Investigating and quantifying shareholder disputes – a forensic accountant’s perspective

A large proportion of the cases our Disputes, Investigations and Valuations team deals with are shareholder disputes in one form or another. These are disputes between company owners for a variety of reasons including disagreements on decision-making, dividend distribution, access to information, business strategy, or perceived unfair treatment; often with a power imbalance between majority and minority shareholders. 

Disputes between shareholders (often owner managers) distract the management team from focusing on the success of the company and running the company. The fallout from shareholder disputes can be really detrimental to the success of the business. Resolving shareholder disputes early is therefore crucial to prevent business disruption, protect relationships, safeguard financial interests, and maintain company stability. Early resolution can allow owner managers to focus on running the company, preserves trust among shareholders, enables smoother decision-making, can limit reputational damage, and can avoid legal costs as far as possible. 

Types of shareholder disputes

While unfair prejudice claims are the most common form of shareholder dispute we are instructed in, these are not the only forms of disputes between owners of a company. An example of some recent cases that we’ve seen include the following:

• Minority shareholder unfair prejudice claims – this is where a minority shareholder claims that actions taken by the majority shareholder are prejudicial to the interests of the minority shareholder
• Deadlock disputes – Shareholders with equal control that cannot agree on key decisions, preventing the company from operating.
• Financial and dividend disputes – Disagreements about profit distribution, salaries, or use of company funds.
• Valuation and exit disputes – Conflicts over the fair value of shares during buyouts or exits. 

The role of a forensic accountant in shareholder disputes

The role of a forensic accountant in shareholder disputes is not just about putting a number on a claim. Forensic accountants often play a crucial role in resolving shareholder disputes by providing financial analysis and an objective assessment of financial matters, right through to giving evidence at court if necessary. Key roles undertaken by a forensic can include: 

1. Investigating financial records – examining company accounts, transactions, and financial statements to identify discrepancies, fraud, or mismanagement
    
2. Quantifying losses – calculating financial losses suffered by shareholders and/or the company due impact of misuse of funds, unfair practices, or business underperformance
    
3. Valuing shares – determining the value of shares in the company, and often the value of a minority shareholder’s interest in the company with or without adjusting for the alleged financial wrongdoing
    
4. Minority discounts – while the application of a minority discount is ultimately a decision for the court, we are often asked to give an opinion on the likely level of a minority discount based that may be appropriate should the court decide that it’s applicable 
    
5. Tracing assets – identifying hidden, diverted, or misappropriated company assets that may be central to the dispute
    
6. Providing expert testimony at court – giving evidence in court or arbitration as an expert witness, explaining complex financial matters clearly and impartially

By combining investigative skills, accounting knowledge, and valuation expertise forensic accountants provide a crucial role in understanding and quantifying the issues in play in shareholder disputes.  

Examples of some recent shareholder dispute cases 
 
1. Case One – Unfair prejudice petition (Industry: Financial Services)

The shareholders alleged that the managing director breached his fiduciary duties by using company funds for personal expenses and misappropriating company assets.

Forensic steps: securing accounting records, reviewing bank and credit-card transactions, testing expense claims, analysing asset registers, tracing asset movements, examining e-mails, conducting interviews with staff, reviewing board minutes and authority levels, and quantifying the value of misappropriated funds and assets.

Outcome: the investigation identified personal spending disguised as business costs and assets removed without authorisation, supporting the shareholders allegations.

2. Case Two – Minority shareholder unfair prejudice petition (Industry: Facilities Management)

A minority shareholder filed an unfair-prejudice claim alleging the majority shareholder extracted value from the business and acted in bad faith, reducing the company’s value and her shareholding.

Forensic steps: securing financial records, analysing bank transactions, reviewing related-party payments, examining board minutes and approvals, assessing management remuneration, performing journal-entry testing, conducting email reviews, interviewing key finance staff, and quantifying the financial impact.

Outcome: Findings showed undisclosed transactions, inflated management remuneration and exclusion from decision-making. Evidence supported the minority shareholder’s unfair-prejudice petition, quantifying financial loss and governance failures.

3. Case Three – Minority shareholder unfair prejudice petition (Industry: Manufacturing)

A minority shareholder alleged unfair prejudice after the majority shareholder diverted company funds into large sponsorship payments benefiting a rugby club he was personally involved with.

Forensic steps: securing accounting records, analysing sponsorship transactions, reviewing board approvals, tracing related-party links, examining e-mails, testing procurement processes, interviewing staff, and quantifying the financial impact on company value.

Outcome: Findings showed inadequate approvals, conflicts of interest, and excessive spending inconsistent with commercial benefit, supporting the minority shareholder’s claim.

Final thoughts 

Shareholder disputes can be damaging to a company, the resolution of them in a timely manner is important for the stakeholders of the business. Understanding the financial issues and the values of shares is a key part in the process and in resolving the issues. The role of the forensic accountant is crucial to assisting the parties and their legal advisors when dealing with shareholder disputes.