A shareholder dispute is extremely disruptive to a business. Therefore, it is essential to recognise when a dispute is arising and to seek early advice on available rights and remedies. Reviewing any shareholders’ agreement and the company’s articles of incorporation is the initial step. These documents may contain shareholder rights that can be enforced.
A shareholders’ agreement may also include a dispute resolution clause that specifies how the parties have agreed to attempt to resolve any arising disputes. The next stage is to consider any available alternative and/or additional remedies. In this article, Disputes Between Shareholders, 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 rights do shareholders have?
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 partnership and shareholder disputes?
Shareholder disputes can arise for a variety of reasons at any time during the course of business. These can include:
Partnership disputes – Disputes can arise within any partnership due to disagreements regarding the allocation of the partnership’s assets, when a partner wishes to exit the partnership, or during an equitable winding-down procedure. All of these situations have the potential to cause problems and complications for the company and the remaining partners.
50/50 shareholder deadlocks – When there has never been a written shareholders’ agreement, disputes frequently arise. When there are no minority and majority shareholders, disagreements can arise when essential business decisions must be made by minority shareholders and no shareholder has the majority vote.
Unfair prejudice claims – In situations where shareholders believe the company’s affairs have been conducted in an unjust manner that could affect their interests, majority shareholders may bring an unfair prejudice claim under Part 30 of the Companies Act of 2006. Through court proceedings, a shareholder can be effectively “bought out” by the company or other shareholders by obtaining a court order.
Funding disputes – Funding disputes are extremely common, particularly when there is no specific agreement regarding how a business will be funded beyond the initial contributions of shareholders.
Breach of fiduciary duties – Conflicts may result from a director’s breach of fiduciary duties, and these breaches may lead to derivative actions, such as fraud or other types 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
Shareholder dispute resolution
Ideally, shareholder disputes should be addressed during shareholder meetings. However, if concerns are not adequately addressed at these meetings, it may be necessary to explore other options. Parties should consult (i) the company’s articles of association and (ii) the shareholders’ agreement (if one exists) to determine the shareholder options.
Beyond this, some of the following alternatives are available to settle shareholder disputes including:
Unfair prejudice proceedings – Where a minority shareholder alleges that the company’s affairs have been conducted in a way that unfairly prejudices its interests, that shareholder may bring unfair prejudice proceedings against the majority shareholder under Sections 994 and 96 of the Companies Act 2006. In such actions, a minority shareholder may pursue a variety of remedies, including the purchase of its shares by the majority shareholder at market value (adjusted to account for the impact of the majority shareholder’s wrongdoing).
Derivative proceedings – These are actions filed on behalf of the company by a shareholder or shareholders. When there is an alleged infraction of fiduciary duties by one or more of the company’s directors, such proceedings may be brought. For this form of action, the court’s permission is required for a shareholder to pursue an action on behalf of the company.
Negotiation/Mediation – Shareholder disputes are similar to other disputes in that they can be resolved without the time and expense of court proceedings. It is possible to reach a resolution through direct negotiation between the parties or their legal counsel. Alternately, a mediation facilitated by a neutral third party may be an effective means of resolving the dispute.
Purchase of shares – If resolution of a dispute is not proceeding well, parties may wish to contemplate purchasing the disputing shareholder’s shareholding (subject to the terms of any shareholders’ agreement and the articles of association). It is probable that an independent third-party valuer will be required to conduct an evaluation of the shareholding.
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.
The importance of a shareholders’ agreement
Typically, each share (whether public or private) in a limited liability company carries one vote. Regardless of the other shareholders’ opinions, a motion is passed if the proprietors of more than 50 per cent of the shares at a meeting support it. If a single shareholder possesses more than 75 per cent of the company’s shares, he or she has absolute power and may veto all shareholder decisions.
How can a minority shareholder avoid having his investment controlled by a majority shareholder, and how can decision-making authority be more equitably distributed among owners?
In this situation, there are two options available: distinct classes of shares or a shareholders’ agreement.
For shareholder agreements, a variety of dispute resolution options are available. Professionally-formulated and executed shareholders’ agreements can prevent partnership disputes by regulating the relationships between the company and its shareholders. Moreover, shareholder agreements can facilitate the resolution of potential disputes. They can provide a detailed account of the agreement between the disputing parties.
Additionally, members of a limited liability partnership may enter into contracts with one another. The agreements for limited liability partnerships are legally enforceable contracts that outline 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 governs the default clauses of 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.
