A shareholder dispute significantly disrupts a business. Consequently, it is crucial to recognise when a dispute is arising and to seek early guidance regarding available rights and remedies. The first stage is to review any shareholders’ agreement and the company’s articles of incorporation. These documents may contain executable shareholder rights.
A shareholders’ agreement may also contain a dispute resolution clause that specifies how the parties have agreed to attempt to resolve any disputes that may arise. The subsequent step is to evaluate any available alternate and/or additional solutions. In this article, Can A Shareholder Sue Another Shareholder, we consider the process and mechanism involved.
Please click here to find out more about our Commercial Litigation services.
Free initial telephone discussion
For a free initial discussion with a member of our New Enquiries Team, get in touch with us today. We are experienced in dealing with all the legal aspects of shareholders’ agreements and dispute resolution. Once instructed, we will review your situation and discuss the options open to you in a clear and approachable manner. Early expert legal assistance can help ensure you are on the best possible footing from the start. Simply call us on 0345 901 0445 or click here to make a free enquiry and a member of the team will get back to you.
What are the rights of shareholders?
While they are not directly involved in the company’s operations, shareholders still possess privileges in and around the business. These include:
- Influence over management. By determining who sits on the board of directors, they have the authority to influence who is appointed to management positions.
- Voting privileges at an organisation’s annual or general assembly
- The ability to vote on any substantial changes prior to their implementation. Perhaps the most important right of a shareholder, this provides them with additional influence over how a company is managed.
- The legal right to seek redress for wrongdoing. When a shareholder believes their rights have been violated or there has been a breach of the shareholder agreement, they have the legal right to file a lawsuit against the company.
What are the different types of disputes between shareholders?
Shareholder disputes can arise at any time for a variety of business-related reasons. Examples include:
50/50 shareholder deadlocks – When there is no shareholder agreement in writing, disputes frequently arise. When there are no minority and majority shareholders, disagreements can arise when minority shareholders must make crucial business decisions and no shareholder has the majority vote.
Claims of unfair prejudice – When majority shareholders believe the company’s affairs have been conducted in an unjust manner that could affect their interests, they may file a claim of unfair prejudice under section 30 of the Companies Act of 2006. By obtaining a court order, a shareholder can be effectively “bought out” through legal proceedings by the company or other shareholders.
Funding disputes – Funding disputes are extremely common, especially when there is no specific agreement regarding how a business will be funded beyond the initial shareholder contributions.
Breach of fiduciary duties – A director’s breach of fiduciary duties may lead to conflicts and derivative actions, such as fraud or other forms of claims.
Why do disputes typically arise?
Disputes with shareholders can arise for a variety of reasons, including:
- Disagreement over the company’s direction
- Unhealthy interpersonal relations
- Competing interests
- Poor business performance
- Insufficient individual performance
- Insufficient capital reaching shareholders
- Conditions of a director’s service agreement
- The concern that the board is not carrying out its duties
Resolving shareholder disputes
Shareholder disputes should ideally be resolved during shareholder meetings. Nonetheless, if concerns are not adequately addressed during these meetings, it may be necessary to consider alternative solutions. To determine shareholder options, parties should consult (i) the company’s articles of association and (ii) the shareholders’ agreement (if one exists). In addition to this, the following options are available to resolve shareholder disputes:
Unfair prejudice proceedings – Where a minority shareholder alleges that the company’s affairs have been conducted in a manner that unfairly prejudices its interests, that shareholder may bring unfair prejudice proceedings against the majority shareholder in accordance with Sections 994 and 96 of the Companies Act 2006. In such cases, a minority shareholder may pursue various remedies, including the purchase of its shares by the majority shareholder at market value (adjusted to account for the majority shareholder’s misconduct).
Derivative proceedings – These are actions filed by a shareholder or shareholders on behalf of the company. When there is an alleged breach of fiduciary duties by one or more directors of the company, such proceedings can be initiated. The court’s permission is required for a shareholder to pursue this type of action on behalf of the company.
Negotiation/Mediation – Shareholder disputes, like other disputes, can be settled without time-consuming and costly court proceedings. It is possible for the parties or their legal counsel to reach a resolution through direct negotiation. Alternately, mediation facilitated by a neutral third party may be an effective way to resolve the dispute.
Purchase of shares – If the resolution of a dispute is not proceeding smoothly, parties may wish to consider purchasing the disputing shareholder’s shareholding (subject to the terms of any shareholders’ agreement and the articles of association). It is likely that a third-party independent evaluator will be required to conduct an evaluation of the holding.
Is it possible to avoid shareholder disputes?
You can take measures to reduce the likelihood of a shareholder dispute occurring. First and foremost, it is recommended that all private businesses have a shareholders’ agreement that establishes the rights and responsibilities of each shareholder.
Moreover, a shareholders’ agreement can establish a precise framework for matters such as:
- Consulting charges
- Executive appointments
- Dispute resolution
- Leaving procedures
- Profit sharing
- Salaries
- Succession
If a business has a solid shareholders’ agreement, a dispute can be resolved quickly and efficiently, causing minimal disruption or damage to the company.
Additionally, it is essential that meticulous records be maintained. Similar to a good shareholders’ agreement, appropriate record keeping can prevent a shareholders’ dispute from escalating and harming a company. It ensures transparency among shareholders and functions as evidence of a person’s adherence to the shareholders’ agreement and good practices. In addition, when a dispute leads to litigation, a business is frequently required to provide the court with its records and accounts.
As soon as feasible, it is also recommended to seek legal advice to avoid shareholder disputes. An experienced solicitor can not only provide invaluable insight during a dispute but can also assist in the creation of a shareholders’ agreement.
Why are shareholders’ agreements so important?
Each share (public or private) in a limited liability company typically conveys one vote. Regardless of the opinions of the other shareholders, a motion is approved if the owners of more than 50 per cent of the shares present at the meeting support it. If a single shareholder owns more than 75 per cent of a company’s shares, that shareholder has absolute authority and may veto all shareholder decisions.
How can a minority shareholder prevent a majority shareholder from controlling their investment, and how can decision-making authority be more equitably distributed among owners?
There are two options available in this situation: distinct classes of shares or a shareholders’ agreement.
There are a variety of dispute resolution options available for shareholder agreements. By governing the relationships between the company and its shareholders, professionally-formulated and executed shareholders’ agreements can prevent partnership disputes. Additionally, shareholder agreements can aid in the resolution of potential disputes. They can provide a comprehensive account of the agreement between the parties in dispute.
In addition, members of an LLP can engage into contracts with one another. The agreements for limited liability partnerships are legally binding contracts that specify the responsibilities, rights, duties, and liability of each member, as well as the administration and operation of the partnership. The Limited Liability Partnerships Act of 2000 regulates default provisions in limited liability member agreements.
How we can help
We have a proven track record of dealing with shareholder disputes. We will guide you through the process and ensure all checks are carried out swiftly and efficiently. We firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.
Please click here to find out more about our Commercial Litigation services.
How to contact our Commercial Litigation solicitors
It is important for you to be well informed about the issues and obstacles you are facing. Expert legal support is crucial in terms of reducing risk, saving you money and ensuring you achieve a positive outcome.
To speak to our Commercial 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.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
Comments are closed.
