Costs and Risks of Shareholder Dispute Litigation

Why Costs and Risk Assessment Are Essential Before Bringing a Claim

Shareholder dispute litigation is among the most expensive and unpredictable categories of commercial litigation. Cases that appear strong at the outset can become complicated as the full evidential picture emerges. Costs escalate quickly in contested proceedings. And the value at stake, however significant, can be consumed by legal fees on both sides if disputes are not managed carefully. Before bringing or defending shareholder dispute proceedings, a clear-eyed assessment of the financial costs, the litigation risks and the realistic range of outcomes is essential.

This chapter does not suggest that shareholder disputes should not be litigated. Where a minority shareholder is being genuinely oppressed, where assets are being extracted, or where the majority is acting in flagrant breach of its obligations, legal action may be not only justified but necessary. What it does suggest is that litigation should be entered into with a clear understanding of what it costs, what the risks are, and what alternatives to contested proceedings might achieve the same or a better result at lower cost and with less disruption.

This page is part of the Shareholder Disputes Knowledge Guide. If you need legal advice on a shareholder dispute see my direct access barrister page.

The Direct Costs of Litigation

The direct costs of shareholder dispute litigation depend on the complexity of the case, the number of witnesses and issues involved, whether valuation is contested, and how far the proceedings go before they are resolved. The following figures provide a general indication, though costs can vary significantly.

In a relatively straightforward unfair prejudice petition where the facts are not heavily disputed and the case settles at or before a final hearing, total legal costs across both parties might run to £50,000 to £150,000. In a complex contested case with multiple witnesses, valuation disputes and a full trial, total legal costs can easily exceed £500,000 and in the most complex cases can run to seven figures. Expert valuation costs, which arise whenever the price of a buyout is in dispute, add further to the total.

The general rule in English civil litigation is that the losing party pays the winning party’s legal costs, though the amount recovered is rarely one hundred percent of the actual costs incurred. However, the court has wide discretion on costs, particularly in shareholder disputes where both parties may have behaved in ways that justify adjusting the usual costs order. A party that refused a reasonable offer to mediate, for example, may find that an adverse costs order is made against them even if they succeed on the substantive claim.

Funding the Litigation

One of the most practical challenges in shareholder dispute litigation is finding the money to fund it. A minority shareholder who is being excluded from management, has lost their salary, and is receiving no dividends may find that they have very limited personal funds available to sustain prolonged litigation against a majority that controls the company’s cash and can, in some circumstances, use company funds to pay legal costs in connection with the dispute.

The use of company funds to fund litigation that is essentially in the personal interests of those controlling the company, rather than in the interests of the company itself, is itself a form of prejudice that may be relied on in an unfair prejudice petition. Courts are alert to this issue and may include the improper use of company funds for litigation purposes in the overall assessment of the majority’s conduct.

Alternative litigation funding arrangements, including conditional fee agreements with lawyers and third party litigation funding, may be available in appropriate cases. These arrangements can enable a shareholder with a strong case to bring or defend proceedings without having to fund all the costs upfront, though they carry their own costs and risks that must be carefully understood before they are entered into.

The Costs of Getting It Wrong: Adverse Costs Orders

The costs risk of shareholder dispute litigation runs in both directions. A petitioner who brings a weak or exaggerated claim, who refuses a reasonable offer to settle, or who fails to engage seriously with mediation when it is offered, may find themselves ordered to pay not only their own costs but also the respondent’s costs, even if some aspects of the petition succeed. In complex cases, a significant adverse costs order can dwarf the value of the dispute itself.

Respondents face a similar risk. A respondent who defends proceedings when a reasonable offer to settle was available, who engages in tactical behaviour designed to increase the petitioner’s costs rather than advance a legitimate defence, or who refuses to engage with mediation may face adverse costs consequences even where they succeed on the substantive defence.

The court’s active encouragement of alternative dispute resolution in shareholder cases, and the costs consequences of unreasonably refusing to mediate, make it essential that both parties can demonstrate at all times that they have approached the dispute in a commercially reasonable and proportionate manner. A refusal to consider mediation without good reason is one of the most reliably damaging tactical mistakes in shareholder litigation.

The Litigation Risks: What Can Go Wrong

Beyond the financial costs, there are significant litigation risks that any shareholder contemplating proceedings should understand.

