Private Railtrack shareholders are to take the government to the High Court to seek "fair value" compensation.
Network Rail is in charge of maintenance
They are angry with the payout agreed after then Transport Secretary Stephen Byers put the rail infrastructure firm into administration in October 2001.
The 45,000-strong Railtrack Private Shareholders Action Group has outlined a claim against the Government for misfeasance - abuse of public power.
Via its solicitors, RPSAG has offered the chance to settle out of court.
The case is effectively against Mr Byers and his decision, but it will be defended by the Department for Transport, though it is possible Mr Byers could give evidence.
The RPSAG, which has raised about £2m to fight the court case, said the government had refused to meet its representatives in order to achieve a settlement and "accordingly, RPSAG has decided that shareholders have no option but to commence legal proceedings".
RPSAG chairman Andrew Chalklen said: "We are disappointed that the government has refused to meet us. It seems to hope that we'll just go away and be quiet.
"But we are determined to seek justice for our members."
He added: "These are not large institutional shareholders but just ordinary people, many of whom took up the offer of shares by the Government in 1996.
"Many worked and continue to work in the rail industry."
'Misuse of powers'
It was "not a political argument about whether or not Railtrack or its replacement, Network Rail, should be in private or public hands," he said.
"What the Government did was to manipulate events unlawfully so that it could take away shareholders' assets without paying for them. That is not how a Government should behave."
The group said its lawsuit alleged misfeasance in public office, or the misuse of official powers by Mr Byers.
Railtrack shares, which had been as high as £17, were suspended at 280p when the administration order was made.
In March 2002, the Government offered shareholders compensation of £500m (or about £2.50 a share) as part of the arrangement which set up Railtrack's replacement company Network Rail.
Shareholders have so far received £2 per share in January this year and 43p per share in August. They are due to receive more shortly.