The effectiveness of shareholder dispute resolution in private companies under UK companies legislation: an evaluation

Abstract

The aim of the research is to evaluate the effectiveness of the legal means of resolving shareholder disputes in private companies. The principal means are ex ante contracting in shareholders' agreements and court-based dispute resolution mechanism in sections 994-996 of the Companies Act 2006. Private companies are often formed on the basis of mutual trust deriving from personal relationships between shareholders. The breakdown of these relationships termed 'relational breakdown' commonly precipitates squeeze-out behaviour that causes disputes over the terms of exit. Ex ante contracting in shareholders' agreements cannot eliminate the underlying factors that cause relational breakdown, but can only mitigate the effects of relational breakdown by qualifying the powers of the majority and providing an exit to the minority on fair terms. Moreover, due to a range of limitations associated with ex ante contracting in shareholders' agreements, shareholders need recourse to a legal mechanism such as sections 994-996 of the Companies Act 2006 (formerly sections 459-461 of the Companies Act 1985) to resolve their disputes. In a Consultation Paper and subsequent Report published in October 1997 the Law Commission criticised the length, cost and complexity of proceedings under these provisions which were said to diminish their effectiveness as a tool for resolving shareholder disputes. After the Law Commission Report there have been significant developments both in terms of substantive law and procedure which have sought to streamline the remedy and make it more effective. The present research is the first attempt to consider from a legal perspective the effectiveness of sections 994-996 of the Companies Act 2006 as a court-based dispute resolution mechanism, in the decade since the Law Commission produced its Report on shareholders' remedies