Family businesses rarely begin with detailed governance structures. For many clients we advise that informality works for years, until relationships deteriorate and assumptions are tested.
Sadly, family relationships can break down. When they do, claims can often or are often threatened under section 994 of the Companies Act 2006. In our dispute resolution and litigation practice, we increasingly see claims brought by shareholders who are no longer involved in the day to day business, but who allege that they have been unfairly excluded or treated in a way that undermines their interests.
What makes these disputes particularly complex is the tension between the informal way the business operated in practice and the formal legal framework that ultimately governs the corporate structure.
This article explores how informal practices in family run companies can give rise to unfair prejudice claims under section 994, focusing on the limits of shareholder rights, the role of legitimate expectations, and the line between disengagement and exclusion. It also considers both overt and subtle forms of exclusion, when such conduct may be justified, and how these claims are often used strategically to facilitate exit.
The myth of participation
A consistent starting point in advising clients is addressing a common misconception: that share ownership confers a right to participate in management.
There is a clear distinction between ownership and management. Simply being a shareholder does not entitle a person to make decisions or take part in day-to-day supervision. The courts will only intervene where exclusion from management breaches a legitimate expectation, derived from the parties’ agreement or from the nature of their relationship.
In some of the family business disputes we see, those expectations arise from the way the business has historically been run, rather than from formal documentation. These companies may fall within the concept of a quasi partnership, where mutual trust and participation form part of the foundation of the relationship.
A key part of our role as legal advisers, whether acting for majority or minority shareholders, is to analyse whether expectations can be established with sufficient clarity to support or defend a claim.
When stepping back becomes exclusion
In practice, many disputes arise where a shareholder’s role evolves over time. What begins as active involvement may gradually reduce, particularly in family-run businesses where roles are fluid and rarely documented.
By the time we are instructed, the position can be entrenched:
- one or more shareholders has operational control;
- another has stepped back;
- and the latter alleges that they have been excluded.
However, as highlighted in Kelly v Hussain ([2008] EWHC 1117 (Ch)), exclusion from day to day operations does not, on its own, establish unfair prejudice. Instead, the court will undertake a detailed, fact sensitive enquiry into the conduct of the petitioner, the parties’ expectations and the structure of the business.
This reflects an approach we regularly emphasise in our advice, that disengagement is not automatically exclusion, and exclusion, whilst prejudicial, is not automatically unfair.
Justified exclusion
Where there is exclusion, the courts will consider whether the majority shareholders had any justification. For example, in Sprintroom (Re Sprintroom Ltd (also known as Potamianos v Prescott) [2019] EWCA Civ 932) the Court of Appeal (Quoting from the book Hollington on Shareholders Rights, 8th edn) acknowledged that there will be instances where the minority has brought the exclusion upon themselves through their conduct. This will be judged objectively by the court. By way of illustration, some instances which may amount to justified exclusion or removal could include:
- diverting business to a rival company;
- instigating secret negotiations on business matters without disclosing to directors;
- theft of company money;
- unauthorised cancelling of a contract with a key client; or
- breach of duty leading to an irreparable breakdown of the relationship.
In circumstances where the exclusion or removal is found to be justified, a section 994 petition will typically fail.
Subtle exclusion: the disputes we increasingly see
Not all disputes involve formal removal. In many cases, the complaint is more subtle: a gradual erosion of influence.
The decision in Saxon Woods Investments Ltd v Costa ([2024] EWHC 387 (Ch)) provides a useful illustration. A minority shareholder was not removed but was effectively sidelined through control of information and exclusion from a key transaction.
This reflects a pattern that is not uncommon in practice:
- board processes becoming opaque,
- key decisions being taken informally,
- minority shareholders not being privy to critical discussions.
From a risk perspective, these situations can be just as significant as outright removal. What matters is whether the conduct undermines the shareholder’s ability to meaningfully engage with the business.
From participation to financial prejudice
Where a claimant struggles to establish a right to participate in management, the focus of a dispute often shifts.
Typical features include:
- profits being extracted through director remuneration rather than dividends;
- limited access to financial information;
- concerns about diversion of opportunities or value.
In these cases, the argument is not simply “I have been left out”, but “my position as a shareholder has been undermined”.
From a dispute's strategy perspective, this shift is critical. It often reframes the claim in a way that is more likely to engage the court’s core concern: whether there has been conduct which is unfairly prejudiced to shareholder interests, rather than just a breakdown in working relationships.
Section 994 as a strategic tool
Although claims are framed in terms of fairness, our experience is that most unfair prejudice claims are, in practice, about exit.
The most common remedy remains a court ordered buy out, requiring one party to purchase another’s shares at a fair value, often being the majority purchasing the minority's shareholding. However, we have seen, and successfully achieved, the reverse remedy as sought by our minority client to buy-out the majority's shares ([2023] EWHC 3232 (Ch)).
- Against that backdrop, section 994 is frequently deployed strategically by minority shareholders to create leverage for an exit;
- seek to negotiate a buy-out on more favourable terms;
- secure access to information and internal documents previously not disclosed;
- stop ongoing prejudicial conduct such as asset diversion; or
- seek to preserve share value, especially where mismanagement can threaten a company's worth.
There are instances where the majority shareholders may deploy a petition should the minority have operation control but is damaging the company, misappropriating assets or there has been an irreconcilable breakdown for example.
In many cases, early engagement which is combined with a realistic assessment of valuation allows disputes to be resolved without court involvement.
Reconstructing the unwritten arrangement
What makes these disputes particularly challenging is that they often require the court and the parties to reconstruct an arrangement that was never clearly defined.
In many family businesses:
- roles were never formally agreed;
- expectations around participation were assumed rather than recorded;
- exit mechanisms were not considered at all;
- shares were passed down by generations; and
- non-family shareholders have been brought in whose expectations and interests differ greatly from founding families
When relationships break down, those gaps become critical.
Section 994 addresses this by focusing on whether the conduct complained of departs from the basis on which the parties agreed to do business.
In practical terms, that means a detailed analysis of:
- the company’s history;
- how decisions were actually taken; and
- the expectations that developed over time.
For shareholders who have stepped back from day to day involvement, the line between voluntary disengagement and unlawful exclusion is often blurred. The law does not guarantee participation, but it does protect shareholders from conduct that unfairly diminishes the value of their interest.
Ultimately, these disputes are rarely about a single decision or events. They stem from competing interpretations of what the parties thought they had agreed, often in circumstances where agreements were never properly documented. When expectations have been left to assumption, resolving the conflict requires careful reconstruction of the relationship, strategic evaluation of the options and clear commercial solutions.