The evidential risk is often greater than parties anticipate. A case that appears straightforward when viewed from one side frequently becomes more complex once the full documentary record has been produced in disclosure. Documents that the petitioner did not know existed may undermine key allegations. Witnesses who appeared certain in their recollections may give less helpful evidence under cross-examination. The opposing party’s account, however implausible it seemed at the outset, may turn out to be better supported by the documentary evidence than expected.

The valuation risk is a particular feature of shareholder disputes. Even where the petitioner succeeds on the unfair prejudice claim, the buyout price that the court awards may be significantly different from what the petitioner expected. Valuation evidence in shareholder cases is often contested and the range of reasonable expert opinion can be wide. A petitioner who has funded expensive litigation partly on the basis of an optimistic valuation of their shares may find that the court’s valuation produces a lower result.

The relationship risk is significant in disputes involving family members or long-standing business partners. Contested litigation exacerbates and entrenches conflict. Evidence given in proceedings becomes a permanent record that can permanently damage personal relationships. Even where a party succeeds in the litigation, the personal cost of the process, and the impact on family and professional relationships, may outweigh the financial benefit.

Why Mediation Is Often the Better Route

Given the financial costs, litigation risks and personal impact of contested shareholder dispute proceedings, mediation offers a compelling alternative in many cases. A mediated settlement can be reached more quickly, at lower cost, with greater confidentiality, and with more flexibility about the terms of resolution than any court order. The parties retain control over the outcome rather than placing the decision in the hands of a judge who will apply the law as they find it without regard to the broader commercial and personal interests of the parties.

Mediation does not require either party to accept liability or to admit that their conduct was wrong. It provides a structured opportunity to explore whether a commercial resolution is possible and, where it is, to agree terms that both parties can live with. Many shareholder disputes that appeared irreconcilable when viewed through the lens of litigation have been settled at mediation, often on terms that neither party had contemplated at the outset.

For more detail on the role of mediation in shareholder disputes see the chapter on how important is mediation in shareholder disputes.

Published Resources

My book Shareholder Disputes: A Practical Guide for Business Owners, Directors and Family Businesses addresses the costs and risks of shareholder dispute litigation in detail, providing practical guidance on how to assess whether the potential benefits of litigation outweigh the financial and personal costs, and how to approach the dispute in a way that gives the best realistic prospect of achieving a good outcome at proportionate cost.

See all books.

Frequently Asked Questions

How much does a typical shareholder dispute cost to litigate?

Total legal costs in shareholder dispute litigation vary enormously depending on the complexity of the case. A relatively straightforward case that settles before trial may cost £50,000 to £150,000 in total across both parties. A complex contested trial can cost significantly more. Early settlement, particularly through mediation, can reduce costs dramatically.

Who pays the legal costs if I win my petition?

The general rule is that the losing party pays the winner’s costs, but the court has wide discretion in shareholder cases. Costs orders can be affected by the parties’ conduct during the litigation, including whether they engaged reasonably with offers to settle and with mediation. A party who wins on the substantive claim but behaved unreasonably in the conduct of the proceedings may not receive a full costs order in their favour.

Can I use company funds to pay my legal costs?

This depends on whether the litigation genuinely benefits the company or is in the personal interests of those controlling it. Using company funds to fund litigation that is essentially personal, rather than in the interests of the company, may itself constitute unfair prejudice that can be complained of by the other shareholders. Legal advice on this specific point is essential before company funds are committed to litigation.

What is third party litigation funding?

Third party litigation funding is an arrangement under which a funder, typically a specialist investment fund, agrees to pay some or all of a litigant’s legal costs in exchange for a share of the proceeds if the case succeeds. It can enable shareholders with strong cases but limited funds to bring proceedings they could not otherwise afford. However, litigation funding arrangements are complex and carry their own costs that must be carefully understood.

Get in Touch

If you want to understand the realistic costs and risks of your shareholder dispute before deciding how to proceed, I would be glad to discuss your situation.

Call 020 4538 0246, use the contact form below, or book a call directly.

Important disclaimer: This page is provided for general information and educational purposes only and does not constitute legal advice. The content may not be legally accurate for your specific situation. You must not rely on anything on this page in respect of your legal rights. The law in this area relates to companies registered in England and Wales only. Always seek independent legal advice from a qualified specialist before taking or refraining from taking any action. The author accepts no responsibility for any decisions made or outcomes arising from use of this material. If you would like specific advice on your situation, contact me here.

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