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Shareholder Agreements and Unfair Prejudice: Untangling Complex Relationships

Dealing with the intersection of professional relationships, personal connections and business interests is not straightforward for boards of owner-managed businesses. Shareholders may feel a false sense of security, based on trust, and it can become challenging for directors to discharge their duties with transparency, untainted by any conflict of interest.

However, in these circumstances, particular care does need to be taken. First, to ensure that, regardless of the strength of the pre-existing relationship, the creation of legally enforceable rights is not disregarded as unnecessary and, secondly, that if a problem arises, the directors behave in a manner that quarantines personal considerations, mitigating the ability for challenge later.

A formal shareholder agreement will typically seek to ensure that ongoing shareholder participation is properly governed by (amongst other things) rules relating to voting control, veto rights, dividends, restrictive covenants and anti-dilution. The agreement will also include terms dealing with the rights or restrictions that apply on an “exit”, when the shareholder relationship ends due either to the sale of the company or the departure of a shareholder.

These terms typically include:

  • The meaning of an “exit”. Is this the sale of a “controlling interest” in the company or some other threshold? Can an individual shareholder sell his shares?
  • The obligations that will arise (both for the company and the other shareholders) in such circumstances.
  • The timing of when these obligations will arise. Is there a period during which shareholders are locked in, meaning that exit provisions can’t be triggered?
  • Details of who can join an exit opportunity (or be compelled to join).
  • Whether the shareholders (or some of them) have a right of first refusal to buy out an existing shareholder who is seeking to exit.
  • The basis on which the value of the exit shares will be agreed or determined.
  • The identity of third-party advisors required to deal with valuation and how (and on what terms) third parties will be instructed.

Advisors to shareholders with existing relationships are sometimes asked to include provisions that provide “statements of intent” regarding exit plans. These typically include an objective accompanied by an obligation for parties to act reasonably, but with limited other details.

Depending on the drafting, this sort of exit arrangement may have very little legal effect because an “agreement to agree” is typically unenforceable under English law. In short, the court will not enforce provisions by filling in the detail and, without the threat of judicial intervention, parties may struggle to reach a settled position on what they meant at the time.

Even when the parties are well-advised and the provisions are clear, directors must ensure that they are compliant, consistent and transparent in their application of the exit process. Directors should ensure that they conduct themselves in a manner in which the company is “fair” to the shareholders, ensuring that those with equality of rights receive equality of treatment and are not unfairly prejudiced by such conduct.

Directors must also be very careful about their statutory and common law duties relating to conflict. If a director interprets or deploys contractual provisions with self-interest at heart. and not the interest of the company or group of shareholders, there can be ramifications for

the company and the director. Conflicts need to be identified and steps put in place to deal with them ahead of time.

Some recent cases (including last month’s case of Wells v Hornshaw [2024] EWHC 330 (Ch)) serve as a reminder of just how complex the interweaving issues of contractual interpretation, director duties and the doctrine of unfair prejudice can be if companies do not take careful advice and are not properly prepared for a shareholder exit.

In the Wells case, three shareholders (Stuart Wells, Paul Hornshaw and Mark Hornshaw) owned and operated a company known as Transwaste Recycling and Aggregates Limited (TRAL).

According to the judgment, following a raid by HMRC, Mr Wells (who held 14.3% of TRAL’s shares) notified the board that he wished to leave TRAL, involving a sale of his shares. A dispute arose in relation to the value of his shares, including the application of a discount (reflecting the fact that his shares represented a minority interest) and the appropriate financial period to use for the valuation.

Mr Wells was not satisfied with the valuation process conducted by the other director shareholders (who were brothers) and he brought a claim for unfair prejudice under section 994 of the Companies Act 2006.

In its judgment the court considered Mr Well’s allegations of unfair prejudice both in the context of TRAL’s management leading up to the raid and, separately, TRAL’s conduct in respect of the share valuation.


Whilst there had, allegedly, been some mismanagement of the company in the period prior to the raid by HMRC, the court found that no unfair prejudice had been occasioned by this. In short, Mr Wells did not need the court’s intervention as the parties already had a pre-agreed resolution (in the form of an exit route) available to him under the terms of the shareholder agreement such that he could sell and obtain fair value for his shares.


In relation to the discount applied to the value of Mr Wells’ shares (due to it being a minority shareholding), a provision to exclude this could easily have been included in the shareholder agreement. On that basis, again the court was not prepared to intervene and wouldn’t impose such a term.

However, the court was more sympathetic to Mr Wells’ position in relation to the board permitting the company’s accountant to use outdated financial information to determine the value of Mr Wells’ shares. One dilemma for the court was that the unfair prejudice must arise from the conduct of the company’s affairs, not because the accountant failed to follow instructions.

Noting that TRAL (though its sibling directors) was entitled to buy back Mr Well’s shares under the exit clause, and had a direct interest in the valuation process, the court determined that TRAL had been “conducting its affairs” when it instructed its own accountant. As a result, the failure to ensure that up to date information was used amounted to conduct that was unfairly prejudicial to Mr Wells and the court held that the valuation was not binding on him.


This case is another reminder of the importance of a having a comprehensive shareholder agreement at the outset which properly evidences the commercial terms agreed between the parties, both whilst they own the business and upon an exit. It also serves to show how important it is that directors manage the company in a manner that is fair and transparent, particularly if actions of the company can be regarded as ultimately self-serving.

To learn more about drafting or reviewing your shareholder agreement, please do not hesitate to contact our Corporate and Commercial team, who will be happy to help.


Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.

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