Can A 50% Shareholder Liquidate A Company?

There are many reasons why a shareholder in a company would want to liquidate the business. Personal circumstances change over time and what originally seemed like a great business idea might soon become a source of heartache. Often, a shareholder may want to retire or move overseas. Perhaps there is a conflict between the shareholders and the working environment has become toxic. This atmosphere can also have detrimental effects on the business itself. In this article, can a 50% shareholder liquidate a company, we take a look at the options open to you and the mechanism involved.

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What are the implications of 50:50% ownership?

When a business started by two people is incorporated into a company, the founders often split the shares 50:50. This is because the beginning of a new business is filled with optimism and a sense that the future will be full of excitement and success. With both parties feeling they will contribute to the business in their own defined way, an equal split of the shares seems like a reasonable thing to do. Unfortunately, a 50:50 split does present certain problems concerning control of the business and this will often present itself when there is friction between the parties or disagreement.

Under company law (subject to any contrasting terms in the shareholder agreement or amended Articles of Association), certain decisions can only be made by shareholders who hold over 50% of the shares. Shareholders with 51% of the equity have the power to appoint and remove directors (and thus change day to day control) and to approve payment of a final dividend. Additionally, if your co-shareholder has over 25% of the shares, he or she may block any special resolution, such as one to change the articles of association of the company. Consequently, if you want full control, you need over 50% of the shares and your fellow shareholders should have under 25% (either individually, or ideally, between them).

What happens if both shareholders want to liquidate the company?

When two directors mutually decide to close down their company and are 50/50 shareholders, it becomes non-contentious and relatively straightforward. A  Members’ Voluntary Liquidation (MVL) allows a solvent company to be closed down, with the assets of the company being distributed to the shareholders.

What happens if only one shareholder wants to liquidate the company?

This situation can be resolved by one director resigning and leaving the other to continue running the company. However, some directors aren’t comfortable with this and would prefer the company to be liquidated and outstanding liabilities are taken care of. This, unfortunately, is where problems often occur.

When there are only two directors, and each has a 50% shareholding, an unresolved dispute is referred to a ‘deadlock.’ To help break the deadlock, outside mediation can be sought.

What is a Deadlocked Dispute

When two directors hold equal shares in a business and disagree on a matter of strategy, or feel there is no future in the partnership the situation is termed ‘deadlock.’ There are no additional board members to cast a vote on the next step, and stalemate ensues.

This can be disastrous, even when a business has been relatively successful in the past. Focus is taken away from running the operation day-to-day and placed on trying to resolve these issues. If both parties are resolute in their own views and refuse to compromise or concede to the other’s opinion, this can cause operations to grind to a standstill and the quality of output to decline, putting the entire future of the business in jeopardy.

What is a winding up petition on ‘just and equitable grounds?’

This type of petition is designed to deal with director disputes that cannot be resolved in any other way. It hands responsibility to the courts for deciding on the next step. They assess the situation and decide whether or not voluntary liquidation of the company is the most appropriate route to take.

These types of petitions are quite rare. The court will take into account whether trust and confidence has broken down between the parties, which in the case of deadlock between 50/50 director/shareholders is likely, and whether there are any other options apart from voluntary liquidation.

Sale of shares and the removal of a director from the limited company

One of these options could be for one party to buy out the other.

One of the benefits of liquidating a company following a dispute is that directors may be able to set up a new company, taking with them existing clients, and starting again on their own.

How we can help

We have a proven track record of helping clients with shareholder disputes. We will guide you through all the necessary legal due diligence in a comprehensive and timely manner. We firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.

How to Contact our Litigation Solicitors

It is important for you to be well informed about the issues and obstacles you are facing. However, expert legal support is crucial in terms of saving you money and ensuring you achieve a positive outcome.

To speak to our Litigation solicitors today, simply call us on 0345 901 0445, or allow a member of the team to get back to you by filling in our online enquiry form. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.

Authored by Ben Posted in Litigation, News Tagged as