When Business Partners Fall Out: Dealing with Director and Shareholder disputes in owner-managed companies

When a business is built by a small group of founders, success depends on trust. You make decisions together, invest together and often become personally tied to the company’s fortunes.

But when that trust breaks down – whether between family members, friends, or long-time colleagues – the fallout can be deeply personal and professionally damaging.

At our firm, we regularly help owners of small and medium-sized businesses navigate these breakdowns. The disputes often centre on two key areas: how the company is being run, and how its value is being shared. Legally, that can lead to claims of unfair prejudice or derivative actions – but in most cases, the real challenge is finding a practical way forward that protects the business and the people behind it.

 1. Where Things Usually Go Wrong

a. Unequal effort and reward
It’s common for disputes to begin when one owner feels they’re doing most of the work while others take the rewards. Salary differences, dividend policies, or the use of company funds can all become flashpoints.

b. Exclusion from decision-making
When one director–shareholder starts making decisions without consulting others – or cuts them off from company information – it quickly breeds resentment. This is especially common when there’s no formal process for how decisions are made.

c. Misuse of company money or opportunities
Allegations that a director has taken unauthorised payments, paid personal expenses through the business, or diverted opportunities to another company are frequent triggers for disputes.

d. Setting up a competing business
Another common issue is when a director or shareholder quietly sets up a competing company, or begins diverting clients and staff. This can amount to a serious breach of duty and often causes irreparable damage to both trust and the business itself.

e. Relationship breakdowns
Many owner-managed businesses are built on personal relationships – friends going into business together or family-run ventures. When those relationships sour, every decision becomes a battleground.

2. The Legal Avenues: Unfair Prejudice and Derivative Actions

Unfair Prejudice (s.994 Companies Act 2006)
This is the most common route for minority shareholders who feel they’ve been treated unfairly. A claim can be made where the company’s affairs are conducted in a way that is unfairly prejudicial to a shareholder’s interests – for example:
– Being excluded from management against prior understanding
– Excessive salaries being paid to others
– Dividends being withheld without justification
– New shares being issued to dilute your holding

Our approach:
We focus on early evidence gathering and negotiation. Many claims can be resolved through a fair buyout or agreed exit, without the cost and disruption of a court case. If litigation is unavoidable, we build a strong case around financial transparency and the true value of the shares in question.

Derivative Actions
A derivative claim is made on behalf of the company against a director who has breached their duties – for example by misusing funds, acting in bad faith, or diverting business opportunities.

Our approach:
These cases are technical and require the court’s permission to proceed. We only pursue them where there’s a clear financial benefit to the company or the shareholders as a whole. Often, the existence of a potential claim gives useful leverage in negotiations, helping us secure settlement terms that put the business back on track.

3. How We Help With These Disputes

a. Early strategy and risk assessment
We start by clarifying what each party really wants – control, money, or a clean break – and then map out the legal and commercial options. That early analysis often changes the dynamic, because everyone can see the likely endgame.

b. Negotiation and mediation
Our priority is to resolve disputes quickly and privately. Mediation or structured negotiation can help restore trust, or at least pave the way for an orderly separation. We manage that process carefully to keep communication constructive and focused on outcomes.

c. Restructuring or exit plans
Where the business can be saved, we help redesign the ownership and governance structure to prevent the same issues happening again. Where relationships are beyond repair, we work towards a fair exit – agreeing a buyout price, managing valuation disputes, and ensuring tax and legal compliance.

d. Litigation when necessary
If one party won’t engage or there’s been serious wrongdoing, we act decisively in court to protect our client’s position. Whether that means securing an injunction, bringing an unfair prejudice petition, or defending against one, our goal is always the same: protect the value of the business and reach a practical outcome as efficiently as possible.

4. Can You Prevent These Disputes?

One way to reduce the risk of future conflict is to have a clear shareholders’ agreement in place. A well-drafted agreement can set expectations from the start – covering how decisions are made, how profits are distributed, and what happens if one party wants to exit.

But the reality is that even with a shareholders’ agreement, disputes can still arise. No document can legislate for every change in circumstances or relationship dynamic. What it can do is give you a framework to fall back on – helping to manage the dispute more predictably and often at a lower cost.

That’s why we always recommend reviewing your company’s constitution and shareholder arrangements regularly, particularly as the business grows or changes direction. Clarity at the outset is valuable, but active management of those relationships is what really keeps disputes at bay.

Final Thoughts

Director–shareholder disputes in owner-managed businesses are rarely just about money. They’re about trust, effort, and fairness – and often about protecting a company that the parties have built from scratch.

Our role is to cut through the emotion, identify the leverage points, and guide clients toward practical outcomes – whether that’s rebuilding relationships, restructuring ownership, or achieving a fair exit.

If your relationship with a co-owner is breaking down, early advice can make all the difference. The sooner we’re involved, the more options there are to resolve the dispute before it damages the business you’ve worked hard to build.

Contact Us

If you’re facing a dispute with a fellow director or shareholder, get in touch for tailored advice on your next steps or connect with Chris Clayton on LinkedIn and send him a direct message.

DISCLAIMER: The information provided on this blog is for general guidance only and does not constitute legal advice. If you require tailored legal advice, please contact us to discuss your specific circumstances.

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