quasi-partnership:
- the shareholders are involved in the management of the business
- there is a relationship of trust and confidence between the parties
- share transfers are restricted
- the company was formed on the basis of personal relationships.
In these circumstances, shareholders may have a legitimate expectation that they will remain involved in running the company.
If a shareholder is excluded from management or removed as a director in such a company, the court may consider whether this defeats the legitimate expectations that formed part of the original relationship.
What types of conduct commonly trigger unfair prejudice claims in family companies?
Family disputes can give rise to many of the same issues seen in other shareholder conflicts, but the personal nature of the relationships often intensifies the problem.
Examples frequently seen in unfair prejudice claims include:
1. Excluding a family member from management
In many family businesses all shareholders initially participate in management. Removing one member from the board or excluding them from decision-making may lead to allegations of unfair prejudice.
2. Diverting business opportunities
Where one group of family members controls the company, they may divert business opportunities or contracts to another entity that they control.
3. Unequal financial benefits
Majority shareholders may take increased salaries or benefits while minority shareholders receive little return on their investment.
4. Share dilution
Issuing new shares to selected family members can dilute the interests of others and alter the balance of control within the company.
5. Withholding information
Family disputes sometimes involve allegations that financial information has been withheld from minority shareholders.
Each case depends on its specific facts, but these situations frequently form the basis of unfair prejudice claims.
How do courts approach breakdowns in trust between family shareholders?
Courts recognise that personal relationships often underpin family businesses. When those relationships break down, the dispute may not be capable of simple resolution through normal corporate governance mechanisms.
In quasi-partnership companies, the court may take into account the expectations that shareholders had when the business was formed. If those expectations included continued participation in management, exclusion from management may be considered unfair.
At the same time, courts will also consider whether the shareholder’s own conduct contributed to the breakdown in relations.
Ultimately, the court’s task is to determine whether the conduct complained of is both unfair and prejudicial in the circumstances of the particular company.
What options exist for resolving family shareholder disputes?
Family shareholder disputes can be particularly sensitive because they combine commercial issues with personal relationships.
- In many cases, the most practical outcome is a negotiated buy-out that allows one shareholder to exit the company while the business continues operating.
- Alternative dispute resolution methods such as mediation can also play an important role. Mediation allows parties to explore solutions privately and may help preserve family relationships where possible.
Where negotiation fails, an unfair prejudice petition may provide a legal route to resolving the dispute. The court has broad powers to order remedies, including requiring one shareholder to purchase the shares of another.
Key takeaway
Family businesses frequently operate on the basis of trust, personal relationships and informal understandings. When those relationships break down, disputes may arise that fall within the scope of section 994 of the Companies Act 2006.
Understanding how the courts approach unfair prejudice in quasi-partnership companies can help shareholders assess whether legal action may be appropriate.
Supportive and friendly with partner-led involvement, I would recommend Francis Wilks & Jones to anyone facing a similar situation.
A shareholder who turned to us after discovering that his co-shareholder was profiting well from their business while he was being paid a pittance. We helped him find a way out of the business by selling his shares
