The most equitable method to divide the responsibilities and profits of a business with others, especially friends, appears to be on a 50/50 basis. In a limited company, however, holding 50 per cent of the shares entails having no control whatsoever.
In order for shareholders to vote on a business-related resolution, the holders of at least 51 per cent of the shares in a limited company must vote in favour of the motion for an ordinary resolution, and 75 per cent or more of the shares in the case of more fundamental resolutions. This means that if you and your business partner each possess 50 per cent of the shares in a limited company, a decision regarding the company’s business can only be made by the shareholders if you both vote unanimously.
At board level, if there are only two directors (and the articles of association that govern the conduct of the directors and the provisions of the Companies Act of 2006 do not permit otherwise), decisions will be made by vote, and with only two directors on the board, both directors must agree and vote unanimously for a motion to pass. In this article, Equal Shareholder Disputes, we consider the process and mechanism involved.
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What rights do shareholders have?
Certain decisions can only be made by shareholders who hold more than 50 per cent of the company’s shares, per company law. These shareholders have the authority to appoint and remove directors (and thus alter day-to-day control) and to authorise the payment of a final dividend. Additionally, if your co-shareholder owns more than 25 per cent of the company’s shares, they can obstruct any special resolution, such as one to amend the company’s articles of incorporation. If you want complete control, you must own more than 50 per cent of the company’s shares and your fellow shareholders must possess less than 25 per cent (either individually or, preferably, collectively).
There are often means to achieve the same objectives as 50/50 without holding equal shares.
The first is to utilise various share classes. Different privileges may be granted to various classes. For instance, preference shares typically lack voting rights but have the right to receive dividends before ordinary shareholders.
The second step is to detail in the shareholders’ agreement which shareholders have voting rights on specific issues. For instance, you could stipulate that your co-founder has no rights to dividend payments until your loan to the business has been repaid. There are a few things that cannot be altered by using a shareholder agreement, but it is still a viable alternative.
The best and simplest solution is for one of the company’s founders to own marginally more shares than the other. If one of you has invested debt in the company or conceived the initial concept, the other may be willing to accept a minority stake. It will save you a great deal of trouble in the future.
Shareholder dispute resolution
A 50/50 share split can be extremely problematic for the company if you and your partner have a disagreement. If there are no provisions for resolving disputes in a shareholder agreement or the company’s articles of association, a disagreement means that the company is at a standstill and cannot act on the disputed matter. If communication breaks down entirely, the company is unable to take any action.
The gravity of the dispute depends on its nature. If one of you wants to borrow money to expand, while the other wants to cut costs to optimise current income, then this is a difficult but potentially solvable problem that will not cause too much disruption. Much more serious is if your fellow shareholder or director is undermining the business by stealing clients, misusing intellectual property belonging to you or the business, or removing funds without permission.
Regardless of the nature of the dispute, if you cannot reach a resolution, you face a serious problem. You lack the authority to control the business or remove your colleague director/shareholder.
Consequently, you can either settle the dispute in a manner that preserves the relationship, seize control of the company and recoup your losses, or leave the company with your share of the assets, profits, and return on investment.
Most importantly, you will be free to conduct business in the manner you believe to be optimal.
Placing the matter in the hands of the courts
On “just and equitable” grounds, a 50 per cent shareholder can liquidate a company by submitting a winding-up petition to the court. The court then determines the best course of action for the company, which may or may not involve liquidation.
Petitions for a just and equitable liquidation can break this type of impasse, but the court will also consider any other actions that may be appropriate in addition to liquidation.
The court will attempt to determine if there is no longer any trust between the two shareholders, as well as consider other options. Therefore, what alternatives to liquidation might be available to break this impasse?
One way out of the impasse could be for one party to purchase out the other, if they have the financial means to do so. This would allow the partner who wishes to liquidate to move on, allowing the business to continue under sole ownership.
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 owners 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, they have absolute power and may veto all shareholder decisions.
How can a minority shareholder avoid having their 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-drafted 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 equal shareholder disputes. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.
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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.
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